Last year, almost 160,000 people in the UK were declared insolvent. In England and Wales alone, there were over 135,000 personal insolvencies – an all-time high.
‘Insolvency’ doesn’t always mean bankruptcy, though. There are various forms of insolvency that can help people in different situations, from IVAs (Individual Voluntary Arrangements) and DROs (Debt Relief Orders) to Protected Trust Deeds.
And there are other forms of assistance that can help people steer clear of the kind of situation where they’d need to think about entering insolvency.
Here, we’ll look at just two: debt management plans and debt consolidation loans.
Debt management plans
A debt management plan is an agreement between a borrower and their unsecured lenders – companies that provide unsecured loans, credit cards, overdrafts and other forms of ‘consumer credit’.
If they can reach an agreement, debt management involves the borrower making lower payments that they can realistically afford without drawing on the funds they really need to keep for their essential bills, from their secured debts to their utility bills.
Their unsecured lenders would rather everyone repaid their debts as originally agreed, of course, but if accepting lower payments looks like the best way they can help a borrower repay what they owe, they may well accept that (although they don’t have to). They may, however, still issue a default notice since the borrower hasn’t stuck to the original repayment agreement – and this can make it harder to borrow money for the next six years.
Repaying their debts more slowly can also add to the overall cost, since the debts would have longer to accrue interest. Having said that, lenders will often agree to freeze (or reduce) interest while someone’s on a debt management plan.
Debt consolidation loans
Debt management plans are only an option for people who actually can’t keep up with their payments as they stand – but debt consolidation loans are designed to help people who aren’t struggling with their debts, but would like to simplify their monthly finances (and perhaps reduce their monthly outgoings as well).
A debt consolidation loan is simply a loan that people can use to repay the money they owe (on credit cards, loans, store cards, etc.). Once they’ve done that, they’ll only have one debt to repay. The actual amount of debt involved won’t be any smaller, but they could well find it’s a lot easier to stay on top of just one debt, rather than many.
This also gives them a chance to really review their finances and arrange to repay their debt at a realistic rate. After all, they might have taken on their original debts over a period of time – and their financial situation may have changed a lot since then – but debt consolidation can give them the opportunity to figure out how much they can really commit to repaying every month, without stretching their monthly finances too far.
However, the longer the repayment term they arrange, the more they’ll pay in total, since the interest on the loan will have longer to build up. If you’re thinking about a debt consolidation loan, it’s important to arrange repayments that you can keep up with, but that won’t go on for longer than necessary (and cost you more in interest than necessary along the way).