Common Debt Terms

Here’s 8 quick debt definitions:

Debt management
An informal arrangement that can bring someone’s monthly payments down to affordable levels.

When someone can’t make their monthly payments, they can ask a debt management company to help. The company will then negotiate with their creditors, asking them to accept lower monthly payments (based on what they can afford after their essential living expenses), freeze interest and / or waive charges. Some debt management companies also distribute funds on behalf of their clients.

Debt consolidation
A new loan taken out to pay off all / some of someone’s existing debts.

This can make it easier for someone to keep track of their finances. It can also reduce their monthly payments, because the new loan:

• is paid back over a longer term, and / or
• is used to pay off higher-interest debts (e.g. credit cards, store card, overdrafts).

Debt help
A generic term that applies to any assistance with debt.

This could mean debt advice (see below), self-help packs (guides, sample letters, glossaries, useful addresses, etc.), or debt solutions (see below).

Debt solutions
A collective term given to a range of options that can help someone handle their debts.

Some debt solutions – Bankruptcy, Trust Deeds and IVAs (Individual Voluntary Solutions) – let people declare themselves insolvent so they can clear their unsecured debts entirely. Other debt solutions (e.g. debt consolidation, debt management and remortgaging) can make someone’s debts more manageable by reducing and / or simplifying their repayments.

Debt advice
Professional advice (often free) that aims to help people get themselves out of debt.

Debt advice (over the phone, via e-mail or in person) is available from a wide range of bodies, from charitable organisations to private companies, some of which also provide professional debt solutions.

Debt problem
A situation which means someone should consider seeking debt advice / help.

There is a distinct difference between manageable debt and unmanageable debt. Debt is normally considered a problem when repayments approach unaffordable levels and / or interest charges start to ‘snowball’. So an overdraft of £10,000 could well be a problem for someone who could comfortably afford a £100,000 mortgage.

Trust Deeds
Trust Deeds allow residents of Scotland to avoid sequestration (bankruptcy).

A Trust Deed is a legally binding agreement between an individual and their unsecured creditors. As a form of insolvency, it can only be set up by an Insolvency Practitioner (IP), and will only be accepted if enough creditors agree.

Basically, the individual agrees to pay a fixed monthly amount (based on what they can afford after allowing for their living costs) for a fixed period, normally 3 years. The creditors agree to freeze interest charges, not to take any legal action, and to write off all outstanding debt when the Trust Deed comes to a successful conclusion.

IVA (Individual Voluntary Arrangement)
Similar to a Trust Deed (see above), an IVA is a legally binding agreement and a form of insolvency which must be set up by an Insolvency Practitioner. Unlike a Trust Deed, an IVA is available to UK residents who don’t live in Scotland.

The individual agrees to pay a fixed amount for 5 years (not 3), and the creditors agree to freeze interest charges, not to take legal action and to write off any debt outstanding at the end of the IVA.