Debt management and 'self help' with your debt problems

Debt management is an informal process of negotiating with your creditors for the freezing or reduction of interest, extension of repayment terms or the writing off of part of your debt.

A debt management company can provide debt management services or debt management can be self managed.

The main advantages of using informal debt management are:

Creditors generally encourage customers who are facing a debt problem to engage in direct communication with them, and are often willing to freeze interest and even accept a debt repayment proposal that includes the ‘writing off’ of a portion of the debt.

Although defaulting on your credit agreements and entering into an informal arrangement to repay your debt will invariably impair your credit record, no formal IVA (Individual Voluntary Arrangement) or bankruptcy order will be recorded.

Informal debt management is quick and quite simple as it only involves making contact (usually in writing) with your creditors and following up written requests until a satisfactory conclusion is arrived at.

Informal debt management does have disadvantages such as:

Creditors will not have any obligation to accept your informal offer, and if only one or two of your creditors don’t agree to your proposals it may make the debt management plan unworkable.

Creditors will always retain the right to demand full payment of the debt and add interest in full at any time, even if they agree to your proposal.

Although no formal IVA (Individual Voluntary Arrangement) or bankruptcy will be recorded, the damage done to your credit record by entering into informal arrangements will impair your ability to obtain future credit almost as much as with an IVA (Individual Voluntary Arrangement).

You will need to be organised and have the time available to calculate your proposals, prepare the proposal letters to your creditors, and follow them up.

What is debt management ‘self help’?

Self help involves writing to your creditors yourself, usually using pre-written letters customised with your proposals, whereas a debt management service will contact your creditors on your behalf, negotiate an agreement, and then distribute your funds and manage your creditors for you.

How does informal debt management differ from an IVA?

Informal debt management is very similar to an IVA except that an IVA is a formal process offering protection from creditors and guaranteeing acceptance as long as 75% or more in value of your creditors agree. In addition, with an IVA quite often a large part of your debt will be written off at the end of the IVA, whereas with an informal debt management arrangement it will be relatively hard to get your creditors to agree to write off your debt, only to freeze or reduce interest charges.

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