A Guide to Debt Management

A Guide to Debt Management

by David Redmond on 30 Aug, 2011

Last year saw household income fall for the first time in 30 years. Insolvencies went up 45% and almost 35% of people will retire this year into poverty. Debt which has been highlighted as a national issue for years has now reached crisis levels for many ordinary people.

The practical effects of this are plain to see. People are falling behind on repayments on credit cards and mortgages, tough decisions are having to be made about lifestyles and debt begins to push people into a hole from which it is often hard to see any way out. And it is in these situations where debt management comes in.

Debt management encompasses a variety of different solutions, from simply changing weekly outgoings right through to the worst case scenario of declaring bankruptcy. Most people though lie in the middle and therefore need more nuanced solutions for their situation. Commonly this means entering into a debt management plan which is an informal agreement between the debtors and his lenders.

Of course lenders do not have to agree to a debt management plan. However, if it is clear that the debtor will not be able to repay without reducing the amount of debt due on a weekly basis then it is in everybody’s interest to look into a plan which makes the repayments manageable. As a result of the increased indebtedness of Britons, these plans are more and more commonplace.

Whether this solution is right for a debtor depends on a number of factors. First, secured lenders must still be confident that the debtor will be able to repay what is owed otherwise they will look to other methods of enforcing the debt such as taking possession of the security. Second,  any unsecured creditors will need to be confident that the debt will still be repaid within a reasonable time and that any agreement will not simply be a stop gap measure. Third, the debtor must be able to see a way out of debt once the credit management plan comes to an end otherwise the agreement may just be delaying the inevitable and delaying the debtor’s recovery into solvency. Finally, the debtor must realise that entering into a debt management plan will have a major impact on his credit rating and that even if it is successful in helping him out of debt, it may lead to higher costs down the road.

As mentioned earlier, there are other options for those who do not wish to enter into a debt management plan. The simplest of these is to try and put the family budget back in the black by reducing monthly outgoings. This can be done by looking to eliminate non-necessary purchases and reduce the amount spent on essential purchases. This could be giving up magazines, dining out or going to the pub each evening alongside buying cheaper washing powder or moving to energy saving light bulbs.

More severe changes may include consolidating the amount owed by taking on a fresh loan to cover the amount already outstanding in an attempt to reduce the amount that goes out each week to pay off debt. The problem of course here is that the debt in the long term never goes down and often goes up.

About the Author

David Redmond

David Redmond is a Partner of Don Gilliard Finance Group. He is a fee-only, independent financial advisor and financial planner. For over 15 years, he has been helping individual investors and their families realize their investment goals.