Five ways to clear your debt
This is an extract from fool.co.uk.
1. Better money management
You need to work out where your money is disappearing and put an end to it. There are some simple ways to go about this.
- Keep a diary for one month of every single little purchase and withdrawal you make.
- Write and stick to a monthly budget.
- You should consider all your areas of expenditure. Use what you've learned from your spending diary, budget and statement of affairs to look for ways to make cutbacks and start living below your means.
- Consolidate your debts but beware the risks of consolidation.
2. Debt management plan
You can write to your creditors and appeal to them to lower your minimum monthly payments and to freeze interest. If they agree, the deal won't be legally binding, so they can retract the agreement at any time. The plan is likely to be reviewed every six months too. At best this gives you breathing space, but this might be all you need to get your finances in order.
Citizen's Advice and debt charity the Consumer Credit Counselling Service (CCCS) can help you to write a debt management plan for free.
3. Individual Voluntary Arrangement
Unlike a debt management plan, an IVA is a legal contract that might last, say, five years. You can have lower monthly payments and write off a portion of your debt. Any reductions in payments or in the total bill you owe your creditors is fixed, once they agree -- if they agree.
IVAs are not the universal cure that they are made out to be. They are unsuitable for a large number of people. The charges for IVAs can be very high. I suggest you think carefully before taking debt advice from a company that sells IVAs, as it's likely they make all or most of their money from them.
The wonderful news is that last month the Consumer Credit Counselling Service started offering IVAs. It should, I hope, offer lower prices, higher transparency, and only offer IVAs when it's the best solution for you.
4. Bankruptcy
Contrary to popular belief, bankruptcy is often a better option than an IVA. Personally -- although I know that many Fools strongly disagree -- I don't think that people should feel bad about bankruptcy, as irresponsible lending and Government policy has encouraged people to take on more and more debt. What's more, financial education is non-existent.
Bankruptcy (especially the softer bankruptcy regime that has been introduced in recent years) is necessary if people are being deliberately driven into serious debt in order to increase company profits and to keep the economy growing at the same rate, which I believe they are.
5. Panic!
The fifth option is a wholly unnecessary one: to panic. If you feel like panicking, visit the Dealing with Debt discussion board at Fool.co.uk. You will get support and guidance from other debtors, former debtors, experts and other helpful folks who'll advise you on all four of the options above. What's more it's anonymous.
For this article, I consulted heavily the excellent book IVA, Bankruptcy and other Debt Solutions, by James Falla.
Visit www.fool.co.uk
Written by Neil Faulkner.
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