Dealing With Personal Debt

It seems that the economic crisis we were suddenly faced with a couple of years ago is dragging on and on. In some countries the recession has been and gone, with others it is still having damaging effect on peoples' lives. Resolving debt problems is not getting any easier.

Unemployment in many places around the world continues to rise. In the UK the unemployment rate for the three months to July 2010 was 7.8 per cent. The number of unemployed people stood at 2.47 million. Particularly hard hit are the young, between 16 and those in their early 20's, and people over 50.

Personal bad debt can't all be put down to unemployment, there are of course many other factors to take into account. But, the fact remains, the UK is driven by debt. The government reduced VAT to 15% during 2009. Why? In order to encourage spending, on the assumption that the recovery would be consumer-led.

From January 2011 the VAT rate increased from the present 17.5% to 20%, and that is bound to hit the poorer in society hard.

Credit card companies have shown a great deal of irresponsibility over the years, encouraging people to take on credit they so often could ill afford. This is not to say of course that consumers themselves have been blameless. We live in a society that says buy now-pay later. Sadly, many people fall into serious debt after they fail to take account of the sometimes extortionate interest rates being charged by some credit card providers. So much so, that often credit card users are barely paying back the interest, never mind the amount borrowed.

For those who are in debt there are a number of options to look at. All is certainly not lost, as long as they face the problem and deal with it. Not opening arrears reminder letters, hoping the problem will go away by itself just doesn't work, and the problem gets bigger and bigger.

Bankruptcy is not the only solution, but it is the most drastic. There are cases where without doubt going into bankruptcy might be the best course to take for some in debt. Fortunately, there are other ways of dealing with serious financial difficulties. Remember too that creditors want their money back, or as much of it as possible, and making a debtor bankrupt is very unlikely to achieve that.

In a very simplified form, they are some of the following-

* Informal agreements where you make contact with your creditors and try to - you write to your creditors and try to agree a repayment timetable which usually means an extension to your loan period. This can be good for some, especially if they have only a temporary problem with cashflow, possibly because of reduced income.

* Debt management plan where you make just one payment each month to a company that sends the payments to your creditors for you. For this service there is normally a monthly charge based on your payments, so be aware of this before finally agreeing to go ahead.

* Individual Voluntary Arrangements (IVAs) can be set up under certain circumstances. Rules apply regarding things like the level of debt involved before being allowed to go for an IVA, ability to pay back a reasonable monthly amount, number of creditors involved and so on. An IVA has to be set up under strict guidelines, and involves someone called an Insolvency Practitioner. With an IVA all interest is stopped, and only a percentage of the debt gets repaid, usually over a 5 year period.

* A debt relief order (DRO) which is quite new, only coming into effect on the 6th April 2009. These can help the poorest members of society. Someone who can apply for a DRO must not own their own home, have no realizable assets of more than £300. Their liabilities have to be less than £15,000. After 12 months their debts are written off.

No one should ever be encouraged to look for an easy way out of paying their debts. Creditors make their living from loaning people money, and it would be wrong just to say they shouldn't be paid. But, a lot of people who borrow money do so for the right reasons at the time. Many people fall into debt because of such things as losing their job, or their business goes bust, they have a marriage breakdown, or other reasons often outside of their control. Facing up to their financial problems will help them get them resolved over time.