Debt consolidation loans – helping borrowers stay in control

Wednesday, 30 September 2009 12:00

A growing number of people are entering insolvency in both England and Wales, according to the most recent Insolvency Service statistics about bankruptcy, Debt Relief Orders and IVAs (Individual Voluntary Arrangements).

But can a more pro-active approach allow borrowers to avoid adding themselves to these statistics in the future?

For those with unmanageable levels of debt, insolvency in its numerous forms could hold the solution; however, other individuals can tackle what they owe and repay it before insolvency becomes a necessary step.

Here the current state of the nation’s finances is examined in light of the insolvency figures, while debt consolidation loans – a debt solution that people who are still at a retrievable financial position could consider – are also discussed.

August’s insolvency figures

In August 2009, official data from the Insolvency Service showed that insolvencies in England and Wales had increased by a significant degree within the previous 12 months.

More than a quarter (27.4 per cent) more people were declared insolvent in the three months to the end of June 2009, compared with the same quarter of the previous year.

Growth in IVAs matched this general trend precisely as more borrowers looked to negotiate with their creditors, potentially writing off a large proportion of their debt while freezing interest on the remainder.

IVAs are also highly likely to protect the individual’s assets, allowing them to retain ownership of their car and home.

When declaring bankruptcy, assets can be sold off to help repay what is owed to creditors; the number of people entering bankruptcy was up by 15.3 per cent year-on-year.

Although this is below the overall growth rate, the Insolvency Service noted that Debt Relief Orders had been introduced as a third option, tailored to suit the needs of low-income individuals with few assets but low debts.

The report also indicated that more people are now petitioning for their own bankruptcy, as opposed to the request coming from one of their lenders.

At 86 per cent of cases, the proportion in the latest figures was higher than throughout 2007 and 2008 as a whole.

Debt consolidation loans

Although debt consolidation loans are not covered by the Insolvency Service’s official reports, they are a further means of tackling debt.

Unlike insolvency, where a portion of the individual’s debt is typically written off, debt consolidation loans allow the full amount to be restructured and subsequently repaid, and are generally suitable for smaller levels of debt.

Through a debt consolidation loan, the borrower takes out the funds needed to clear what they owe, enabling them to establish a repayment schedule with their new loan provider that they can afford to meet while potentially lowering the interest rate that is applied to what they owe.

By combining debts from numerous different lenders into one large sum, debt consolidation loans can also help to simplify finances for people who find it difficult to keep track of many repayments on a month- by- month basis.

Insolvency Service guidance assesses the situations in which debt consolidation loans could be more suitable for an individual’s needs than insolvency itself.

First published in July 2009, this guidance came from the Service in order to fill a gap that it claimed existed in the advice generally available to the public.

A major difference noted between debt consolidation loans and insolvency is that the latter solutions typically impose a set timescale for clearing the debt in full.

While debt consolidation loans do allow debts to be brought together into a single sum, clearing that amount is then subject to the terms negotiated with the loan provider.

The guide also points out the use of debt consolidation loans in tackling any outstanding amount that might be owed, compared with bankruptcy and IVAs which generally do not eliminate maintenance payments, fines or student loans, although they are typically aimed at individuals with a higher overall level of debt.

How IVAs differ from bankruptcy

In addition to the differences between debt consolidation loans and insolvency, there are also differences between the options available to people whose finances have become unmanageable.

For instance, bankruptcy can offer an almost immediate route back to solvency, with the process typically lasting as little as one year.

This compares with IVAs, which usually take around five years to complete.

However, there may be residual obligations for people who declare bankruptcy, such as the need to put a portion of their income towards repaying their creditors for up to three years in total.

While IVAs typically last for longer, they include benefits such as a greater probability of retaining ownership of assets, the guide adds.

Under bankruptcy proceedings, the advice explains that a home may only be retained if a friend or family member can afford to buy the share of the equity held by the individual who is in debt.

As with all financial solutions, however, the individual factors concerned – such as the person’s income, amount they owe and value of any assets – are likely to affect which financial product is best suited to their needs.

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