Debt Management, Can This Really Help With Debts?
Times of recession are particularly hard on families where incomes have reduced. What was once a comfortable lifestyle may be turned on its head by the reduction in income due to reduced working hours, voluntary wage cuts or loss of a job. It may be that personal circumstances change under the stress leading to partnership breakdowns and additional costs linked to finding new accommodation for one of the couple.
Whatever the cause, getting on top of any debt remains a top priority if living standards are to be maintained or a solid foundation for the future is to be laid.
When was the last time that you reviewed your total debt position and your ability to service the repayments given any change in income? Now may be a good time to take a long hard look and get your finances in better shape to weather the storms ahead.
Start by getting a budget together of all the income and expenditure for the household. Make sure that you start by listing all major and important costs first such as mortgage or rent payments, council tax, electricity, gas and telephone. These are all important to keeping a roof over your head and your home together. Whilst the telephone bill may be regarded as an optional cost, it could be that looking at the total cost of fixed and mobile lines rented in the household could lead to some savings!
Next, add all the loans that you have taken out in better times. These could have been for a car, furniture, home improvements or a holiday – but get the balance owed down on paper along with the monthly repayment amount and the period left to repay. Now add in the credit and store card debt that you have and whilst these are harder to quantify in terms of repayment, be realistic and take the balance outstanding and aim to repay in around 9 months.
This budget forms a valuable oversight into your household expenditure. What you have left over after deducting the above costs is free for more disposable or discretionary items such as food, clothing and entertainment. If you have a shortfall, or a margin, after all expenditure, of less than 5% of total income, then you may benefit from looking at some form of debt management plan to improve your financial position.
Even if you look in pretty good shape, you could still benefit from a debt management plan if you have a significant amount of debt.
One of the options open to you is to look at a debt consolidation loan. With this, you take out a new loan on better terms than your current liabilities and repay all your existing loans and credit/store cards. This not only provides a total budgeted monthly payment that can be lower than the aggregate of all the other payments, but it allows you to draw a line in the sand and take control of future borrowings.
One thing that immediately happens is that the expensive credit and store card debt is paid off and a better interest rate is charged on the new loan – significantly reducing the rate charged on the outstanding balance. What you must seek to do is not get into the same pattern of spending again by being more disciplined on how you spend.
If your debt position is out of control, a debt consolidation loan may not be enough to get you heading back to the straight and narrow. More serious debt management plans are available where you can liaise with the lenders and seek to reduce the future repayments for a period or to extend the loan repayment period. Whilst these voluntary arrangements are effective, they rely on the lender agreeing to the terms and then you keeping to your side of the bargain.
A more formal debt management plan is an Individual Voluntary Arrangement (IVA). This is a formal and legally binding agreement between you and your lenders for you to pay less than the full amount of the loan back and for them to agree to write off part of the loan balance. This can be hard to agree and many people use the services of one of the debt counselling companies to negotiate and manage the plan on their behalf. This has the advantage in that they know how to approach the lenders and what can/will be agreed. This takes the hassle away from you but make sure to shop around as terms and services offered vary by provider.
Free and independent debt management advice is available from any Citizens Advice Bureau. They can also provide links to personal relationship counselling advisers if required.
The most serious form of debt management is bankruptcy. Here you have insufficient income and assets to repay all your debts in an acceptable way. This is a last resort option and should only be considered after taking independent advice from an authorised insolvency practitioner or lawyer.