Business
Top 6 debt management strategies you cannot miss

Source: Friends of the Earth International
Debt is all right when it fulfills your immediate needs and you have enough resources to pay it back without sweat but if it increases beyond a limit, your financial position crumbles into dust and you can easily go bankrupt as the situation spirals out of your control. Nevertheless, the thing is, debt can be controlled if we have certain financial knowledge and a commitment to get debt free and to control our spending.
The Requirements for Controlling Debt
An individual must possess many qualities if he has to control his debt and payback in an efficient and steady manner. The most needed such quality is self-control. A person in debt must cut back his spending so that he does not incur more debt and can slowly pay back his older debts. In addition, it takes self-control to steadily payoff the debt and interest out of one’s small salary and one has to undergo a lifestyle change at times to pay the money back. The second quality that is needed is a deep commitment to a payback plan. Many offers from various agencies can confuse a person. However, many of these agencies are not working to help their clients, instead they just make money for themselves and client is left to suffer on his own. It is always advisable to get some knowledge regarding various companies and products offered in the market.
Debt Management Strategies
There are many approaches one can follow to manage his debt. Some of these strategies are listed below:
1. Individual Voluntary Agreement (IVA) – An IVA is a legal agreement between the debtor and the creditors. An agreement is reached on the amount of the debt, which the debtor can pay off in a certain period, by living within reasonable livelihood expenses. It usually lasts for a period of five years and after that amount of time, the remaining debt is written off. It is a formal alternative to avoid bankruptcy. More info www.iva.com
It has many benefits like those that the debt owned is significantly reduced; the individual is also motivated to payback the debt. There is also no hassling of the debtor at the hands of the creditors as the term of agreement is fixed and the creditors cannot force a change in its terms. A financial expert is selected as Insolvency Practitioner who then manages the whole process.
There are some nominal fees involved in the entire process. The debtor also has a greater hold over his home than in bankruptcy. It is difficult to obtain credit during the period of IVA but an individual can still obtain credit if necessary.
2. Debt Restructuring – Debt restructuring (also known as debt consolidation) is a widely used technique to manage debt. In this technique, many small and distributed debts are exchanged with a larger debt with a lower interest rate. This technique will provide one, the benefit of paying off a single debt with lower payments and lower interests. In addition, the hassle to pay different debts at the same time is greatly reduced.
However, this technique has a catch. One must carefully calculate the interest, which will be paid on this larger debt. This new and larger debt will last for a longer period and thus it is possible that one will end up paying much more. Also as the payments last for a longer period, the satisfaction to see the debt disappearing is not there.
3. Debt Snowball Method – In Debt Snowball method, the smallest debt is paid off first, often starting with credit cards. A small fixed payment is distributed among all debts equally but extra payment is applied towards the smallest debt. As the smallest debt is cleared its share of fixed payment and extra payment is applied towards the next smaller debt until it is cleared too.
This strategy offers the satisfaction of watching your debts reducing in numbers quickly, but the inherent problem of this strategy is that debt with higher interest rates may linger on which in turn puts you in more debt.
4. Debt Management Plan– It is an agreement between a creditor and debtor, which is individually tailored. It specifies how the debtor will pay back his debt. In it the payment frequency, the interest rate is adjusted and an affordable amount is agreed upon as the payback. This helps in a person getting control of his finances especially unsecured debts. To follow this strategy a thorough analysis of an individual’s net worth and monthly expenditure is done.
5. Debt Recycling – In this strategy, the unsecured and inefficient debt is replaced with efficient debt. An inefficient debt is the debt for which we do not get tax deductions while for efficient debt we qualify for tax deductions. In a way, it helps a person as the amount saved on tax, can be utilized for debt repayment. However, there are charges for converting inefficient debt to efficient debt as it is difficult to do on your own and financial expert’s help is usually required.
6. Bankruptcy – A person can declare himself bankrupt in case he is no longer able to payback his debts. In that case, the creditors can get control of his assets and can sell them off to secure their repayment. Bankruptcy stays in the individual’s financial record for a minimum of six years, making it very difficult to obtain credit.
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