Seeking Debt Advice

23-Jun-2009

If you're in debt, you're certainly not alone and there are many ways of getting your finances back on track.  Whether you go it alone or enlist the help of a debt professional, there are many forms of debt support available. This article details the most common solutions, as provided by debt advice professionals.

Remortgage

If you find yourself seriously in debt and you own a home, a debt advice professional may recommend that you remortgage to release the equity in your home and to use the money from this to pay off your debts. This can be a sensible option in many cases, because the long-term nature of a remortgage loan means that the interest rate are usually lower than any other kind of debt.

If you already have a mortgage on your property, getting a remortgage involves ending your current deal and taking out a new home loan sufficient to pay off your debts, and this often involves changing lenders.  Moving to a new lender can work to your advantage as you may be able to find a better deal with a new mortgage provider and save money on the monthly repayments.  If you had paid off your mortgage already, you would only need to take the total cost of your debts into consideration when applying for a new home loan.  

If you are planning to remortgage, you need to check with your current lender whether there are fees involved should you decide to move - if you took out your mortgage recently, you are likely to be tied into the deal for a number of years and the lender may therefore charge you a fee for changing.   When you are shopping around for a new deal, enquire with the lenders about any incentives that they offer for new customers. Many will cover the costs of the valuation of your home and legal fees. Get the best deal you can!

When considering taking a remortgage loan to pay off your debts, be sure to seek debt advice before committing to anything. A debt advice professional will help to clarify the situation and to weigh up the pros and cons of taking a remortgage loan to repay your outstanding debts.  As with any loan secured against your property, you are at risk of losing your home if you cannot keep up the repayments so careful consideration is required before you proceed.

Consolidate your debts

Another option given by debt advice specialists, which offers some similar benefits to remortgaging, is to consolidate your debts into one loan.  This involves working out the sum of your debts and taking a term loan out for the full amount.  You could then pay off all your existing debts and pay back the loan over the agreed repayment term. 

There are several benefits of debt consolidation, namely the fact that the interest payments are likely to be much lower than your existing payments, and that you owe money to one company rather than several, making your financial management much easier. 

However, because you are already struggling financially, banks will be more reluctant to give you a loan.  It is therefore likely that you will have to offer up some kind of security against the loan, such as equity on your home if you already have a mortgage.  Because of the risks involved, it is advisable to seek professional advice before proceeding with a debt consolidation loan. 

Although it could well be the answer to your debt problems in the short-term, you are essentially replacing one debt with another, and therefore you need to be sure that you will be able to make the repayments on the consolidation loan. 

Debt Counselling and Debt Management Plans (DMPs)

If you are not able to communicate directly with those you owe money to, a debt management plan may be an appropriate option for you.  This involves hiring the services of a debt specialist, who will help you make a total of your incomings and your outgoings, calculate your disposable income and come up with a realistic monthly plan for you to pay off your debts.  They will also be able to help you talk to your creditors, explain your situation and put a repayment schedule in place.

A debt advice specialist would also help you make a budget and keep to it, to help you develop a more positive attitude towards your financial management in the future. Debt mangement plans are recognised by many financial institutions, and can therefore be very helpful when entering into negotiations with banks.  Although they may not save you a huge amount of money (and many cost money to implement), these services are invaluable when it comes to organising your finances and maintaining positive relations with lenders and other creditors.

IVAs

An Individual Voluntary Agreement or IVA is a formal, legally binding agreement between a debtor and their creditors to settle debts within a reasonable timescale, usually five years.  IVAs are becoming increasingly popular among those in debt in Britain who are struggling to keep up with repayments. They offer an alternative to bankruptcy with less social stigma attached, and they are popular among creditors because they generally stand to recoup more of their money than they would if you declare bankruptcy.

With the help of an insolvency practitioner, you would submit a proposal to your creditors outlining the reasons for your financial problems, how much you can repay monthly and providing other relevant details.  If the IVA proposal is accepted, you would make monthly repayments to all your creditors and then at the end of the agreed term any outstanding debts would be written off.

An IVA is a large undertaking with serious financial implications, and therefore should not be viewed as an easy way to write off your debt.  Your credit rating would be negatively affected for some years afterwards, and you would therefore find it much more difficult to borrow money in the future.  A debt specialist would be able to advise you on the suitability of an IVA, taking your personal circumstances and current financial situation into consideration.

Bankruptcy

Bankruptcy is a word that strikes fear into the hearts of many, and it is often seen as a last resort.  Debt advice resources would tell you to very carefully consider all other options before resorting to bankruptcy. However, if you are struggling under the burden of a number of debts that you are unable to pay back, a bankruptcy order would at least release you from pressures from creditors because they would not be able to approach you directly, and it would ensure all assets are divided equally among creditors.

There is a social stigma attached to bankruptcy, and your credit rating would take years to recover enough for you to be able to borrow money again in the future.  When you are declared bankrupt, you are not allowed to use a bank or building society account or any credit cards, so your life would have to change in a number of ways.  Most importantly, if you own a house or any other valuable assets, these would have to be sold in order to pay back your creditors. 

If you are considering applying for bankruptcy, you should first speak to a qualified insolvency specialist.  They will be able to look at your circumstances and advise whether another option would be more suitable, and if they feel that bankruptcy is the right solution, they will be able to guide you through the process.  Bankruptcy is a hard process that will mean a total reevaluation of the way you live your life, but it should also be viewes as a positive step towards a debt-free future.

The debt plan that you choose should depend entirely on your circumstances and the level of debt that you have, there is no 'one size fits all' solution.  Before entering into a remortgage, a debt consolidation loan, a debt management programme, an IVA or bankruptcy, take some time to find reliable debt advice from a qualified debt advice specialist, who will be able to explain the process of each in more detail and guide you in the right direction.