The Major Debt Management Techniques
Have you ever thought what would be the consequence of uncontrolled expenditure? While the desire to purchase continues to be unsatisfied, the income base gives up much earlier. The result is debts. Debts up to a certain level are admissible. Debts need to be managed to keep them within this level. The process involving the use of several techniques to curb the amount of debts is known as debt management.
Outside agencies may not always be the ones who carry out debt management. In fact, the first step towards debt management, i.e. accepting that debts are a menace, is taken by the borrower himself. This is an important step because no amount of debt management tips will be little helpful if the borrower does not have enough motivation to bring about a change in his financial situation.
Debt management help, for debts on a smaller scale require more participation of the individual himself. For debts that are not large and where the step is more of a preventive nature, debt management will include suggesting tips. One or two face-to-face sessions is what will be required. Along with the suggestions, debt management agencies will also tell about the problems that the individuals will face while incorporating the debt management tips. The individual himself has to employ the debt management tips. All the debt management agency would do is provide a helping hand whenever the individual falters.
Debt management on a smaller scale is known as debt counselling. The tips that are offered to curb the debts form a part of the ancient wisdom that is handed from generation to generation. The idea is to remind individuals of the knowledge. The following constitute the major debt management techniques adopted at this stage:
There must be a restricted expenditure proportionately to the income.
If possible, individuals must try to augment their income to suffice the additional expenses.
If a debt is incurred, it must be repaid or proper preparations must be made for its repayment.
These and several other debt management tips will be offered to help bring about a real change in debt scenario. This will require patience and perseverance on the part of the borrower. Debt counselling can be a long drawn process. However, instead of creating cosmetic changes or a temporary healing of the debts as in debt consolidation loans and mortgages, debt counselling has a long-term effect on the individual’s debt scenario.
Nevertheless, the importance of debt consolidation loans and mortgages as a debt management tool cannot be discounted. When standing on the edge of bankruptcy, it will be imperative to clear the huge mound of debts already incurred. Once the finances regain health, only then should debt counselling be practiced. Situations like the one discussed above require an instant solution to debts and not a protracted one. Debt consolidation loans ensure the fastest release from the debts.
Debt consolidation loan is a personal loan that is employed to settle the debts. For the purpose of ease in settlement, all debts taken from several lenders are consolidated. The total of the debts is the correct measure of the amount of debt consolidation loan that must be drawn. The entire debt consolidation loan may not be consumed by the debts. It depends on the way debt settlement is negotiated. This is the reason why it is very necessary to engage the services of a proper debt consolidation agency. One of the principal distinguishing features of debt consolidation loans is that the loan provider helps in the settlement of debts. There is an active participation of the loan provider. In this method of debt management, the role of borrower ends once he presents the list of debts to be settled.
Debt consolidation mortgages, another popular debt management tool, is a second mortgage that includes certain debts in an existing mortgage. As in a debt consolidation loan, the borrowers will not be helped in settlement of debts. However, the advantage of this method is that debts are settled at the rate of a mortgage. Home equity loans also offer this advantage to the borrowers even though help from the loan provider may be absent.
Whatever be the method of debt management adopted, it must be effective towards debts. The ultimate aim of debt management must be to find a long lasting solution for debts. This can be brought about only by increasing awareness for the bad effects of debts and taking the necessary steps to curb them.
Debt Relief Options
Solutions such as a Debt management plan, Individual Voluntary arrangement, Debt consolidation, or even as a final straw, bankruptcy are all viable solutions when looking for ways to resolve a debt problem.
Below is a summary of these solutions and what they entail.
A Debt management plan enables you to repay your debt in a way that is affordable. This is achieved by offering creditors a reduced monthly repayment which is manageable.
Generally you would need a minimum of $100 a month to realistically offer the creditors an amount which they would be willing to accept.
The main thing is to offer creditors a fair percentage of your available income. Therefore, if you have 3 creditors, you would need to fairly split the $100 to each creditor; this generally works out on a pro-rata basis.
Below is an example of how to divide your available income between your creditors.
If your total debt is $5000 owed to 3 creditors and you have $200 a month available, you would divide the amount you owe to a creditor by your total debt and multiply it by your available surplus, i.e.:
Total Debt $5000
Creditor 1 $2400
Creditor 2 $1200
Creditor 3 $1400
Surplus available $200
Creditor 1 - $2400 / $5000 x $200 = $96
Creditor 2 - $1200 / $5000 x $200 = $48
Creditor 3 - $1400 / $5000 x $200 = $56
As long as you can show the creditors you are offering a fair percentage of the debt, more often than not, they will accept the offer of payment.
As well as offering a reduced payment, more often than not, the creditor will freeze the interest on the account to allow you to repay the debt without increasing the amount of debt by adding interest.
Debt management plans are not legally binding, but may prove to be a suitable option.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement is a legally binding agreement between you and your creditors. IVA’s work differently to Debt management plans as they are repaid over 5 years whereas a debt management plan runs until the debt is repaid.
You may be required to include any equity you may have in your property, however, this will be discussed when setting up your proposals of repayment to your creditors.
The idea behind an IVA is to offer your creditors a reduced lump sum which is generally repaid over 5 years. Any assets you have may be included in the arrangement. An insolvency practitioner will discuss with you whether or not an IVA is suitable, and if so, they will work out the best way to repay your debts.
The IP will set up the repayment proposals agreed by you and send them over to your creditors for your creditors to vote on whether they find the proposals acceptable or not. Creditors who represent 75% or more of the total outstanding debt must accept the repayment proposals in order for the IVA to be accepted.
Once the IVA is accepted, you and your creditors are then tied into a legally binding agreement. This means the creditors can no longer write or phone requesting monies from you.
Debt Consolidation Loans
Debt consolidation Loans are not for everyone. Sometimes it is all too easy to borrow money to pay money off, yet in the end, you can find yourself in a worse situation than before. It can sometimes help as a quick fix, but in the long run, you end up struggling more with debt and still looking for solutions.
On the flip side, if you know you are a good money manager, make sure you work out the figures, including how much interest you will be paying on top of the money you borrow and you’re not tempted to buy something else with the money which lands into your bank account, then debt consolidation may be a solution.
Consider whether or not an alternative option is available which may better solve the situation rather than taking out another loan.
Regardless of your financial situation, it is always advisable to look into all options to find out which is the best solution to repay debts, if no option is suitable and you find you have no realistic amount to offer creditors, then maybe bankruptcy is the only solution.
There is no shame in bankruptcy, although that is what some may like you to believe. Bankruptcy is there because it is needed, and if it the only viable solution, then you can make a petition, but always get as much information as possible so that you are 100% sure bankruptcy is right for you and you are not restricting yourself in anyway.