Is debt consolidation the best debt solution for me? Now that we're in a recession (according to the Ernst & Young ITEM Club Autumn forecast), there's a real need for people with debt problems to understand the differences between debt consolidation and the various other debt solutions available – and understand which one could be right for them at a time like this.



First of all, it depends on what the future holds. In a recession, it's more likely than usual to be bad news – when consumer spending drops and businesses lose money, many companies are forced to make people redundant just so they can stay afloat. For anyone who's pretty sure their company is thinking about laying off staff, a debt consolidation loan might not be a good idea.

Why? One of debt consolidation's most attractive benefits is its ability to reduce an individual's monthly debt repayments. A debt consolidation loan is most effective when the individual is in a reasonably stable financial situation: when they know how much they're earning and how much they're spending each month, they can figure out the best way of repaying their debt.

With a stable income, they can calculate how much they can afford each month, and arrange to repay the debt consolidation loan at the right speed – not too slowly (unnecessarily postponing the day they're debt free, and increasing the amount of interest they'll pay) and not too quickly (stretching their monthly budget dangerously thin).

So someone facing the prospect of unemployment could be better off looking into a debt management plan, rather than a debt consolidation loan. Debt management offers a flexible approach to debt: borrowers can ask debt management professionals to talk to their creditors on their behalf, asking them to consider accepting lower monthly payments, waive charges and/or freeze interest.

Debt management is an informal agreement that isn't legally binding, so someone on a debt management plan can ask the debt management company to go back to their creditors if their financial situation worsens – if they lose their job, for example, their debt management company can ask their creditors if they'll accept nominal payments for a while, until they find new work.

But unemployment isn't always the only threat. In a recession, many people face the prospect of a reduced income, rather than no income at all. Someone with significant unsecured debts might find they can't keep up with their debt repayments if their income drops and isn't likely to rise again. Rather than a debt consolidation loan, they might be better advised to look into an IVA (Individual Voluntary Arrangement), a form of insolvency that could actually write off the debt they can't afford to repay – as well as allowing them to reduce their monthly debt repayments.

IVAs take a lot of commitment and can require homeowners to free up some of the equity in their property. Borrowers must be able to commit to making fixed monthly payments for (normally) six years, based on the maximum they can afford once they've taken their essential expenses into account. Even so, an IVA can make all the difference – for people whose debts have gradually got out of control, as well as people faced with a sudden drop in income. Of course, IVAs do require a level of financial stability: if the individual doesn't feel they can commit to five years of regular payments, an IVA may not be the right debt solution for them.