An introduction to debt management
Anyone’s circumstances can change. Their income can go down, their expenses can go up, they might have a baby, move house, get a new job involving more travel… Whatever the reasons, the payments they could comfortably afford three years ago may be impossible to make today.
If that problem sounds familiar, remember you’re not the first person to borrow money - or to have to deal with changes to their financial situation. If you realise you can’t make your payments any more, it may be the first time you’ve been in this situation, but your lenders will (almost certainly) have ‘been there before’.
So you may be surprised to find they’re willing to listen to your story, help you explore your options, and do what they can to help you find a way of repaying the money you owe them in a way you can realistically afford - i.e. more slowly than you originally agreed.
Having said that, they can’t help if they don’t know you’re struggling financially. That’s why it’s vital you get in touch with your lenders - or ask professionals to do it on your behalf.
A ‘debt management plan’ is a repayment plan that takes into account the fact that your situation has changed and you simply can’t keep up with your repayments any more. It involves talking to your lenders and telling them what you can realistically commit to paying every month once you’ve taken care of all your essential costs, from your mortgage/rent and food costs to your utility bills and essential transport costs.
Your unsecured lenders should understand that paying for these essential expenses has to be your top priority, and they may well agree to accept a pro rata (i.e. in relation to how much you owe them) portion of your disposable income (the income that’s left over once you’ve taken into account all your essential costs).
It’s up to you whether you talk to them on your own or ask a debt management organisation to do it for you.
Some people will prefer to do it on their own, maybe because they don’t want anyone else involved in their financial affairs, or maybe because they’re keen to save themselves the fee that the debt management organisation may charge.
Others would rather get some professional help so they don’t have to do all the calculations, negotiations, payments, etc. - they’d rather hand it all over to professionals, make one monthly payment and leave the rest to their debt management representative.
Either way, there are ‘cons’ as well as ‘pros’ associated with debt management. For example, repaying a debt more slowly will mean you’re defaulting on your agreement (not sticking to the terms you originally agreed to) and this will stay on your credit report for six years, which can make it harder and/or more expensive to get further credit during that time. It can also add to the overall cost of repaying your debt, since you’ll be paying interest for longer (unless your lenders agreed to freeze interest on your debt - or reduce it sufficiently).
Having said that, your lenders wouldn’t accept lower payments unless you were genuinely unable to keep up with the payments you originally agreed to make - so if you’re in that situation, there’s a fair chance you will have damaged your credit rating already.
Further reading
You can find more helpful advice on debt management here.
IVA (Individual Voluntary Arrangement) or Debt Management Solutions
While seeking debt solutions most people are debating between Individual Voluntary Arrangement (IVA) and Debt Management solutions. To learn which of the two options is best suited for you, read ahead and find out for yourself. Though both are capable of preventing you having to resort to bankruptcy.
Individual Voluntary Arrangement commonly known as IVA is a formal agreement between a debtor and his creditors while Debt Management Plan is not.
The main difference between the two is that IVA is legally binding whereas Debt Management is not, which can cause problems if the creditors decide to change the repayment terms. The main idea behind both options is to pay a reduced, affordable amount regularly each month. However in IVA, the interest charges will be frozen. Moreover, the debt will be written off on behalf of the creditor after five years. Under Debt Management, even though you pay an affordable amount, there is no provision for writing off your debt as there is no time limit involved to pay the debt. It can go on for a longer term, or until the full amount is paid.
Since the IVA is legally binding, the creditor cannot pressurize the debtor or change his mind. Thus, it is more secure. The Debt Management Plan does not offer this solution. Since it is not bound by law, the creditor can change the terms and conditions at his convenience.
The cost of administration is lower than IVA, thus enabling higher payments for creditors. It is always advisable to read the terms and conditions of both forms of solutions before making an informed decision. Beware of huge interest charges and other fees involved in the two processes.
One downside on an IVA however, is the credit rating of the debtor is likely to be affected more severely, which is not true with Debt Management.
Which one to choose greatly depends on the amount you owe and your income. By all means, the help of a professional must be sought if you are not completely sure which financial route is best for you
Is Debt Management Right for Me?
If you are having trouble repaying your unsecured loans and can’t see the proverbial light at the end of the tunnel then a debt management plan may be the best solution for you. Essentially, a debt management plan is an agreement drafted between a debtor and creditors to make debt repayment more manageable. The process involves combining all your monthly payments into a single debt repayment which often have a lower interest rate than your initial debts. This is usually a better solution that filing for personal bankruptcy.
Eligibility Conditions
To qualify for a debt management plan you need to have at least £8,000 in debt and owe more than two creditors. Debt management plans are only applicable to unsecured loans and credit card debt.
Debt management can be an option for many people in the UK.
Advantages of a Debt Management Plan
The main advantage of a debt management plan is that you will find it easier to pay off all your loans, even if it appears to take longer than the initial debt repayment plan, and your assets will be protected. However, since you have most likely been missing payments and accruing late fees and penalties the schedule may in fact be quicker than if you attempted to ignore the problem and continue as you have until now.
Another advantage to a debt management plan is that creditors will most likely stop calling you as long as you meet the agreed upon payment every month, which will be significantly lower than if you were paying each creditor individually.
Disadvantages
There are two sides of the fence in any situation and a debt management plan also has its drawbacks. For one it will take longer to pay off all your debt and even if the interest rates appear lower your loan will still cost you the same or even more. This is because your repayment plan will be spread out over a higher number of years and since interest rates are calculated per annum you will most likely end up paying a significantly larger amount.
A debt management plan bares no legal implication for either party which means that a lender can withdraw from the agreement any time they see fit and you can end up in the same situation as before. It should also be noted that creditors have no obligation to accept your debt management plan but most will if they see your payments are late or you have been missing them completely.
Money Management as a Debt Management Tool
Even if you do qualify for a debt management plan and successfully negotiate with your creditors, you will still have to employ a money management system to make sure you can make your monthly repayments. Whether you are in this situation because of the harsh economic climate or purely due to bad spending habits you still have to learn how to manage your money to avoid a similar situation in the future.
A good money management system is based on a budget. Yes, the dreaded budget, but if you don’t know what is coming in and what is going out then you will never be able to get out of debt. So, consider drafting a simple budget for the first month and only spend what you allot to each category. Of course, this is easier said than done but practice makes perfect.
Debt Management Plans: The Process
Your best option would be to consult a company that specializes in debt management plans because a professional counsellor will help you analyse your income and expenditure to determine the minimum payment you can make and to draft a customized programme for you.
Your debt management counselor will also negotiate with your creditors on your behalf and they are more likely to succeed as they have much more experience in dealing with lenders and drafting these types of agreements. A good debt advisor may even be able to help you write-off part of your loan and reduce your debt load, depending on your financial situation.
A debt management plan is the best solution as it does not place any of your assets at risk, unlike a debt consolidation programme, because it does not involve taking out another loan. Debt management is one of the best options for you to avoid bankruptcy, clear your debt and eventually repair your credit rating.
Tackling Student Debt
As the new student year is on the horizon, many students will soon realise that university life is not cheap. Despite the increasing expense of further education, there are numerous was to stay in the black and enjoy yourself while you are at it!
If you are about to start university this autumn you could graduate with on average £30,000 in personal debt over the course of your studies. With an estimated expenditure of £10,000 per year over the course of a 3 year degree, there are numerous ways to help cut this figure and reduce your overall level of debt.
Being intelligent with your accommodation choice is just one way to save money over the course of your student career - “Consider staying in shared halls during your second year, not just your first year” suggests Amy Holt, a third year student at Birmingham University. The tendency to move into private accommodation may be somewhat appealing during your later university years, but this can often come with added costs.
It is estimated that students spend around £2,900 on accommodation in their first year of university, rising to £3,300 in second and third years. A saving of around £300 over a year may not sound like much but over a 5 year degree this can be a considerable reduction in your student debt levels - which makes the appeal of university subsidised accommodation an attractive prospect.
At some point, you may find yourself contacted by a debt collection agency, but this is not always as intimidating as it is made out to be. Keep in mind there are laws that these companies must adhere to, and they are acting on behalf of whoever your debt is owed to. If you are courteous and professional while speaking to a representative, they should return the favor.
Along with some of our other money saving tips, we will be continuing a series of student debt management ideas to keep your debt levels to a minimum during your student years.
7 Quick Debt Busting Ideas
7 quick tips to help save you a few pennies
If your finding yourself up against a mountain of debt, there are numerous ways in which to change your spending habits and get back on the right path to financial security. Outlined below are 7 quick debt busting ideas that you can implement today to help tackle your debt:
1. Shop around online for good deals on any potential purchases you make - Although excessive spending is not great for reducing for your, there are some situations when large pruchases must be made. An hour or two crawling the net for the cheapest deals can save you tens or even hundreds of pounds. This is especially true for electronical and hardware purchases - so don’t buy in high street stores unless you cannot avoid it.
2. Consider going on a cash only allowance - Allow yourself a set budget of say £35 a week to spend and leave your credit cards at home. This prevents you going for the impulse purchase that you don’t neccesarily need. You will also be taught to think alot more carefully about where you spend your money.
3. Make your own lunches for work - Saving money by making your own lunches can add up to a great deal over the course of a year. If you imagine £3 per day that equates to:
£3 x 5 days = £15 a week
£15 x 52 weeks in a year = £780 a year!
If you make your own lunches, you could save upwards of around £390 a year - nothing to be sniffed at.
4. Ask your boss for more hours at work - If you work in a job that is paid hourly, why not add a few hours to your working week. An added 5 hours a week work could add over £1,000 an year to your income, which could help pay off some of your debt repayments.
5. Rent out a spare room - If you have a spare room or even a loft, which could be converted, you should consider renting it out to earn a little extra money on the side. In the UK, this is easier than ever, with the government’s ‘Rent a Room’ scheme, you can collect up to £4,250 tax free from becoming your own landlord.
6. Ask your credit card companies for a better interest rate - Often credit card companies are so eager to keep your business that, when pushed, will sometimes lower your APR. You can achieve this by ringing and saying that you are considering cancelling your credit card and would stay if you were offered a lesser rate.
7. Start earning cash back on your old items - Think about renting out some of your electrical equipment or machinery on Zilok, the peer to peer sharing site. Alternatively, why not list some of your items on Gumtree or eBay to earn a few extra pounds (Gumtree is still free to use for most categories).
It’s true that every little helps, which is why following a few of these ideas can be used to bust that debt!
Are your water bills furthering your debt?
Excessive water wastage can increase your debt
Everyday we spend money unneccesarily on utilities, by leaving taps running, leaving that hallway light on or forgetting to turn down your heating during summer. All these things can contribute to a rising level of personal debt.
If you have been keeping up with our recent debt management and budgeting articles, you find various bite size articles which will can help you save money, however utilities seem to be one area that is often overlooked within the household.
Unlike our gas and electric suppliers, who we can change to find a better rate (which we highly recommend), our water supplier is often fixed, so usually stays the same. Because of this, some basic ways to save money on your water bills include:
- Use a shower rather than a bath. Although showers are commonplace nowadays, some people still are bathing rather than using a shower. An average bath uses between 30-50 gallons of water, however a shower uses around half of that. So that’s a considerable saving on your daily water usage!
- Turn off your taps whilst you brush your teeth. Although this may be a little over cautious, you may have a tap running for 2 or 3 minutes whilst you brush. Add up this volume of water over 2-3 brushes per day it soon adds up.
- If you have a garden or plant lfie that requires constant watering, consider rigging up a water trough that collects rain water from your gutter. When the weather is warmer, you will have collected plenty of rainwater for use on your plants, saving you cost on your water bills.
Even small changes in the way you use water can add up to considerable savings during the year which can be used to repay your debt.
Do hobbies increase your debt?
Often when we attempt to consider why we end up with high levels of debt, we look at the common factors such as rent, mortgages and credit card bills to understand our financial situation. Although these areas are key to understand your personal finances, it is also important to consider your hobbies and whether or not they are adding to your financial worries.
If you have expensive hobbies, such attending sports events, music gigs and theatre trips then you may be living too extravagently when instead, you should be considering putting that money to one side to help clear your debt.
Firstly assess how much your hobbies and leisure activities are costing you. Of course, im not saying stay indoors at all times and never enjoy yourself, but you may need to ease back on the spending for a few months while your finances get back on track. The key to debt management is minimise unneccesary spending when you have more urgent outgoings, such as credit card and mortgage payments.
Although you may be a little tighter on the purse strings for a while, there are thousand of free things you can do that wont involve just staying indoors. Check Time Out for some great suggestions. So get to those free museums, gallerys, fetes and shows and save some money in the process. Your bank balance will thank you in the long run.
Succesful Debt Management
Beating debt can be a real task, but you can find success if you know where to look for help. If you find yourself overwhelmed by money troubles, there are a number of debt management resources available for you both online, via phone or in person. Its all about choosing the right option for your own circumstances.
Sometimes it can be easier to look something up online, especially if you are embarrassed about what someone may think of you, but also if you want to remain anonymous about the whole process. However, the qualtiy of advice found online can vary quite dramatically and be wary of some older, more outdated articles which may be misleading. I would also recommend ringing one of the many debt charities, such as the national debtline, that have been established to offer free and confidential money management advice.
A good place to start would be to read all of the debt advice articles on this site - i will be covering a wide range of article topics, ranging from credit card management, budgeting tips and learning how to make your money work harder in savings accounts and bonds. There is also an upcoming site, my debt options, which aims to outline in full, what options are available if you ever find yourself in debt.
Whatever your circumstances there will always be a debt management resource that can be used in a positive way. Sometimes you just have to do a little bit of searching to find the resource that works for you.
Keeping track of your cash
Spending less than you earn is an easy concept to understand, but in practice its not always that simple. By keeping track of your spending on a weekly, or even daily basis can help you from furthering your debt.
One of the main problems with financial planning is not keeping track of small personal expenses, like toiletries, lunches and other impulse buys. The things that we don’t keep receipts for are the worst, as they become increasingly difficult to monitor, and are often forgotten about.
If this sort of spending sounds familiar, you may have to resort to some tough budgeting measures to keep you on the straight and narrow. Alot yourself a daily budget, in line with your spending expectations for the week. So whether that is £1, £5 or even £50 per day, that is all you are allowed to spend. Don’t be tempted to use that credit card if you go over your daily budget.
This strict way of restricting your spending can be a great way to keep those impulse buys at bay, and will teach you the value of thoughtful financial planning.
Avoid Debt while you can
If just one person who reads this article avoids getting into debt, then i think it has been a success. Sometimes, all some people need is a quick reminder now and again, just to keep you on the track to staying debt free.
Some of these quick tips will help you avoid debt while you have a health bank balance. For the spendaholics amongst us, there are still some lessons to be learnt from these 5 quick tips to keep you out of debt:
1. Create a weekly or monthly budget and try not to overspend.
- Base this budget around your monthly income and deduct your outgoings.
- Divide the remaining money into essentials, such as food and bills.
- Try to put some money aside, if there is left over money at the end of the week.
2. Avoid using credit whenever possible - It is probably out of your budget if you are thinking about using credit cards to make the purchase. Cut up that plastic and get saving if you really want the item that bad!
3. Bin all those loan and credit card forms you receive through the mail - Avoid temptations by ditching those shiny leaflets when you want to go on a spending spree. Often lenders will sell personal data to other financial companies, when they are aware you are looking for credit.
4. Think about your savings - Learning about how to save money from an early age is a must. Even £5, £10 or £20 a month into a savings account can really add up over the years, if you have some money spare, tuck it away into a high interest account for a rainy day. This nest egg can help you if you run into financial difficulty.
5. Do some work on the side - Check your local paper and see if there are any part time jobs you could do while you have a few spare hours. The extra cash can help keep you above board, whilst your financial situation improves.
