Debt Management: when bankruptcy isn`t the answer...

Debt management plans are almost certainly keeping thousands of borrowers from going bankrupt. As figures from the Insolvency Service reveal, there were over 25,000 insolvencies in the first three months of 2008 – and according to R3, the Association of Business Recovery Professionals, that figure tells only part of the story.

A recent press release from R3 states that: ‘The true number of individuals unable to pay their debts in the UK could be three times higher than the Insolvency Service’s figures due to those in Debt Management Plans not being counted.’

Debt management halts the ‘debt spiral’
For thousands, a debt management plan is the ideal way to break free of a downward spiral into debt before it reaches the point where insolvency is the only option. If someone’s monthly debt repayments become unaffordable, most creditors will be prepared to negotiate. They may, for instance, accept lower payments, waive charges, freeze interest or grant a short ‘payment holiday’ (a period of time when the borrower has to pay nothing).

But that doesn’t mean it’s easy. Negotiations can be complex, and each creditor’s response will depend on various factors, including how many other debts the borrower has, as well as how well they’ve paid their bills in the past and why they’re in financial difficulties now. Rather than ‘going it alone’, thousands of people every year turn to professional debt management companies with the experience and expertise to negotiate for them – and do it well.

“At Gregory Pennington, for example,” says a company spokesperson, “each client is assigned a Personal Finance Manager (PFM), who gets to know their situation, answers their questions, provides advice – and anticipates any problems or opportunities that might arise as their situation changes. The PFM also oversees all negotiations with creditors, making sure that their client is kept fully informed and that all agreements reflect the needs of lender and borrower alike.”

“The vast majority of creditors are keen to help borrowers repay their debts at an affordable, sustainable rate. In most cases, creditors would prefer to discuss a debt management plan’s proposals than push for bankruptcy – rather than giving up all their assets to make a partial repayment immediately, borrowers on a debt management plan can repay their entire debt, but more slowly, and without losing their home and other valuable assets.”

Debt management – one of many debt solutions
But debt management isn’t always the answer. Rather than joining a debt management plan, borrowers might be better off taking out a debt consolidation loan / mortgage, entering an IVA (Individual Voluntary Arrangement) or Trust Deed – or going bankrupt.

“Debt is a serious matter and the consequences of approaching it the wrong way can be disastrous. Finding the right way, however, can be extremely complicated. If someone’s in financial trouble, it’s vital they talk to a company that offers a range of debt solutions, so they can make an impartial recommendation based on all the factors (income, expenditure, assets, level of debt, type of debt, etc).”

Although bankruptcy is sometimes the best way forward, even the Insolvency Service states that ‘Bankruptcy should always be the last resort as the debtor will lose control of their assets and will be subject to bankruptcy restrictions, potentially up to 15 years’. No-one should consider bankruptcy without understanding all its consequences and speaking to a debt adviser about the alternatives – and debt management, as the numbers demonstrate, is clearly an attractive alternative.