Debt, loans and consolidation

It's all very well us telling you how to get more debt with a personal loan, but what about how to get out of it? Rather than another consolidation loan, consider these other options:

Money management

Work out where your money is disappearing and put an end to it. There are some simple ways to go about this – here are a few suggestions:

Keep a diary for one month of every single little purchase and withdrawal you make. This is a good way to see where money is disappearing to; the result is often surprising.
Write and stick to a monthly budget. You should consider all your areas of expenditure. To that end, people with hefty debts should look at and use our Statement of Affairs calculator.
Use what you've learned from your spending diary, budget and statement of affairs to look for ways to make cutbacks and start living below your means.
Pay off the debts with the highest APR first, rather than your biggest debt. This'll save you loads of money in the long run!

Debt management plans

You can create a debt management plan by writing to your creditors and appealing to them to lower your minimum monthly payments and to freeze interest. If they agree, the deal won't be legally binding, so they can retract the agreement at any time. The plan is likely to be reviewed every six months too. At best this gives you breathing space, but this might be all you need to get your finances in order.

Citizen's Advice and debt charity the Consumer Credit Counselling Service (CCCS) can help you to write a debt management plan for free.

It's better to come to some sort of temporary arrangement with your creditors, rather than miss payments. However, your credit record will still be affected, and default notices may be issued.

Individual Voluntary Arrangement

Unlike a debt management plan, an Individual Voluntary Arrangement (IVA) is a legal contract that might last, say, five years. You can have lower monthly payments and write off a portion of your debt. Any reductions in payments or in the total bill you owe your creditors is fixed, once they agree -- if they agree.

IVAs are not the universal cure that they are made out to be. For the majority of people, one of the other debt solutions (budgeting, a consolidation loan, a debt management plan or bankruptcy) is much more suitable.

The charges for IVAs can also be very high. Think carefully before taking debt advice from a company that sells IVAs, as it's likely they make all or most of their money from them. Before making any decisions, we suggest you seek a variety of independent opinions from Citizens' Advice and our Dealing with Debt community.

Bankruptcy

If you can't stop your debts mounting, the earlier you accept that you may have to take the nuclear option, the better for you and your family. Most people feel unbelievably rotten about going bankrupt, but, afterwards, the majority feels surprisingly OK about it. Most people have, by that stage, learned their lessons and ensure they don't rack up big debts again.

You'll get to keep reasonable assets, such as your fridge, settee and DVD player, but you'll probably lose your home and cars worth over £1,500. Your credit rating will be badly damaged for six years and your name will be published in the local paper and the London Gazette. Whilst you're bankrupt, you aren't allowed to be employed in some professions.

Contrary to popular belief, bankruptcy is often a better option than an IVA. Most of your debts are cleared and you can be discharged from bankruptcy within twelve months. Payments to the court typically last just a short period, usually no more than three years.

Now you're thinking, ‘Forget that! I'm just going to consolidate.'

Don't! If you're getting a loan to pay off other debts, consider whether this is the wisest course of action. The Consumer Credit Counselling Service believes that consolidating debt is a sensible solution for just 3% of people in serious debt, and Fool research has found that well over half of people who consolidate go on to rack up more debts using their cleared credit cards. Furthermore, it's not always the cheapest solution.

So, if you haven't thought of alternative ways to deal with your debt, please consider better budgeting in the first instance, and think of your other options, too.

If you're in serious debt

If you're seriously in debt, contact your creditors before they contact you. Believe it or not, they do not want to take court action unless it is absolutely necessary. But the problems will not only not go away if you ignore them, they will most definitely get worse. Nothing annoys a creditor more than someone ducking and diving. If you know that you are getting into difficulties, talk to your creditors.

Debt, loans and consolidation