If you come to the conclusion that just trying to pay off your existing unsecured debts (bearing in mind that interest will continually be added) is impossible within your income level or would leave you in poverty for years to come, then your options at first appear limited to bankruptcy.

For many people, bankruptcy could actually end up being the cheapest way to resolve their debt situation.It costs around £500 to make yourself bankrupt at the local County Court, but this “last resort” action does have severe and long lasting consequences and should be avoided if at all possible!

Other, less drastic options include a consolidation loan.You’ve seen them advertised on the TV and in the press!  Take out a (usually secured) loan and lump all your debts into one monthly repayment. Not only does this mean putting your home at risk, but if you are in this position, your credit score and rating may mean you can’t get such a loan in the first place.

You could get a debt management company to negotiate with your creditors to accept a reduced payment schedule. Creditors are under no legal obligation to accept reduced payments or a suspension of interest in this way, so each creditor would have to be approached individually to see if they will agree to it and of course you do have to pay all your debts in full.  It’s costly, time consuming and if the debt management company is unsuccessful in stopping interest you’ll probably end up being charged more in interest than you are actually making in payments, which means you’ll never get out of debt!

A better option is to consider entering into an IVA (Individual Voluntary Arrangement).  This is a legally binding deal lasting five years that’s brokered by a licensed Insolvency Practitioner who puts forward a single repayment proposal to all your creditors.Within 24 hours the Insolvency Practitioner will make contact with your creditors and they are then legally bound not to hound you any further.The insolvency Practitioner will make an offer to your creditors of somewhere between 30%-50% of what’s owed and in most cases interest is dramatically reduced or even frozen.   Your creditors then vote to decide whether to accept the proposed IVA or not.  If 75% (that’s by value of the debt you owe them – not ¾ of all the people you owe money to) of your creditors do accept it, then it’s binding on everyone, even those who didn’t vote or voted against it.

The usual minimum level of acceptable monthly repayment for an IVA is £300.00, it’s really only suitable for larger debt cases (i.e. if you owe more than £20,000.00) to at least three or more creditors.  If you are a homeowner with a level of equity in your property that’s more than the total of your unsecured debts, then an IVA proposal will probably not be accepted.Creditors will expect you to re-mortgage or sell the property to pay off the debts in full. IVAs are also not suitable for people living on state benefits as their main or only source of income, as the level of these benefits has been set to allow solely for living expenses.

If you’re not in those circumstances above, and you’re  are certain you’ll  be able to make consistent payments towards an IVA from your earnings of at least £300 per month for five years, then an IVA is worth exploring.  Unlike debt management, an IVA is a “full and final” settlement which means that any debt still outstanding at the end of the IVA is permanently written off and you are free of debt.An IVA is an affordable and workable solution to serious debt problems and preferable to bankruptcy.