The common myth about debt, is that all of it is bad. Conventional wisdom is that debt is debt, and all of it holds you hostage to the lendor, and therefore should be avoided at all costs.

Ask any millionaire if they have ever borrowed money, and they will tell you that they have. So how is it that we have learned that debt is bad, and something to be avoided at all costs?

The answer lies in understanding differences between good, and bad debt. Let’s start with bad debt. Bad debt is borrowing money for things that don’t, or won’t make you money. For example, I want to go out to dinner. I don’t have the money, so I charge it on my credit card. I am borrowing money for entertainment. After I have enjoyed the meal, I have nothing to show for it, except maybe a couple of extra pounds. This is not a good reason to borrow money, as I am borrowing for today, without any consequence for tomorrow.

Let’s suppose I want to purchase a home and it costs $100,000.00, and I don’t have a hundred thousand in cash to buy the home, I only have $10,000.00. I like the home, would enjoy living in it, and have earnings to support the monthly payments of $800.00 per month. If I borrow $90,000.00 for a mortgage loan, then this is good debt.

Why is this good debt and the other bad debt? It’s real simple. A house will go up in value most of the time, a dinner never goes up in value, ever.

If I apply borrowed money to purchase the home, Uncle Sam benefits me with a tax break. This means that I can write off of my taxes the interest I pay on the loan. That means the government actually gives me a write off for borrowing the money. If I spend $9000.00 per year in interest, that is the amount that is written off of my taxes. If I spend $9000.00 a year on nice dinners, the government gives me nothing.

When borrowing money, it is wise to only borrow it for items, that appreciate in value, or will pay you higher returns later. If I borrow for an education, this is good debt as it considers future earnings. I will earn more if I have a college education then if I don’t. Therefore borrowing money makes sense. If I want to go to Disneyland, borrowing money doesn’t make sense. When the vacation is over, I will be left with good memories, but no appreciable assets.

In summary, only borrow money when you will reap higher returns, or gain some benefit by borrowing the money as this is good debt.

Avoid borrowing for items that don’t give you rewards after you have spent the money, as this is bad debt.

When you find yourself knee deep in debt and are unable to manage your finances, its time that you need debt assistance to help you pay off your debts to gain financial independence. There are several debt assistance companies that offer reliable debt management programs to help you become debt free.

When do you need debt assistance?

If you need debt help, you must act immediately. It would save you money and time and would also save you from ruining your credit score. So, identify the situations when you require immediate debt help.

• If you are paying multiple bills, you can opt for debt relief program and make a single monthly payment. It would make your life easier.
• If you find that your monthly debt payment get reduced by opting for debt relief programs, you must opt for one. You’ll be able to free up some cash every month.
• You can also use these programs to tackle your various high interest rate debts. For example, if you have numerous credit card balances with high interest rates you can use a debt program to get a handle on that debt and lower the interest rate that you are currently paying.

What to expect from a debt assistance company

There are many debt assistance companies available in the market ready to help you. So, it is important for you to know what to expect from a reputed company.

1. The company must offer you credit counseling and reliable advice on managing your debts and help you create a realistic budget.
2. The company must offer you a plan that is approved by your creditors and is affordable to you. Both you and your company must together work out a plan.
3. You must be given written documents for all the proceedings.

Things to watch out for

There are many companies that are unscrupulous and can cause greater harm to your credit score. So, beware of the following things when you are looking for a debt help company:

1. False promises – There are some companies that make false promises such as repairing your credit history instantly or increasing your credit score. Remember they have no such authorization.
2. High fees – Beware of companies that charge high upfront fees or high monthly fees.

When you are debt and looking forward to a debt free life, you must opt for debt assistance to help you pay off your debts.

Do we really need Debt Management?

There are many options available if you need finance. Financial institutions are offering various kinds of loans on attractive rates of interest. If you need to expand your business, you can opt for a commercial loan. If you want to refurbish your old home, you can avail a home improvement loan. Loans are also available for special needs like, financing a new car or some vacation. You can get emergency loans in case of accident.

Getting a loan these days is very easy. People are opting for secured loans very often for their various needs. Online loan options have expanded the horizon of loan market. People are comparing various loans and are choosing a loan according to their need.

Loan is just one example; we are very much relying on plastic money nowadays. You may be using more than one credit card. You pay be paying your store bills through them. In this kind of environment anyone can be trapped in debts. You may forget to pay your monthly installment or you may have incurred some dues in your credit card bill.

Sometimes the debt bills become so confusing that we start to develop stress. Debt management is gaining popularity to solve various debt related problems of the citizens. Debt management provides direction to all your queries related to any kind of loan which you have incurred or you want to incur.

How can you do debt management?

You can manage your debts and lower your stress levels to a great extent. There are various debt management companies which are providing services to the people who have been trapped in bad-debt.

You can easily access the debt solutions by consulting any such company. You can have an initial advice from a certified credit counselor for debt management. The credit counselor evaluates your debt situation and offers free advice to you. Your current income, expenses and debts are investigated and scrutinised. After studying all the aspects the credit counselor suggests options. A debt consolidation loan is one option that they may suggest but it will depend upon many factors.

The credit counselor also suggests you about opting for a debt management plan. Under the plan you chose a credit counseling organisation. You can have all the information you need about those organisations online. You can study about their services and fees. After choosing the debt management company you will have to deposit a particular amount of money each month. The company would calculate the money after studying your debt.

Now on, the company will do transactions with your lenders and it is their responsibility to clear all the bills on time. You can get interest rate benefits also by pursuing a debt management plan.

It is true that debt management is an excellent option to lead a stress free life.

There are four main options for dealing with debt:

Debt consolidation – borrowing more money but reducing your monthly payment;

Debt management plan – reducing your monthly payments without borrowing more money;

Individual voluntary arrangement – a formal legal procedure which offers a write-off of debt after a prescribed period of time, generally, five years;

Bankruptcy – a formal legal procedure, which offers a write-off of debt after a prescribed time period of, generally, one year.

It is important to stress that there is no ‘right’ way to deal with a debt problem. Each option has its own set of advantages and disadvantages. And just as important, identifying the best option is as much to do with personal and family implications as with the financial issues.

Debt consolidation: How it works

Debt consolidation involves borrowing more money to repay your existing debts. The selling point is that the payments on the new loan will be less than you currently pay on your existing debts. This allows you to bring your income and expenditure back into balance, so solving your debt problem.

The problem with debt consolidation is that the reduction in monthly payments often comes at a heavy price.

Paying back your debt through a new loan over a longer period may sound good but take careful note of the figures. While the reduced monthly payment will help your budget, the calculation of how much you will have to pay back in total will be an unwelcome shock.

Also unwelcome if you are a homeowner may be the news that your consolidation loan is secured against your house – in effect, you are taking on a new mortgage (which is why these loans are often only advertised to homeowners). Fall behind on the consolidation loan payments and you risk losing your home.

Debt consolidation: things to be wary of: Watch out for debt consolidation companies who heavily sell additional insurances to accompany the loan. You may need protection against unemployment, sickness, or critical illness, but you will almost certainly get it cheaper if you buy it separately rather than bundled in.

If you fully understand the implications of what you are doing and are able to access new borrowing at a low rate of interest, debt consolidation can be an effective approach to a debt problem. But more often than not, it leads to worsening debt and sometimes even potential homelessness. If you are considering debt consolidation you must be aware of the downsides.

Debt consolidation is big business. And that means that some of the companies who offer loans are far more concerned with maximizing their profits than in ensuring that a consolidation loan is the right option for you. Watch out particularly for debt advice or debt management companies who suggest an additional loan without full consideration of other options.

A few years ago, debt consolidation loans were only available to those with flawless credit ratings. If you had current or previous arrears on your debt payments it was unlikely that you could access more borrowing. However, there is now a wide-range of companies that specialise in lending to borrowers who are ‘credit impaired’ or ‘sub-prime’.

Of course, these companies do not do this out of the goodness of their hearts. The number of borrowers with current or past payment problems means that there is a large market for this borrowing with interest rates that are higher (sometimes much higher) than you might expect.

Remember that high interest debt consolidation loans – which are secured on your property – are a win-win for the lender. If you repay, then they benefit from the higher interest charges; if you default, they can repossess your home and get their money back early.

Debt consolidation loans can be a good option if: You have the self-control to see debt consolidation as a ‘once and for all’ solution.

You use the reduction in outgoings to bring your budget back under control, pay back any future credit card spending in full each month without fail, and start saving for future unexpected or irregular costs;

You are prepared to shop around to identify the best value debt consolidation loan;

Debt consolidation loans can be unhelpful if:

You use some, or all of the debt consolidation loan for reasons other than repaying debt. If you need to borrow £10,000 to repay debt, then don’t be tempted to borrow £12,000 to also pay for an impulse holiday;

You don’t shop around and end up paying a high rate of interest on the debt consolidation loan;

You don’t realize the implications of taking on a secured debt against your home.

Debt consolidation loans can be disastrous if:

You continue to accumulate debt after taking on the consolidation loan.

You cannot repay a secured debt consolidation loan and lose your home.

Advantages of debt consolidation:

You can reduce the total amount you pay each month on debt repayment.

Maintains your credit rating.

Disadvantages of debt consolidation:

Normally greatly increases how long it takes to repay your debts.

Often only advertised to homeowners.

Debt management plan

How it works

Any bank, finance company or credit card lender owed arrears by a consumer has the option to seek a judgment in the county court to reclaim their money. However, where you are not trying to avoid payment but are in genuine financial difficulty, the court is likely to order repayments based on your ability to pay.

The court accepts that you must first pay your ‘priority’ debts – these are debts where non payment would lead to the loss of your home (mortgage or rent payments); loss of an essential utility (gas, electricity, telephone, or water payments); loss of an essential item (cars or other hire purchase items); or could theoretically lead to imprisonment (magistrate court fines or council tax payments).

The court further accepts that you need to make other payments to maintain you and your family – so reasonable amounts for housekeeping, travel, clothing, and other similar items are taken into account.

What remains after this exercise is a guide to the amount of money left to repay your bank, credit card and other ‘non priority’ credit debts. The court will make a repayment order based on the figure but also take account of monies owed on other credit agreements. In addition, the court will freeze the interest charges so that the debt no longer increases.

The negotiation of reduced debt payments simulates the approach taken by the court. It involves producing a detailed income/expenditure schedule, showing how much ‘spare’ money is available after priority payments have been made and proposing a fair distribution of this money. At the same time, a request is also made for further interest charges to be frozen.

Arranging a debt management plan is something that you can do reasonably easily yourself, particularly if you use the self-help booklets available from National Debtline or your local Citizens Advice Bureau. However, it is also (unfortunately) true that the banks and card companies will sometimes respond more positively if a debt advice agency writes on your behalf.

Fee charging debt advice agenciesDebt advice agencies offer a similar debt advice service to the Citizens Advice Bureau but will also administer your reduced payments negotiated under a debt management plan. Your local CAB will often arrange for you to make reduced payments, but you will be responsible for making these payments.

The fee charging companies will also arrange that you pay your money over to them and they will pass it on. However, this additional facility comes at a price – the fee charging companies typically keep up to 15% of your regular payment as their fee and the whole of your first month’s payment may also be swallowed up in administration costs.

Of course, paying somebody else to administer your payments means it takes longer to repay your debts. There is therefore little point in paying for a debt management company unless you think their service is worth it.

Advantages of debt management plans

Allows you to bring income and expenditure back into line without taking on more borrowing;

You can follow this option by yourself or with the help of a no fee charging debt advice agency.

Disadvantages of debt management plans

There is no guarantee that your creditors will accept the reduced payments and/or freeze future interest payments;

The time taken to repay your debt will increase. The time will further increase if you pay your debts through a fee-charging debt management company;

Your credit reference file will show details of the Debt Management Plan. This will affect your ability to get credit in the future.

Debt management plans can be a good option if your financial problems are caused by a temporary reduction in income and the situation will improve in the near future.

Debt management plans can be unhelpful if:

Your ability to pay your debts will not improve within 12 months.

Debt management plans can be disastrous if:

The fees taken by commercial debt management companies and the refusal of banks and credit card companies to freeze interest means that your debt steadily increases.

Individual Voluntary Arrangements

At best, an IVA can be an excellent solution for somebody faced with an overwhelming debt problem. At worst it provides a moneymaking opportunity for the increasing number of companies that advertise IVAs. You must make sure that this is a suitable option for you and that the company operating the IVA fully understand and represent your financial situation.

How It Works

A specialist insolvency adviser, called an Insolvency Practitioner, draws up a proposal for you to repay a specified amount in full repayment of your debt. The payment can be made in a lump sum or over a period of time – often up to five years. The companies owed money agree to write off any debt still outstanding once you have made the agreed payment. The amount paid under the IVA is normally calculated with reference to the amount that would be collected if you were to be made bankrupt.

There is normally no up-front fee to pay in using an Insolvency Practitioner – the costs of the IVA are written into the arrangement. But you should be aware that the costs can be high (we are talking thousands of pounds for even a simple IVA). It is vital that you understand how the costs will affect how much you will pay and the proportion of your payments that will be paid to your Insolvency Practitioner rather than to repay your debt.

Advantages of IVAs:

Allow you to repay your debt at an affordable rate over a reduced period of time. Alternatively, the IVA may be proposed on the basis that your family or friends are prepared to help meet your debts;

Offers the advantages of bankruptcy but without some of the restrictions and disadvantages.

Disadvantages of IVAs:

The costs of setting up an IVA can be surprisingly (some would say outrageously) high;

You may have to pay an upfront fee;

Defaulting on the payment arrangement can lead to bankruptcy;

The regulation of Insolvency Practitioners is fragmented and many consumer groups report situations where Insolvency Practitioners seem more interested in the fees that they earn rather than the success of the IVA;

Your credit reference file will contain details of your payment default.

IVAs can be a good option if:

You face a large debt problem and a debt management plan will involve payments over a greatly extended period;

You are faced with bankruptcy but wish to avoid the associated restrictions and disadvantages;

You identify an Insolvency Practitioner who you can trust to propose a realistic, workable, and, if appropriate, sustainable arrangement which works to the benefit of both you and the companies to whom you owe money.

IVAs can be unhelpful if you don’t shop around to find an Insolvency Practitioner who understands your problems and who you feel you can trust.

IVAs can be disastrous if you agree to make regular payments that you know you won’t be able to sustain.

BankruptcyBankruptcy is a formal legal process that draws a line under your debts. It involves the sale of any items of value that belong to you (but some items, such as your basic household goods will not be taken). It may also require that you make regular payments from your income if you can afford this after you have paid your essential domestic and work costs.

Bankruptcy is not an easy way out of paying your debts but it is an option to consider if you face overwhelming debt pressure and can see no possibility of being able to meet your liabilities. It is generally a more attractive option for those with few or no assets.

How bankruptcy works

Bankruptcy can be started by the person who owes money or by the firms who are waiting for missed payments. Banks and other finance companies will generally only make someone bankrupt if they think if it is financially worthwhile. However, this does not stop them threatening bankruptcy even where they know that they will not follow through. If you are being threatened with bankruptcy, you should get advice urgently (your local Citizens Advice Bureau or other free independent advice agency is a good starting point).

Once bankrupt, you are under the control of the bankruptcy trustee. They will arrange to sell items of value belonging to you (including your house if you are a homeowner and the sale value is more than your mortgage debt) and will want to discuss what regular payments you can make. The trustee has the power to examine the way you conducted your finances prior to bankruptcy, particularly if you gave away or sold assets. You are required to cooperate with the trustee.

A recent change in the law means that those experiencing bankruptcy for the first time can normally expect to be discharged after a maximum period of one year. You are then released from your debts (although you may be required to make regular payments for up to three years). You are expected to learn from your experience. People who go bankrupt again get a much tougher time.

Advantages of bankruptcy:

Limits the period over which you repay your debt;

Provides legal protection in respect of your debts;

Disadvantages of bankruptcy:

You are subject to the control of the court;

You face the loss of assets other than those necessary to satisfy your domestic needs, your tools of the trade, and vehicles you need in the course of your employment (which does not include travel to and from work);

Gas, electricity, and telephone contracts will need to be put in to the name of another adult who lives with you. If there is no other adult, you will have to change to a prepayment system or lose the service;

You cannot hold certain public offices while you have not been discharged from bankruptcy, nor can you continue as a director of a limited company;

Your access to credit will be severely restricted until you are discharged; thereafter you will pay higher rates of interest until you have re-established your credit rating;

Some debts will not be included within the bankruptcy. These include mortgage and other secured debts, magistrate court fines, debts payable after personal injury claims, and debts to the student loans company;

Any determination by the court that you have acted dishonestly or recklessly can lead to restrictions on your discharge from bankruptcy;

You will normally lose the use of your bank account and will be forced to open a ‘basic’ account with no overdraft and limited other facilities;

You should assume that your employer, friends, and neighbors will find out about your bankruptcy. Your bankruptcy will be publicized in the local Press and is available to anyone who wants to request information about you;

You will have to pay £475 to petition for bankruptcy.

Bankruptcy can be a good option if: You face a substantial debt problem, few assets, and limited ability to pay your debts;

Bankruptcy can be unhelpful if: You are attracted by the advantages without fully considering the downsides of the bankruptcy procedure and aftermath;

Bankruptcy can be disastrous if: You have assets which will be seized by the bankruptcy trustee;

Your employment, business or personal relationships will be detrimentally affected.

The American dream is slipping away for many people as the economy sinks, investment funds plunge, and mortgage rates reset. Homes across the country are going into default followed by foreclosure. Emotions run high when it comes to losing one’s home. However, if you are facing imminent foreclosure, there are some steps you can take to save your home and your dream. First, don’t throwaway letters you receive from lenders or ignore calls. Realize this problem will not resolve itself, and initial contact from the lender may actually contain a solution.

A legal professional can help negotiate settlements and stop creditors from harassing you. The Fair Debt Collection Act will work to your advantage and assure that you are treated fairly. It is after the delinquent payments compound that the problem compounds as well. An attorney can help you with loan workout or loan modification plans. Take steps to address the problem with your mortgage company. There are people in place with strategies to help you out of this problem.Secondly, educate yourself about foreclosure and bankruptcy laws. Gather all loan documents and read them; therein may lay information vital to you at this juncture. You will find information as to your lenders rights and yours when you can not make payments. Become familiar with legal measures you can take to protect yourself such as real property lien stripping, bankruptcy, Service Members Civil Relief Act, and the Homeowners Relief Act. Each state has different laws regarding foreclosure, and this information can be obtained from the State Government Housing Office. Consult a lawyer or credit counselor, who has real estate experience regarding any negations with the IRS and possible tax relief.

Next, re-evaluate income and spending. Take the necessary steps to reduce expenses. Take a new look at any assets you can turn in to cash. This is the time to tuck-in financially. Take steps to show the creditors you are working on the problem; this may give you advantage with negations.Finally, contact a lawyer or a foreclosure counselor whose primary focus is your home retention. You have 90 days after a foreclosure sale to vacate. You must file quickly to stop this process. A professional will help organize debt and help with a strategy to buy you time to pay off debt and stay in your home.

In making any purchase, you want that the item purchased must have a long term utility. However, while selecting the debt management technique a shift in the approach is quite noticeable. We find that short term debt management techniques like debt consolidation loans are much greater in use. Nevertheless, this is not double standard on the part of people. The choice is mostly influenced by the immediate pressure of debts.

Debt settlement techniques, which have a longer standing effect, are the rule of the day. People know them by the name of debt management in the UK. Debt management aims to strike at the roots of debt, instead of simply countering the after effects of debts. When debts are not allowed to increase, the use of debt consolidation loans and other short-term debt management techniques become redundant.

Why is debt management preferred to have a longer effect? The realisation is the result of people accepting that debt consolidation loans can give succour for only a time being, but not for ever. Even when borrowers are able to pay all the debts at a particular point of time, is there a guarantee that debts will not arise again? What shall one do at that time? Taking a new debt consolidation will not be a viable solution. The loan providers will be the first to deny loans to borrowers who have grown a habit of borrowing. And what about your home against which the loan is taken? Will it have sufficient equity left to be used for any other purposes? No! These are the reasons that have pushed borrowers towards seeking long term debt management.

Certain borrowers are perplexed at the inclusion of debt consolidation loans in debt management, when the debt management agencies themselves say that debt consolidation loans are of not much good. To this the debt management agencies reply in the following manner; “We do not recommend the total ban on the use of debt consolidation loans. What we recommend is a ban on the misuse of debt consolidation loans.”

Debt consolidation loans are rampantly used in the UK. It is because of the ease with which people are able to draw debt consolidation loans that people have started spending rashly; thus being further weighed down by debts.

Debt management agencies have come down on this habit of the people of the UK. Since debt consolidation loans abet people in taking more debts, debt management agencies also criticise debt consolidation loans.

Debt management makes a planned use of debt consolidation loans. Compare the situation with an ailment that a person is facing. Debt consolidation loans will be like a surgery to be performed. However, doctors will first try to cure the ailment through oral medication. The oral medication is to be given through debt counselling. Only when oral medication is not able to cure the ailment, doctors will suggest surgery, i.e. debt consolidation loans.

Debt counselling is referred to the advice to borrowers about the manner in which they can cure a debt problem. The advice is not general in nature. Debt counsellor, who is an expert, will sit with the debtor during a few sessions to discuss the details of the debt problem. When debt problem is at its preliminary stage, it will require efforts from the borrowers own side. Debt counsellor offers certain suggestions through which borrowers can bring upon a marked change in their finances. Debt management agencies have given a new look to certain age old principles of coping with debts. It is these principles that are made use of to inculcate debt sense in borrowers.

It is during these sessions that the debt counsellor will access the use of debt consolidation loans. The factors that will be considered while making the decision are as follows:

• What is the amount of debts that the debtor owes to one or different creditors?
• Does the borrower have sufficient available income to repay debts on his own without using debt consolidation loans?
• The nature of the debts- whether debts are accruing higher interest rate, and if they have already reached their repayment date.

The various tips that you learned during the debt management process must not be forgotten during repayment of debt consolidation loans. While debts owed to creditors have been settled, you continue to owe to the loan provider. Never must the borrower relax until the final instalment of debt consolidation has been made.

With consumer debt at an all time high, increasing numbers of people are looking for a way to financial freedom. As a result, the popularity of the debt settlement company is growing at a steady pace. A debt settlement company offers one of the quickest ways out of debt today. These companies, sometimes referred to as debt negotiation companies have arbitrators that negotiate directly with your creditors to have your unsecured credit balances reduced.

When you are looking to get relief from your debt problems, a lot of people tend to feel that the only good solution is to go about getting credit counseling or to even file for bankruptcy. What a lot of these people do not realize is that there is a little known about process that is known as debt settlement. The goal of debt settlement is to allow you to not only meet the requirements and needs of your creditors for less than what they say that you owe them but to also save you as much cash as possible throughout the process of it.

One of the many reasons why a lot of people choose a debt settlement institution is because their amount of debt amounts are highly out weighing what they are capable of managing in order to back the full amounts to avoid having to file for bankruptcy. Another reason as to why a lot of people choose to go about a debt settlement company is simple because they are way too fed up with the credit card companies because they are constantly increasing the interest rates to unfair advantages and they refuse to lower it no matter how much you try and get them to.

However, the absolutely number one reason as to why people choose to utilize a debt settlement company is to relieve the burden of being in debt. The burden of debt becomes such an overwhelming thing that their biggest goal is to become debt free and as a result it outweighs the thought of what could happen to their credit profile if they do not act upon it immediately. This is why the debt settlement process is something that is gone after when trying to accomplish the goals of getting out of debt and staying out of debt.

It becomes absolutely needed to eliminate your debt before trying to improve your credit score. This is because thirty percent of your score is determined by your debt to credit ratio so if you happen to have a lot of outstanding debt your score will be a lot lower than it should be which as a result can hinder your chances of getting anywhere financially. Your credit profile is a good indication of your history in terms of payments and late payments and such but it is one hundred percent possible to improve your score over a period of time because in the United States everyone gets a second chance at doing that.

Banking and financial institutions would love to keep you locked into the state of mind that your credit score is the absolutely most important thing in your life. Do not get suckered into feeling this way because it’s their way of fearing you into doing things their way. It is by all means an important part of your life but in no way should you allow it to dominate your life and make it so that it is the only thing that you care about. These financial institutions do not really care about you; all they care about is making more money. Why else would they raise your credit limit on your credit cards in order for you to charge more things to it? It is because they know that you are likely to fall into some sort of debt like most Americans and as a result they will make more money off of you and your debt.

When you are looking about the different options and as debt settlement comes to pass you realize that it is your choice to become debt free. There are typically two different types of companies that can help you in becoming debt free over time. The first one is the type of Debt Settlement Company that you see advertised everywhere that happen to not be lawyer based. The others are law firms that happen to have a debt settlement service as one of the things that they offer to people.

When you are searching for a debt settlement company there are some important things that you really do need to consider before choosing the right one that will help you become debt free. There are even some things that you should steer clear from if you want the best possible help for your current financial situation.

The first thing that I would like to point out is that any of these companies should be able to save you at least half of your debt including the fees that you have to pay and the paying of your creditors. While on your own you can typically save around half of that without too much effort on your behalf, getting any more relief than that will require a fair degree of experience that you do not have. One thing you need to be aware of when attempting to speak to someone from any debt settlement company is that you should always do your homework first. There are some companies out there that just want to make as much cash as they can off of their clients without any true regard for their own problems. These people say just about anything that you want to hear in order to get you signed up with their programs.

One way to see through all of the best is that some of these companies will tell you that you can set up a monthly payment for any amount that the client wants. This payment will usually be quite low and for a lot longer period of a time that many of the more reputable companies will allow you to have. This obviously will remove the purpose of what you are trying to accomplish because the longer the period of time you have to pay off a loan the more interest that will pile on and the more you will end up having to pay back as a result.

When you are looking about the different options and as debt settlement comes to pass you realize that it is your choice to become debt free. There are typically two different types of companies that can help you in becoming debt free over time. The first one is the type of Debt Settlement Company that you see advertised everywhere that happen to not be lawyer based. The other is law firms that happen to have a debt settlement service as one of the things that they offer to people.

A lot of people get into the mind set that there is a magic way to fix any of their problems quickly. These bad companies understand this need and typically are very good at catering to that and as a result sign up thousands of people on a yearly basis. Be careful of what they tell you because at first it may sound like a great deal but they do not usually include how much it will cost you in the long run. The first thing that you need to ask them is if their claim of savings includes their companies; fees or not.

You should also make certain that you have a realistic time frame for paying back your debt. There is a huge benefit in going with a debt settlement company in that you can become debt free in a short period of time instead of paying the minimum payments to your creditors which with interest takes quite a long period of time to finish up. You should most definitely pick a debt settlement company that is going to focus on getting you debt free in two or less years only. This is because by stretching your payment plan further than three years time you will never get the full benefits that you are seeking out due to increasing interest piling on. The longer the program is that you sign up for the more debt you will end up having to pay out of as a result of it.

You should also make certain that the collection calls will be stopped from being made. One of the bad aspects of these debt settlement companies is that in order for your creditors to be willing to let you pay less you are going to have to fall behind on your payments to them. As a result of this you will end up getting several calls from collection agencies. This can be very annoying and just straight up aggravating. So when it comes to getting these calls stopped the only way that you can legally get them to is by having a lawyer from the debt settlement company to represent you.

As a result of this they must contact your lawyer or they will be faced with a law suit otherwise. If you are told from your debt settlement company that you can have these calls stopped to make certain that they have a lawyer to aid you in this. By law a collection agency does not have to deal with the debt settlement company unless they provide you with an attorney. If they tell you to just send a cease and desist letter to the collection agency, be careful, because you will leave them with no option but to serve you with papers to appear in court and as a result could end up being sued.

You need to make certain that the company you go with is a reputable one. To start with you should check out the better business bureau to see if they have any negative comments regarding their business practices. After this you should consider how long they have actually been in business as a general rule of thumb is that a company that has been in business for over ten years in good standing should give you some sense of peace in knowing that they know what they are doing and have helped a lot of people in the years past.

If the company you go with is only a year or two old be wary of this because there are lots of fly by night operations that sign up lots of people knowing that they are not going to be able to help them just to get the collection fees and when that is over and done with they close up shop and start a new company. If you end up going with a law firm you should obviously make sure that they are registered with the state bar association. If you have a problem and complain, they could lose their license, so it is in their best interest to help you if you go with them and do the best job that they can do for their clients.

The warning signs are pretty obvious because if a company has a poor record with the better business bureau it would be best to stay away. If the company is fairly new be sure to do your homework before going about getting their services as it would be in your best interests.

Even though debt settlement is a very smart way to go about getting out of debt just like anything you need to be careful with the place that you go with. If you read this guide carefully you will have a leg up and know how on how to choose the best possible company that can help you and your situation. You too can soon be out of debt completely and have a huge weight lifted off of your chest.

If you are looking for ways to get out of your credit card debt, bankruptcy does not have to be the answer. These are a few tips you can use to avoid bankruptcy and find debt relief.

Bankruptcy versus IVA : FREQUENTLY ASKED QUESTIONS

Q: What is an Individual Voluntary Arrangement ‘IVA’?

A: An IVA is a legally binding contract between yourself and your creditors, which will generally last for 5 years. You will put forward an offer as settlement of your debts to your creditors based upon the following:

A fixed monthly contribution based upon your available disposable income

If you own your property you will be required to take reasonable steps, (by way of remortgage), to make a proportion of the equity available to your creditors.

If you are unable to remortgage at the end of the term, you will NOT be required to sell your property

If the IVA is a sole proposal you are only obliged to realise your share of equity in a jointly owned property, ensuring your partner’s share remains unaffected.

Provided 75% of those creditors who vote are in favour of the proposal the IVA is accepted. As long you keep to the terms of your IVA once it has been approved, all of your creditors who were entitled to vote are legally bound.

This means that:

Your creditors can not bring further action against you

Your creditors can not change their minds at a later date

From the date of approval of your Arrangement all interest and charges are frozen. Unlike bankruptcy there is no advertisement of the IVA in a local paper. Your professional status or ability to hold public office will not be affected. On completion of the IVA term, provided you have adhered to the terms of the Arrangement, the balance of your debts is written off. On the basis of the information which you have provided this would appear an appropriate solution to your financial problems.

Q: What is bankruptcy?

A: Bankruptcy is a serious matter. You will have to give up possessions of value and your interest in your home. It will almost certainly involve the closure of any business you run and the dismissal of your employees. Bankruptcy may also impose certain restrictions on you. Subject to certain exemptions, bankruptcy means that the Official Receiver will take control of all your assets on the making of a bankruptcy order. He or she, or any insolvency practitioner who is appointed trustee, will dispose of them and use the money to pay the fees, costs and expenses of the bankruptcy and then your creditors. Assets you would be allowed to keep include:

7. Ordinary household contents;

8. An average car;

9. Tools that are required for your trade

The trustee may apply to the court for an order restoring property to him or her if you disposed of it in a way which was unfair to your creditors (for example, if before bankruptcy you had transferred property to a relative for less than it is worth). If you have a surplus income above the needs of yourself and your dependants, you will be expected to make contributions to your creditors during the bankruptcy, and may be ordered to do so by the court. If you come into any money during the bankruptcy, such an inheritance or a lottery win, that too will be available to your creditors. In addition your bankruptcy would be advertised in a local paper. Generally you will be automatically discharged from bankruptcy after 1 year although you may be required to pay into the bankruptcy for 3 years.

Q: What are the main differences between an IVA and bankruptcy?

10. Assets

In bankruptcy you loose control of your assets as these vest in the Trustee. The Trustee will then dispose of these assets and use the funds to pay their fees and disbursements and distribute the remaining funds among your creditors. In an IVA you make an offer to your creditors. This should be your best offer and so may include the disposal of excessive assets for the benefit of your creditors. However it is possible to specifically exclude assets from the Arrangement such as life assurance policies, pensions, motorcars etc. In bankruptcy your home will vest in the trustee whereas in an IVA you will be expected to use your best endeavours to realise, by way of re-mortgage, the equity you have in your property. You will not be expected to sell your home and will not loose it.

11. Duration

An IVA will generally last for 5 years whereas it is normal to get a discharge from bankruptcy after 1 year with payments to the bankruptcy lasting three years.

12. Publicity

Your bankruptcy is advertised in a local newspaper which is not the case in an IVA

Q. Do I have to be in full time employment?

A: No. You need to have a regular source of income, from which once you have paid your household bills, you have a surplus income.

Q. Do I have to tell my partner?

A: An IVA will generally last for 5 years and if you own a property you will be expected to try to realise your share of the equity at the end of the term. In addition the information, which is presented to your creditors needs to show the total household income, although an allowance is given to your partner which is calculated based upon the level of their income and household expenditure. You will almost certainly, then, have to tell your partner if you are entering into an IVA.

Q. Does an IVA cover all of my debts?

A: Only unsecured and preferential debts can be included. Secured debts cannot be included but a provision will be made in your income and expenditure to allow you to continue to repay your monthly instalments. Certain other debts are specifically excluded from your IVA such as fines and arrears on CSA payments. Please note these cannot be included in bankruptcy.

Q. Can I be made bankrupt when I am in an IVA?

A: No. An IVA precludes those creditors bound by the IVA from taking any further action, provided you adhere to the terms of the IVA.

Q. Can CCJ be registered against me when I am in arrangement?

A: As the arrangement is a legally binding contract the creditors are not able to pursue further action against you unless you breech the terms of the arrangement

Q. What happens if I am unable to make a repayment?

A: During your arrangement it is important that you make every effort to adhere to the terms as agreed with your creditors. However, if you need to miss a payment for any reason this must be agreed with your supervisor.

Q. My partner and I have joint debts but they do not want to enter into an IVA. What will happen?

A: If you and your partner have debts, which you took out in both your names then you are both jointly and severally liable in respect of those debts. The credit company is therefore at liberty to pursue your partner for the entire debt. Some creditors may be prepared to wait for their repayment under the IVA; however some may not so your partner may need to make a provision to pay the monthly repayments in line with the original credit agreement.

Q. How will an IVA affect my credit rating?

A: An IVA will be listed on your credit file with the different information providers. This information will show that you have entered into an arrangement. Once you have completed your IVA you will be issued with a certificate of compliance stating that you have completed your IVA satisfactorily. You will need to send this to the credit reference agencies who will then register your IVA as satisfied and this will stay on record for a further six years.

Q. Will I be able to obtain credit whilst I am in my IVA?

A: No further credit, with the exception of utilities, can be taken whilst in an IVA. Failure to adhere to this term is a fundamental breach of its terms and is likely to result in the failure of your IVA.

Q. What will happen if my circumstances change during my IVA?

A: Your creditors may be willing to look your change in circumstances which have resulted in you being unable to keep to the terms of the arrangement. Once all the facts have been established, a variation meeting can be called and an amended proposal put forward to your creditors for their consideration.

Q Who will know about my IVA?

A: Unlike bankruptcy an IVA is not published in any newspaper, however it is listed with the department of trade and industry and is available for public inspection if requested. Your employers do not need to be advised of the arrangement.

Individuals who have amassed large debts have many options. However, if an individual finds that non-bankruptcy alternatives are not feasible, a decision then must be then made between filing a Chapter 7 liquidation proceeding or a debt adjustment proceeding under Chapter 13.

A Chapter 7 bankruptcy filing is best described as obtaining a discharge from debts (with some exceptions) while retaining some assets such as a home, household goods and an automobile as long as they do not exceed certain values determined by the U.S. Bankruptcy Code. Chapter 7 is consider a “liquidation” decision however if filed correctly and using the Bankruptcy Code to the best of your ability some assets can be retained while crushing debt is removed.

To be eligible to file a Chapter 7 bankruptcy the filer has to reside or be domiciled in the United States. In addition, they can not have been a debtor in a bankruptcy case in the 180 day period prior to filing the current bankruptcy case; they must receive counseling from an approved nonprofit budget and credit counseling agency prior to the filing and pass the “median family income” test. In order to receive a discharge in a Chapter 7 an individual may not have received a Chapter 7 bankruptcy discharge in the previous eight years or a Chapter 13 discharge in the previous six years.

The element which will fully determine if you can file a Chapter 7, is the “median family income” level. The individual or couple must review income made within the previous six months and average it out. If when the average income is measured against the “median family income” as stated in 11 U.S.C. § 707(b)(7) and it falls below, then a Chapter 7 filing is appropriate. If the household income exceeds the “median family income”, then the individual or couple will be subject to the means testing. The means testing calculation takes the average amount of the income received during the six-month period prior to the bankruptcy filing and subtracts it from the average monthly expenses. This determines the margin of excess income. Using this figure you determine if the excess income exceeds the margin allowed by 11 U.S.C. § 707(2)(A)(i) and if you are eligible to file a Chapter 7 bankruptcy.

If you are unable to file for Chapter 7 due to the “median family income” level being too high and failing the means testing, then your other option is filing a Chapter 13. A Chapter 13 bankruptcy filing allows a person to seek protection of their property and develop a plan of paying creditors by making monthly payments to a Trustee under Court supervision. The plan can be for as little as 24 months or for as long as 60 months.

To be eligible to file a Chapter 13 bankruptcy the filer must reside in the United States, have a regular income, have unsecured debt less hand $336,900 and secured debt less than $1,010,650 and receive counseling from an approved non profit budge and credit counseling agency. In order to obtain a discharge in a Chapter 13 an individual must not have been granted a discharge in a Chapter 7 bankruptcy in the previous 4 years or been granted a Chapter 13 discharge in the last 2 years.

The primary advantage of a Chapter 13 filing over a Chapter 7 filing is that a debtor by paying a portion of his or her pre-bankruptcy debts over the life of the Chapter 13 plan can obtain a discharge of the unpaid balances while retaining all of their asset, avoid foreclosure of a home and more debts are deemed dischargeable in a Chapter 13 verses a Chapter 7.

The disadvantages to a Chapter 13 verses a Chapter 7 is that the filer will have to pay something to unsecured creditors, a reduced amount against entire debt. However in a Chapter 7 filing it could result in a discharge from most or all pre-bankruptcy obligations without any payments. Another disadvantage to a Chapter 13 is that a discharge will not be received until all payments required by the plan are done whereas a Chapter 7 debtor will usually receive a discharge in three to five months from filing.

It is essential that when trying to figure out if bankruptcy is the right option to contract an attorney to discuss the entire matter, review your current financial situation, determine what is most important to keep and let go and decide which is the best plan for their situation.

What is an IVA?

There is an alternative to bankruptcy called an “Individual Voluntary Arrangement” (IVA). This is a formal arrangement through the county court to pay an agreed amount off your debts over a shorter period. This usually means paying a high monthly instalment over 3 to 5 years. The rest of the debts are written off. Some IVAs are set up on the basis of using a lump sum to make offers to the creditors rather than make monthly payments. Some IVAs are a mixture of both.

Is an IVA suitable for me?

An IVA is not suitable for everyone. It is usually only worth looking at if you have a lot of money to spare every month to pay your creditors and/or you have a lump sum or assets that can be included.

What is the procedure for an IVA?

An IVA has to be set up by an insolvency practitioner (IP). An insolvency practitioner is usually an accountant or solicitor who is authorised to set up IVAs. Once an IP has agreed to make an IVA proposal for you, they can apply to the county court for an “Interim Order”.

This stops your creditors from starting bankruptcy proceedings against you. It also stops any other enforcement action without the court’s permission whilst the Interim Order is in force.

From 2003 you can put forward an IVA proposal without applying for an Interim Order first. This may reduce your costs but means your creditors can still take enforcement action against you until the IVA is agreed.

You can ask for an IVA even after you have gone bankrupt. See the section on “Fast Track IVAs’. There are no rules on how much debt you have to be in before you can ask for an IVA.

The IP sends the IVA proposal to your creditors and arranges a formal meeting called a “Creditors Meeting”, giving the creditors at least 14 days notice. Check with your IP and make sure that all your creditors have been contacted. If creditors have no notice of the meeting they do not have to stick to the terms of the IVA and can pursue you for their debt separately.

At the meeting creditors have to vote on whether to accept the IVA. Often creditors send their vote to the IP and don’t actually come to the meeting. If 75% of your creditors “by value” who actually vote agree to the IVA, then the rest are bound by the IVA even if they voted against it or did not vote at all. “By value” means the creditors to whom you owe 75% worth of debt not the number of creditors you have.

So if the creditors to whom you owe the highest amount vote against the proposal then the IVA may not go through. Sometimes creditors will haggle about the terms of the IVA and ask you to agree to pay more every month or include assets you do not want to lose. They may ask you to make payments over a longer period.

Once the IVA is agreed your IP will supervise the arrangement and make sure you make the payments. If a creditor comes to light after the IVA has been agreed, they can claim the amount they would have received as if they had been included in the IVA at the start.

If the IVA does not go through then you are back to the same position as you were in before the Interim Order and you have to negotiate with your creditors separately. You have to wait 12 months before you can apply for another Interim Order.

How do I find an Insolvency Practitioner?

Your local county court may be able to give you a list of insolvency practitioners. You can also ask your local Official Receiver’s office for list. If you cannot find your local Official Receiver’s office contact The Insolvency Service Central Enquiry Line on 020 7291 6895. Check out the Yellow Pages or telephone directory.

WARNING: Be careful of companies who suggest they can put you in touch with an IP if you pay them a fee. These are known as “ambulance chasers”. You can contact an IP directly without going through another company.

A list of IP’s can also be obtained from:

The Association of Business Recovery Professionals
4th Floor Halton House
20-23 Holborn
London
EC1N 2JD
020 7831 6563
www.r3.org.uk

The Insolvency Practitioners Association
52 – 54 Gracechurch Street
London
EC3V 0EH
020 7623 5108
www.insolvency-practitioners.org.uk

The Insolvency Practitioners Policy Section
The Insolvency Service
PO Box 203
5th Floor
21 Bloomsbury Street
London
WC1B 3QW
020 7637 1110
www.insolvency.gov.uk

There is an Insolvency Service publication called “The Directory of Authorised Insolvency Practitioners”. This is kept in local reference libraries. It lists IPs by area and who regulates them. If they are not licensed then you should not use their services.

Fees

All IPs will charge fees for setting up and supervising an IVA. It is very important that you shop around to make sure you are getting the best deal. Typical fees are over £4,000 and sometimes a great deal higher. Many IPs will offer an initial free meeting to look at whether an IVA is suitable in your situation. Some IPs will only accept payment of their fees up front. Other IPs will allow you to pay the fees as part of the monthly payments over the term of the IVA.

What if I can’t pay the IVA once it is agreed?

You may not be able to keep to the monthly payments under the terms of the IVA. This might be because your circumstances have changed or because the payments were set unrealistically high in the first place.

It is very important that you talk to the IP supervising your IVA.

The IP can ask the creditors to agree to a lower amount. You may be charged another fee for doing this. If you can’t agree a new or “modified” IVA then the IP can terminate the old IVA if you cannot make the agreed payments. It is then possible for the IP to apply to make you bankrupt.

If the IP decides it is not worth doing this then your creditors can take action against you instead. You will need to try to negotiate payment arrangements with each of your creditors separately to stop this happening.

What are the advantages of an IVA?

You may well be running a small business which would be difficult to keep going if you were bankrupt.

You may be a profession where you could lose your job if you go bankrupt such as accountancy/police/ armed forces.

You may have access to a large lump sum and want a formal arrangement with your creditors to accept the lump sum and write off the rest of the debts.

You may have a very high monthly available income to make payments.

You will not automatically lose your house or other assets which can be kept out of the IVA with the agreement of the IP and your creditors, although the creditors will usually want most of the equity in your house. See the section on “Disadvantages of an IVA”.

You will not have the same restrictions on you as you would if you went bankrupt, e.g. you can still use your bank account without saying you have an IVA.

What are the disadvantages of an IVA?

If you do not keep to the terms of the IVA then the IP or your creditors can make you bankrupt.

If creditors do not accept the IVA proposal you are back to square one. You cannot make another IVA proposal for 12 months.

If you paid an up-front fee for your IVA and it is not accepted, then you will have lost the fee and be in a worse position than when you started.

If you own your house the IP and creditors may make you agree to sell your house as part of the IVA. It is standard for IVA agreements to include a clause that you will get your house valued after a set number of years with a view to giving most of the value or “equity” in your house to the creditors.

You may be able to pay instalments for an extra year to cover the amount of equity in your home. However it could mean selling your house if you cannot raise the money. Your options may include you or a partner taking out a new loan and even securing it on your house. This may be difficult as your credit rating may not be good enough to get a loan through a reputable lender and you would be putting your house at risk.

There is a risk that the IVA is agreed on the basis of monthly payments that you cannot afford long term. You must be very careful that the payments are set at a realistic amount in the first place.

If your circumstances change and you can no longer afford the payments your IVA may end if the IP cannot persuade the creditors to accept a new agreement.

Fast track IVA

From April 2004, under the Enterprise Act, there are new rules on how to get an IVA after you are made bankrupt. You can apply for a Fast Track IVA by putting a proposal to the Official Receiver even after you are bankrupt. The Official Receiver may agree to act as supervisor of the IVA if they feel it will produce a better deal for your creditors than they would receive through bankruptcy.

There are set fees for this process so costs are reduced.

There is no formal creditors meeting.

The proposal is sent by post and creditors can either take it or leave it.

The IVA proposal cannot be modified.

If the IVA is agreed, the Official Receiver will annul your bankruptcy order.

If your IVA fails the creditors could make you bankrupt again but the Official Receiver will not take any further action.

Where will details be kept about my IVA?

Public Register Records of IVAs are kept on a public register. To find out if someone has an IVA, records can be searched by anybody including members of the public either in person, by post or by fax. A copy of the search form can be printed from the website below or you can ask the Insolvency Service to send you a form. Your IVA will remain on the register until it is completed or terminated.

The Individual Insolvency Register
The Insolvency Service
5th Floor, West Wing
45-46 Stephenson Street
Birmingham
B2 4UP
Tel: 0121 698 4000
Fax: 0121 698 4406
www.insolvency.gov.uk

You can also search the register in person by visiting your local Official Receivers Office.

Credit Reference Agency Files
Records of IVAs are held for six years on credit reference agency files. The IVA is marked “complete” by the credit reference agency when they are informed of this by the IP supervising the IVA. Make sure you send a copy of the letter from your IP to the 3 credit reference agencies so that your credit file is up-dated.

Complaints about insolvency practitioners

To complain about an insolvency practitioner you need to find out which authorising body they are registered with. This should be given to you by your IP. You should first make your complaint in writing to your IP. If you are still not happy then write to the authorising body for your IP.

The Law Society
113 Chancery Lane
London
WC2A 1PL
Tel: 020 7242 1222
Tel: 0870 606 2500 (national rate)
www.lawsociety.org.uk

The Competent Authority
The Secretary of State for Trade and Industry (SoS) Insolvency Practitioner Section
The Insolvency Service
P O Box 203, 21 Bloomsbury Street
London
WC1B 3QW
Tel: 020 7291 6772
www.insolvency.gov.uk

The Institute of Chartered Accountants (ICAEW)
Gloucester House
399 Silbury Boulevard Central Milton Keynes MK9 2HL
Tel: 01908 248 100
www.icaew.co.uk

The Association of Chartered Certified Accountants (ACCA)
29 Lincoln’s Inn Fields
London
WC2A 3EE
Tel: 020 7396 5700
www.accaglobal.com

The Insolvency Practitioners Association
52-54 Gracechurch Street
London
EC3V 0EH
Tel: 020 7623 5108
www.insolvency-practitioners.org.uk

If the Insolvency Practitioner is acting as a Trustee in Bankruptcy you need to complain to the Official Receiver first, followed by the Insolvency Service.

For details of company liquidations or company disqualifications contact:

The Registrar of Companies
Companies House Crown Way Cardiff
CF14 3UZ
Tel: 02920 388 588
www.companieshouse.gov.uk