If you have a debt problem then one of the options that you will probably have considered is debt consolidation, where payments to lots of different creditors are replaced by a single (lower) payment for a loan that is big enough to enable you to pay off all of your other creditors. The debt consolidation loan can be either secured or unsecured and can result in a dramatic reduction in your monthly payments.
Advantage of Debt Consolidation for Your Debt Problem
The main advantage of debt consolidation is the reduction in your monthly payment for all of your debts. It is very important to prepare a realistic budget to make sure that your new reduced payments on your debt consolidation loan are affordable. Consolidation also makes your total debt situation clearer, i.e. you can’t fool yourself about the true total of all your debts. There is an administrative benefit to having only 1 monthly payment instead of lots of little ones, and if you had got to the stage of defaulting on any payments then the resulting letters and calls should stop when you pay off your account using the money from your debt consolidation loan.
Disadvantages of Debt Consolidation
If you use debt consolidation as a debt solution then you must make sure that you have sorted out the original problems that caused you to get into debt in the first place. If you don’t, you will quickly find that you have a debt consolidation loan AND lots of other debts, which would make consolidating your debt completely pointless and is a path that leads to severe debt problems and possibly bankruptcy.
If you take out a debt consolidation loan secured against your home (and I would usually advise against it) then you are making it much more likely that your home will have to be sold in the future. Unsecured creditors cannot usually force you to sell your home, whereas secured creditors can.
If you do enter a formal debt management solution after debt consolidation you will find that taking on an unsecured consolidation loan over a longer period than the original debts will effectively increase the amount of debt that you have, making it harder to get an IVA agreed with your creditors or extending the period of time that a debt management plan will take to clear your debts. This is because most debt solutions calculate your outstanding debt using the formula – Debt = Monthly Repayments * Number of Repayments left, e.g.
Credit card debt of £1,000 would be considered as £1,000 in an IVA or debt management plan. However if this credit card debt was payed off using an unsecured loan then the debt for IVA purposes would be (for a 7-year loan) 84 x repayment (roughly £22) equals £1,848.
Conclusion
Debt consolidation can be a useful tool on the journey towards a debt-free lifestyle. However you need to be certain that you have the discipline to keep paying the new loan and not create any more debts. If your income does not realistically enable you to pay the cost of your debt consolidation loan then there is little point taking it out. It will make the inevitable process of sorting out your debts properly much harder in the end.
There is a (usually) unwarranted shame attached to getting into debt. A lot of people feel so embarrassed about their debt problem that they will do anything to keep it from friends, relations, and even their family. Unfortunately this is not the best idea. Firstly your family need to know about your debt situation because sooner or later it is going to have an impact on them. Also, trying to conceal your debt problem will often result in it getting worse as you take on more debt to try and maintain the illusion that everything is OK. At best, keeping it a secret from your family will usually stop you from taking the tough decisions that you need to resolve your debt problem.
Who Should You Talk to About Dealing With Your Debt Problem?
At first it doesn’t really matter who you talk to, just find someone that you know will be a sympathetic listener and let it all out. If there isn’t anyone that you feel comfortable talking to then try an online forum or blog to start with.
If you are hiding your situation from your partner/immediate family then you will really have to tackle this soon. Unless you are confident of being able to pay off your debts with no affect on your credit history then your situation WILL have an impact on your partner. The knowledge that they will find out sooner or later about your situation should help you to be brave and tell them now. The later you leave it the bigger the problem and its impact on your relationship.
Next Steps
Once you have broken your silence you should find it easier to talk to other people about your debt problem. You should definitely get some free debt advice from a charitable organization or company. Make sure that you do not pay anything for debt advice at this stage as there is no need to. Research the main different types of debt solution (debt consolidation, informal arrangement, debt management plans, IVAs and bankruptcy) and try and work out which would be best for you.
Conclusion
Keeping your debt problem hidden will often make sure it gets worse or doesn’t get resolved. Seek out the help and support that you need (both professional and personal) and you will start on the journey towards a debt-free future.
Tags: Bankruptcy, Debt Advice, debt counseling, debt management plans, Debt Problems, IVA
It is a common situation for one partner in a marriage or relationship to get themselves into serious debt, sometimes without their partner knowing anything about it. So what are the consequences for the partner with no debt problem?
Firstly it is important to remember that your partners debts are not your own. You cannot be made responsible for paying them directly. However there are some implications for the debt-free partner in a relationship with someone in debt crisis:
1. Your credit score. If you live with your partner then most likely the credit reference agencies will have linked your records and your partners. This means that as soon as they start missing payments on their debts your credit rating will be affected. You may find it increasingly difficult to get/keep credit agreements. This situation will get worse as your partners debt crisis gets more severe. If your partner is declared bankrupt then you will be very lucky to get any unsecured credit.
2. Any shared debts. If you have a joint debt like a joint account or a debt that you have signed up for together then you will most likely be “jointly and severally liable” which means that if your partner cannot pay up then the creditor will come after you for the full amount owed (not half of it).
3. If your partner declares themselves bankrupt then any assets that you jointly own like your home will be at risk of being sold (although you will have at least a year after bankruptcy is declared before the house has to be sold) . Only the share of the asset that is owned by your partner will be taken, but in practice this often means that the house has to be sold. There are ways of taking your house out of the equation before your partner declares themselves bankrupt but these do require the debt-free partner to “buy out” their partner using a mortgage in their name or funds from relatives etc.
4. If your partner wants to enter an informal arrangement, debt management plan or IVA then your joint income will be taken into account when calculating how much your partner can afford to pay. The situation is slightly different with bankruptcy in that you cannot be forced to contribute anything towards the bankruptcy from your income. Also, your partner should not say that they pay half of the mortgage/rent etc. and you pay the other half. It is perfectly OK for them to say that they pay ALL of these essential bills and therefore make it less likely that they have an excess that the insolvency service will want to take.
Tags: Bankruptcy, Debt Advice, Debt Solutions
