The most important fact to bear in mind when deciding between several possible debt solutions is that no two circumstances are entirely alike.

Because of this, some debt management plans will work better than others for particular people, depending on the aggravating factor that is causing someone to be plunged into debt.

For some, it is a sudden economic shock, such as those caused by the cost of living crisis (1), where household bills and expenses increase substantially, whilst for others, it is an issue with inconsistent income or several smaller debts that have accumulated.

One possible solution is an Individual Voluntary Agreement (2), which is a formal agreement with creditors to pay back debts in an agreed period of time, approved by the courts and thus legally binding.

IVAs, as befitting their name, are often tailored around individual circumstances with mutually agreed restrictions, but typically involve paying off debts as a consolidated payment (typically monthly but can be a lump sum), with conditions to inform the insolvency practitioner involved of any change in circumstances.

In return, creditors are required to stop chasing you to pay off debts and cannot charge any further interest on these debts.

In some cases, with large long-term debts, it can be a beneficial solution, but there are important factors to consider.

Insolvency practitioners often charge high fees to set up an IVA, so it is often not worth it for smaller debts and requires a long-term commitment as IVAs last from five to six years. Payments into the IVA may increase if your circumstances improve. Windfall lump sums, such as inheritances, are often taken completely as payments towards the IVA.

With that said, it can help spiralling debt payments get under control, and if you complete the terms of an IVA the rest of the debt is written off, which can be beneficial for a huge number of small debts that mount up to a huge sum. There are drawbacks, however, such as potentially needing to release equity in your home and having to stick to a potentially restrictive budget.

An IVA also will affect your credit rating in a similar way to a debt relief order or bankruptcy.

As with any solution to debt, it is important to check with a professional impartial advisor before making any major decision.

If you are struggling with debt as a result of the cost of living challenges you can contact the Fresh Start UK team today.

References:

(1) https://www.instituteforgovernment.org.uk/explainers/cost-living-crisis

(2) https://www.gov.uk/options-for-paying-off-your-debts/individual-voluntary-arrangements