Debt solutions

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Helene Mueller
eCollect support team

Debt solutions as an economic definition stands for the settlement of bad debts by a private debt help companies on behalf of the subject of debt, which can be either a consumer (with an individual debt) or a business debtor (with a commercial loan). When a subject of debt is experiencing severe financial problems and has pecuniary difficulties, he should pass this problem to a professional debt help agency. Part of such organisations work on charity tenet and offer free debt help. Even if the consumer decides he does not want to use any personalised debt solutions, he can still benefit from competent advise regarding how to better control his income and prepare more effective budget plan. Debt solutions consist of various repayment plans and debt clearance options, which bring certain advantages and specific disadvantages as well. As some debt elimination plans are very similar in their content, a consumer should be well informed about their differences in order to estimate which is the most appropriate scheme for his financial condition.


Debt solutions in UK: DMPs or IVAs

If a consumer prefers to sign a formal contract for debt repayment, rather than relying on an informal agreement, he can choose an Individual Voluntary Arrangement. Although the IVAs origin from United Kingdom, they are now employed in other countries as well, like the United States of America. The IVA (and respectively the CVA- Company Voluntary Arrangement, for businesses in debt) stands for signing an official written agreement by both parties- the creditor (first party) and the debtor (second-party entity). When the IVA’s contract is signed, both sides are legally obliged to abide the new contract’s terms. This means that the lender will be bound to stop all legal actions against the debtor (if such have started before the execution of the arrangement). The creditor also has to stop and write off all future interest charges and additional fees towards the consumer, except for the clear amount of the liability.

In contrast to the IVA, DMPs (Debt Management Plans) represent an unofficial agreement between the creditor and the subject of debt. The lender can agree to place such alleviations, but as the contract is not legal, the first party can always abolish the agreed terms and apply the old debt conditions.

As Individual and Company Voluntary Arrangements have legal power and statutory duty the debtor’s home can be forcefully foreclosed, if he falls behind with payments again. As the IVAs are an alternative to bankruptcy proceedings, the same conditions for repossession, which apply for bankruptcy, apply for IVAs and CVAs as well. Debt management plans do not have such lawful and court pressure, as they are unofficially signed. If a creditor agrees to a DMP and the consumer delays his payments again, the lender has to begin the whole debt collection process once again.

The UK’s Voluntary Arrangements have a time limit of five years. During this time the debtor pays fixed monthly rates. After this period the debt obligation is written off by court, no matter if there is an outstanding balance left to be paid or not. However, a consumer should bear in mind that if he cannot financially afford to repay his debt obligations within these five years, he will not be qualified and allowed to use such IVA. As for the DMPs, a consumer is considered into debt, until he repays the full sum of the default amount.

Debt solutions’ alternatives- debt settlement or debt consolidation

Although debt settlement & debt consolidation programs have similarities, they also offer different methods for debt repayment. They both aim to provide more manageable plans for a subject in debt, but they include contrasting techniques. If a debtor has no financial funds to settle the liability as soon as possible and he prefers lower monthly payments with reduced interest, a debt consolidation is more appropriate. This method also combines all debts into one monetary obligation, providing the subject of debt with more bearable monthly repayment conditions. However, when choosing debt consolidations plans as a debt solution, the total length of the repayment term period will prolong in time, and also the total debt amount will increase.

If the consumer/business debtor prefers to settle the default at once, he can choose the debt settlement scheme. This will bring sufficient benefits to the debtor, as debt settlement is equal to debt reduction. If a creditor agrees to proceed with this method, he will also agree to lower the full debt amount (sometimes with up to 25-30%). The only condition for the application of this method is that the consumer pays the reduced sum in one single payment, performed within a few days from signing the debt settlement agreement. If the debtor has the financial funds needed for covering the sum in full, settlement of defaults will usually be a better option for him.


Used literature & external links

http://www.stepchange.org/Debtinformationandadvice/Debtsolutions/Debtmanagementplan/Debtmanagementsolutions.aspx
 

http://www.debtadvicefoundation.org/debt-solutions
 

https://www.payplan.com/2013/09/04/what-is-the-difference-between-an-iva-and-a-dmp-2/
 

http://www.debt.org/settlement/vs-consolidation/
 

http://blog.creditkarma.com/personal-finance/debt-consolidation-vs-debt-settlement-the-right-debt-relief-plan-for-you/