Debt consolidation
Debt consolidation companies promise a way you can consolidate debts into one monthly payment. They do this by arranging a new loan to replace your existing debts. The monthly payment may be less, but the loan may be over a longer period (or at a higher interest rate) so you could end up paying more overall. Often the new consolidation loan is secured on your house, so you could lose your home if you don't keep up payments.
Some companies offer schemes where you make one payment every month to the company and they distribute your payments to your creditors. They may charge an up-front fee for their services. But normally there will be a monthly fee taken from the payment you make before the money is distributed to your creditors. So you could be paying more overall, and there's no guarantee that your creditors won't take enforcement action against you. Also, creditors do not have to freeze fees or interest, and debt management plans can typically last a lot longer than IVAs.
While bankruptcy is one way to deal with serious financial problems, it's generally considered a last resort. This is because it has a long-term negative impact on your creditworthiness,involves the loss of control of many of your assets and the sale of them to pay your creditors (this may include your home), and imposes certain restrictions on what you may do whilst bankrupt. Bankruptcy itself lasts a minimum of one year, but can last longer. A bankruptcy stays on your credit file for 6 years, and can make it harder to get credit or insurance, or even a job or a place to live. To top it off, you are likely to be responsible for court fees for bankruptcy proceedings.
Please note that there are special provisions for bankruptcy and personal insolvency in Scotland.
An IVA is a formal process through the county court that has to be arranged through an Insolvency Practitioner (IP). The IP will submit a proposal for an IVA to the court and to your creditors. The proposal must be approved by 75% (by value) of your creditors. Providing it is approved, it is binding on them all. Typically payments are made under the terms of the IVA for 5 years providing you make your payments, at the end of that period you will be free of all the debts that the IVA covers. You have to pay a fee to the IP for arranging and supervising the IVA. If your IVA fails, for instance because you can't afford the payments, you may find that you have paid out a lot of money in fees but still have large debts outstanding. And if the IVA fails the IP can make you bankrupt. An IVA stays on your credit file for 6 years.
Contact a free, independent and confidential money adviser. A money adviser can look at the whole picture, check you are receiving all the benefits and tax credits you are entitled to, work out a budget plan with you, discuss options for dealing with your debts, and make sure that priority debts are paid first.
If you need information or advice about debt, please see the following sections:
- Borrowing money
- Key questions before you borrow
- Your credit record
- Debt counselling
Or contact us by telephone or email.
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- Source:
- Consumer Direct
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