Published in Debt Solutions Guide on Friday, November 19 2004

Debt management is an informal process of negotiating with your creditors for the freezing or reduction of interest, or the writing off of part of your debt. A debt management company can provide debt management services, or debt management can be self managed.

The main benefits of using informal debt management are:

• Lenders generally encourage customers who are facing a debt problem to engage in direct communication with them, and are often willing to freeze interest.
• Although defaulting on your credit agreements and entering into an informal arrangement to repay your debt will invariably impair your credit record, no formal IVA (Individual Voluntary Arrangement) or Bankruptcy order will be recorded.
• Informal debt management is quick and quite simple as it only involves making contact (usually in writing) with your lenders and following up written requests until a satisfactory conclusion is arrived at.

Before entering into an informal debt management plan you will need to consider the following:

• Lenders will not have any obligation to accept your informal offer, and if only one or two of your lenders don’t agree to your proposals it may make the debt management plan unworkable.
• Lenders will always retain the right to demand full payment of the debt and add interest in full at any time, even if they agree to your proposal.
• Although no formal IVA (Individual Voluntary Arrangement) or Bankruptcy will be recorded, the damage done to your credit record by entering into informal arrangements will impair your ability to obtain future credit almost as much as with an IVA (Individual Voluntary Arrangement).

How does informal debt management differ from an IVA (Individual Voluntary Arrangement)?

Informal debt management is very similar to an IVA except that an IVA is a formal process offering protection from lenders and guaranteeing acceptance as long as 75% or more in value of your lenders agree. In addition, with an IVA quite often a large part of your debt will be written off at the end of the IVA, whereas with an informal debt management arrangement it will be relatively hard to get your lenders to agree to write off your debt, only to freeze or reduce interest charges.