Top 5 Debt Solutions for those in serious debt

The Ministry of Justice guidelines to help inform people about debt management plans need to go further to cover the full range of different personal debt solutions available.

The Ministry of Justice has recently released guidelines for undertaking debt management plans. I am very pleased to see this proactive approach by the government which is designed to help people resolve their debt problems and avoid the potential pitfalls of a debt management plan (DMP).

However, on reading the guidelines, I was a little disappointed that the advice given was limited to only one debt solution. Very little mention is made of the alternative debt solutions available. As such, I am worried that the guidelines may give the wrong impression that a debt management plan is a "one fits all" solution which is certainly not the case.

There are a number of different ways that personal debt can be solved. The right solution will depend on many different factors from the amount of debt owed, income levels, whether the person owing the money is a home owner and also personal preference. The main options are described briefly below:

1. Consolidation

   Consolidation is simply the act of paying off a number of smaller debts with one large loan. The loan could be in the form of a personal loan or the re-mortgage of a property. This solution is useful if the objective is to simply reduce monthly repayments so that they are more affordable. It will also often result in reduced interest charges.

2. Debt Management Plan

   A debt management plan (DMP) is an agreement to reduce the payments made to each individual creditor so the amount repaid each month fits within an affordable budget. The agreement is flexible and can be implemented quickly. However there is no guarantee that interest charges will be frozen and 100% of the debt has to be repaid which could take many years.

3. Individual Voluntary Arrangement

   An IVA is an agreement with creditors to settle debt over a fixed period of time, normally 5 years. The agreement often involves reducing payments to an affordable amount and writing off 50% or more of the debt owed. However, this type of plan is formal. Once it is entered into, failure to keep up agreed monthly payments may result the failure of the arrangement and in some cases, the debtor being declared bankrupt.

4. Bankruptcy

   Bankruptcy sounds like a solution to be avoided at all costs. However in reality it is an extremely good way of dealing with debt for many people. All of your debts are taken away from you and in many instances you will not have to make and more payments towards them. However, if you have equity in your home, you may risk losing your house. This is why many homeowners choose to avoid bankruptcy as a debt solution.

5. Debt Relief Order

   This solution is designed to help people who want to declare bankruptcy but are unable to because the cost of the procedure (normally about £500) is prohibitive. A debt relief order costs approximately £100 to implement. However, you cannot use this solution unless your total debt is less than £15,000, the amount you can pay your creditors is no more than £50 and your assets are less than £300.

Clearly, each person's financial situation is unique. For this reason it is very difficult to find a "one size fits all" solution when you are talking about resolving personal debt problems. Before making a decision about how to deal with your debts, it is extremely important to understand all of the options available to you.

The guidelines which have been issued by the Ministry of Justice regarding what to think about when considering a debt management plan are welcome. However, I believe that there is a lot more work to do to make sure that those suffering from serious debt are given the right help and advice that they need so that they can make informed choices about the best way to deal with their debts.

If you have a debt problem, the first thing to do is discuss you situation with an expert who can help you understand your situation. They will be able to explain all of your options clearly and help you decide on the right solution for you.