Somewhere along the way I learned that borrowing money to pay off your debts is not a very good idea at all.  Yet as I passed through the different phases in life, this sweeping statement seemed to inapplicable to certain situations.

When you are in serious debt with different creditors, taking out another loan at a lower interest rate and better terms could actually be a solution to your problems.  That is what a debt consolidation loan is all about.

In very simple terms, a debt consolidation loan is the restructuring of all of your debts into a single one.  As a result, you will only have to answer to a single creditor.  More so, debt consolidation loans are almost always offered at a lower rate than the separate loans or debts that you may have had before.  This makes it easier for you to pay off your debts.

Do be careful about the mentality that once you’ve consolidated your debts, you will be fine.  It is still important to know how to manage your finances, with or without a debt consolidation loan.  It does not mean that you have no more debt.  It merely means that you have lumped all your loans into one huge loan and of course, it still has to be paid off.

It is not uncommon for some people to find themselves unable to pay off their debt consolidation loan after several months.  In order to avoid this, make sure that the repayment amount you agree to is feasible for you.

Another way to deal with debt is to come up with a Debt Management Plan, or DMP.  This should not be confused with the Individual Voluntary Arrangement (IVA), which we talked about in the last post.  In contrast to the IVA, the DMP is a much less formal set up and less conclusive as well.

How would you know if a DMP will work for you?

One requirement is that you should be able to pay off your debts in 5 years or less.  This means that the total of your debts should be so that you can afford to get rid of all of them within the specified period of time.  More than this, your creditors should agree to freeze all applicable interests and charges within the specified period.

Since all fees and charges are going to be frozen, the set up entails that you pay fixed amounts on a monthly basis over the agreed period of time.  The regular monthly payments are computed on a pro-rate basis.  Take note that creditors are NOT obliged to agree to your DMP.  Your strength lies in the reality of your situation – what you can and what you cannot afford.

How do you go about a DMP? 

Your best course would be to seek the advice and services of professional debt management consultants.  They are the ones who will draft your DMP and present your case to your creditors.  It is also their responsibility to make sure that your payments are made regularly and spread equally amongst your creditors.

Though some people would rather bury their heads in the sand and see how things will turn out, I seriously suggest that when it comes to debt, you should seek out help and study your options.  Our nation may be one of debt, but there is a solution to everything, if only we would exert that extra effort needed.

In the UK, there are several ways of dealing with debt – most of them designed to bail out individuals who are in serious trouble.  One of the simplest solutions to debt is an IVA, or Individual Voluntary Arrangement.

An IVA is basically a legal process which allows an individual to settle his unsecured debts with his creditors through a formal proposal (originating from the debtor).  An IVA keeps an individual from resorting to bankruptcy.  An IVA is ideal for individuals whose debts do not exceed a total of £15,000 distributed between 3 creditors.

How does it work?  If you are the debtor and you want to have an IVA, you need to come up with a workable proposal – satisfactory to both you and your creditors.  You have to engage the assistance of a licensed Insolvency Practitioner for this.  The IP will al so be the one to convene a meeting of your creditors, who will then vote whether to accept or decline your proposal.  You only need 75% of your creditors to vote positively for the IVA to be legally binding.

The best thing about an IVA is that once you have completed it, your outstanding debt will be written off, allowing you to start with a clean slate all over again!

I don’t know about you but I have this strong aversion to this word.  Debt comes in many forms but in the end, it means the same thing – you owe somebody something.  When it comes to finances, despite the common negative tag associated with debt, not all debt is bad.  However, debt sometimes gets out of hand and people get mired in its cycle.

In the UK today, it seems that there are mounting debt problems.  An estimated 8 million adults are supposed to have unsecured debts of around £10,000 each.  This information was supplied by top debt management consultancy Thomas Charles.  Scotland is not exempt from these concerns as well.  The same consultancy found out in a study it commissioned that 1 out of 4 Scottish people are in debt.

I could go on and on about the statistics but I think I have driven the point home.  We live in a nation of debt, so to speak.  We have lifestyles and mindsets that are prone to having to borrow money.  If you think about it, though, we are not alone in this problem.  The United States has similar issues – maybe even worse.  Yet this does not excuse us from being more responsible for our finances.  Just because the Americans (or some other people for that matter) are in debt does not mean that we should be as well.

In the next several posts, I would like to talk about some solutions to address debt.   In the meantime, try to stay out of it!

Money does not manage itself – that much is evident from the countless Britons who are in debt today. How do you avoid being in the same boat? The answer is simple – manage you money well. Come up with a budget and stick to it.

The idea behind a budget aims to keep you in line with regard to your spending and earning. The prevailing principle is to earn more than you spend and not the other way around. In the old days, our parents had their own way of keeping a budget. Lucky for us, we now have so many tools and resources that we can make use of to keep a budget and to monitor our finances as well.

One of my favorites is Quicken. This software is well known all over the world for its simplicity and user friendliness. Personally, though, I think that some mathematically-challenged or computer-challenged people would have to read the manual carefully. Once you figure it out, however, it does all the work for you.

There are also other countless software available online and in stores for managing your finances. There are even free spreadsheets that you can find in different finance web sites. These are the simplest tools but can be very effective as well.

I believe that no matter how many tool and gadgets you have, the bottom line is exercising self control and discipline. These toys are merely here to make the job a little bit easier.