Now a days there is no need for debt to lead to bankruptcy. Over the past twenty years the legal framework for bankruptcy and managing debt problems has dramatically changed meaning that there are now more options available to people that are suffering financial difficulties.
One of the key ways to get on top of debt problems is by considering debt consolidation. This is where a borrower takes out a new loan and uses this to pay off expensive credit or store card balances, loans with high interest charges or monthly instalments.
This is particularly effective where the credit rating of the borrower is still in good shape and a new loan can be sourced with good terms. If the debt problems have already caused payments to be missed then the credit rating may have been affected meaning that the best terms may not be available to the individual.
Debt consolidation works by reducing the individual’s monthly payment into a single loan obligation compared with the aggregate amount payable on the previous loans. Although the total amount of interest paid may end up being greater, the prime driver is to reduce the monthly payment to a more affordable amount for the individual. This way, much needed cash can be freed up to make living within the available budget easier.
The number of people filing for bankruptcy has increased throughout the recession but not as alarmingly as many analysts thought. This is through the increased use of debt consolidation and Individual Voluntary Arrangements (IVAs), many have managed to avoid the ultimate sanction.
IVAs have been particularly successful in reducing bankruptcy proceedings. These are legally approved debt management plans that allow debtors to talk to and agree with lenders what can be afforded. This is done with an understanding that at the end of the IVA term any remaining debt will be written off.
Whilst this is not ideal for lenders, it does offer them a structured and legally approved method of recovering some of their loan balance rather than having to repossess or go to the expense and hassle of instigating bankruptcy proceedings.
Whilst smaller amounts of debt may be manageable, larger sums may take more of an effort to get under control. Ignoring debt is never an option. Debt may eat into relationships and cause all sorts of future borrowing problems if it is left unaddressed. There is a good and effective legal framework for managing debt problems ranging from debt consolidation loans through to IVAs.
Bankruptcy need only be considered as a final and drastic remedy.
This is a post by Phil Broadhead.