Piling debt can be worrisome for any person, especially if the debt has piled up over a long period of time and is now the size of a mountain. Debt, if used wisely, can be a complete lifesaver, but if mismanaged, it can suck the life out of you. The stress and anxiety can end up costing you more in medical bills than all your debt combined.
So if you are in a sticky situation with your debt, now is always the best time to start sorting it out. There are a number of ways you can clear debt that has piled up over a period of time, but the core idea behind all of these strategies is financial discipline. Let’s take a look at some of the best ways you can go about clearing overdue debt.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is a part of the package of Debt Consolidation Plans. A Debt Consolidation Plan consolidates all your unsecured debt into one loan and allows you to make a single payment periodically, usually monthly, to clear multiple unsecured debts over a period of time. DMPs are offered by Debt Management Agencies that work on your behalf with creditors to reduce your monthly interest, installments, penalties and other fees associated with your debt.
A credit counseling agency works with your creditors and determines a monthly plan to help you clear debt and regain control of your finances. When the pre-determined monthly payment date arrives you can make the payment to these credit counseling agencies who will forward this amount to your creditors. These debt clearing monthly plans are tailor-made to you and the payment amount is determined by analyzing your monthly income versus your monthly expenditures.
Advantages Of A Debt Management Plan
- A Debt Management Plan allows you to consolidate credit card bills from multiple credit cards, making it easier to clear debt that has accumulated on your credit cards.
- A good Debt Management Plan will help you get disciplined when it comes to the payment of bills and other debt.
- DMPs can help you clear debt that seems almost out of control by providing you an achievable monthly repayment schedule.
- The use of a DMP and regular payments towards the DMP can help strengthen your credit score and credit reports over a period of time.
- The use of a DMP will reduce the number of times your creditors will call and hassle you.
Debt Relief Order
Debt Relief Orders (DROs) are usually used by individuals that have a relatively low debt amount and only a few assets. A DRO service provider will begin the insolvency procedure for you, to prove that you are insolvent and are not in a position to repay the debt immediately. When you opt for a DRP it will freeze debt repayments and interest rates for 12 months. At the end of these 12 months, if your financial situation does not improve all the debts included in the DRO will be written off.
Advantages Of A DRO
- When trying to clear debt a DRO can be a better option than filing for bankruptcy.
- The DRO will give you an additional 12 months of a moratorium on your debt, allowing you to regain control of your finances before beginning to repay debt.
- During the 12 months of the moratorium, your creditors will leave you alone to allow you to regain a good financial foundation.
- DROs are considered formal solutions to debt, but they do not require you to appear in court.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) is quite similar to a DMP. When trying to clear debt that is a considerable amount the IVA will allow you a specified period, normally lasting five years to clear your debt. The IVA is a legally binding document, so all unsecured creditors bound to the IVA will not be able to take any legal action against you during its execution. In case you decide to take out an IVA against your debt you should be aware that the IVA will appear on your credit record for six years from the date it was commenced or until the IVA has been fully executed, whichever is earlier.
Advantages Of An IVA
- While clearing debt, especially if the debt has accumulated from multiple sources, this can be quite a time consuming and disheartening task. An IVA allows you to gradually clear debt by making a single fixed periodic payment to clear debt accumulated from multiple creditors.
- An IVA has a fixed lifecycle, meaning your debt will be cleared on a fixed date. This allows to plan your expenses post-debt in advance and provides a kind of “light at the end of the debt tunnel”.
- At the end of the lifecycle of the IVA an unsecured debt that has not been paid off within the IVA will be written off. This does not apply to secured debt like a mortgage, which will still need to be paid off.
- Upon the commencement of an IVA, all the creditors bound to the IVA cannot add further interest, penalties or fees to the outstanding debt.
Bankruptcy is probably the least favored way to clear debt, as it carries some serious financial consequences. Bankruptcy is a form of insolvency where when you declare bankruptcy through an Insolvency Agency, the courts will assess your total assets and grant you bankruptcy. Once you are declared bankrupt your creditors will write off your debt as irrecoverable and you will be given a second chance at starting over afresh, without debt. Bankruptcy usually lasts a period of 1 year, during which there will be quite a few financial restrictions imposed on you. After 1 year you will be discharged from bankruptcy and you will be able to resume a normal financial state. Applying for bankruptcy is a big decision and should not be taken lightly, as it will reflect on your credit report for six years.
Advantages Of Applying For Bankruptcy
- Filing for bankruptcy triggers an automatic stay on all your outstanding debt, this prevents creditors from taking legal action or seizing property that is under your ownership as a way of recovering the debt.
- In a lot of cases where the equity on a property is low, the debtor can retain possession of the property after applying for bankruptcy.
- Since you will not have access to any lines of credit after applying for bankruptcy, this experience will teach you to live within your means and will provide you the financial discipline you require to hold yourself in good stead in the future.