Debt Resources > Debt Solutions > Debt Consolidation

What is Debt Consolidation?

Debt Consolidation is a way of bringing all you debts into one more manageable payment, not only does this make everything more easy to manage, it make more financial sense as rather than paying all individual amounts of interest you are just paying one rate. A common mistake people have been making in the UK is once they have consolidated the debt they either;

a) Pay the other credit cards/store cards off and refuse to cut them up, or

b) Don’t pay the debts off that they got the loan for and use it for other reasons.

You must be disciplined when you consolidate debt with a loan otherwise it can stretch you financially and if you don’t tackle the problem early, then you could fall into financial trouble.

In the current climate it is becoming increasingly more difficult get a consolidation loan, as we hit the “Credit Crunch “ the banks have become very stringent in offering credit. With record figures for bankruptcies / house repossessions / job losses, people are now turning to a more favourable way of debt consolidation which prevents more serious situations occurring such as bankruptcy.

Debt Management

Debt Management is becoming a more popular debt consolidation solution here in the UK as it consolidates all unsecured debts in one payment each month. Everything becomes more managed and because the interest and charges are requested to be frozen, then your debt begins to reduce in size. You first need to fond a Debt Management Company to help you. It is their role to carry out a full financial assessment on your finances and take into account all your creditor information. They will then go through a financial statement with you to try and establish your disposable income (this is the amount you will need to contribute into the plan).

Once the Debt Management Company has established your disposable income they will then arrange a suitable payment which you can comfortably afford to be repaid to your creditors. They will take this payment from you, usually by standing order, and distributed to your creditors on a Pro-rata basis allowing all one there fair share. The Debt Management Company will normally take a small percentage of your payment as a fee for the work they do on your behalf, this normally ranges from 15% to 18% of the monthly payment.

IVA Debt Consolidation

Another debt consolidation option that is becoming very popular in the UK is an IVA (Individual Voluntary Arrangement). An IVA is for people who owe over £15,000 of unsecured debts and can afford to contribute at least £200 a month towards them. The IVA needs to be drafted by an licensed Insolvency practitioner (IP) who will draw up an official proposal and put this to your creditors in a meeting. Your creditors will then vote as to whether they will accept the proposal or not, and as long as at least 75% of the value agree in favour then it becomes legally binding and the IVA is approved.

The agreement is that you pay what you can afford, for normally around 60 months (5 years) to the creditors and at the end off it have a large percentage of your debt written off. The IVA is a very good alternative to bankruptcy, especially for someone looking to protect there assets. There is a similar solution called a Trust Deed available for Scottish residents only and the main difference is the timescale, where an IVA is five years, a Trust Deed normally only last for 3 years.