Archive for January, 2009

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Credit cards are one of the most common debt problems in the UK.  Britain has more credit card borrowers than any other European country and the International Monetary Fund expects defaults to increase in the coming months.

Causes of debt

Kiran Mistry an insolvency practitioner from WMProserv said there are several reasons why credit card debts accumulate.  Firstly, many people have multiple credit cards with different providers and so missed payments and high interest rates on some of these cards can lead to a build up of debt.  Many people don’t change their credit card provider when an initial offer rate expires and this leads to high interest charges, increasing the amount owing on the card.

Another main reason for credit card debt is general overspending.  Many people spend significant sums on credit cards with the expectation that they can pay off the debts in future by, for example, bonuses or by remortgaging their home.  The credit crunch impact on both income and property values has left many people with high levels of unsecured credit card debt that they are unable to repay.

Shopping around

For those people with a number of credit card balances it is often prudent to shop around and find providers offering low rates of interest for “balance transfers”.  Many credit card providers offer an initial period with 0% interest and may offer a low interest rate for the lifetime of the balance.

By transferring debt to another provider it will significantly reduce your interest payments and allow you to repay the actual credit card debt more quickly.

Budgeting

Moe Nawaz from UKAdvice.com advises, the first step when dealing with spiralling credit card debts is to devise a monthly budget planner.  This will help you work out how much is available for repaying these debts after other essential bills and living expenses have been taken into account.

Another key step is to prioritise the credit card debt.  It is important to look closely at the interest rates and charges being levied by your various credit card providers and to make steps to repay the most expensive cards first.

It is also important to set up an automatic direct debit or standing order payment for your cards.  This will ensure that the minimum payment is made every month to avoid any additional charges.

Freezing interest

Once a budget planners has been created it is often a good idea to speak to your credit card providers to discuss the possibility of them freezing the interest payments on your debt.  By presenting them with a carefully constructed budget planner (which also includes all other loans, cards and unsecured commitments) you can make a strong case to the provider and negotiate a payment regime that suits your budget.

Many people find their minimum payment is only slightly higher than their monthly interest costs meaning it would take years to repay the debt.  By negotiating payment terms with the card providers it is possible to ensure that the capital is repaid much more quickly.

Formal solutions

If you simply cannot manage the level of credit card debt after taking the steps above it may be necessary to consider a more formal solution to your debt problem.  This might take the form of an Individual Voluntary Arrangement (IVA) or even bankruptcy.  In these situations it is vital that you seek professional advice from an insolvency practitioner or turnaround consultant in order that you can determine exactly the right option for you.

The Council of Mortgage Lenders estimates that there will be 75,000 repossessions in the United Kingdom in 2009.  Repossession can be a frightening prospect for many families who are struggling to keep on top of their mortgage repayments and other debts.  Repossession should, however, be a lender’s last resort and so there are many other ways you can tackle your debt problems to avoid this outcome said Kiran Mistry a leading Insolvency Practitioner.

Deal with your lender

One of the most important steps you can take to stay in control of your home is to avoid burying your head in the sand and to keep in touch with your mortgage lender at all times.   Lenders can offer a range of options to help struggling homeowners including repaying any arrears over a longer time period or even “capitalising” the arrears (adding them to the mortgage balance). 

Your lender may also accept reduced payments, organise a payment holiday or change the structure of the mortgage (for example from a “repayment” to an “interest only” basis).

Government help

The Government has been quick to announce initiatives to help struggling homeowners avoid repossession.  The Homeowner Mortgage Support Scheme is designed to help those who have suffered a sharp drop in income by allowing them to defer their mortgage interest payments for up to two years.  This scheme is only offered through a small number of lenders and there are certain conditions attached.

Homeowners who are unemployed may also be eligible for Income Support for Mortgage Interest.  Available after thirteen weeks of unemployment there are again conditions attached and a maximum mortgage limit of £200,000.

Take advice

There are many debt counselling experts available who can help you draw up a budget planner to determine what you can afford to pay towards your mortgages. Specialist turnaround consultants and debt specialists can help you prioritise and manage your debt in order to ensure that the most important outgoings (your mortgage) are maintained whereas less critical payments may be suspended until your financial situation improves. 

Sell the property

One of the options available to families facing repossession is to sell the property.  The best way is to do this through an estate agent on the open market but homeowners need to ensure that there is sufficient equity in the property to allow them to clear their debts.

There are many “sale and rent back” schemes now available by which companies will buy your home and allow you to remain living there by renting it back to you.  Sale and rent back schemes are currently unregulated so it is worth trying to find a recommendation for a reputable firm in your area.

Attend hearings

If these steps have failed and court proceedings have begun it is important that you attend all the court hearings.  Repossession should be a last resort and by making your case in front of a judge you may be able to delay or stop the repossession proceedings.  If you can prove that you are able to make your basic mortgage payments then it is unlikely that a judge will grant a repossession order.

One important factor to remember when considering repossession is that simply handing in the keys will not solve your financial problems as you will remain liable for the debt in that situation.

Whilst repossession remains an unfortunate outcome for many families struggling with debt there are many steps that you can take to delay or avoid court proceedings.  The main points to remember are to take specialist advice and to keep in contact with your lender at all times. 

Kiran Mistry a leading Insolvency Practitioner said he welcomes the new Debt Relief Orders which have now been introduced by the government to assist people that are facing debts.

Debt Relief Orders (DROs) were introduced by the Government in their 2007 Tribunals Courts and Enforcements Act and they came into existence on 6^th April 2009.  They are designed to provide an alternative to formal bankruptcy or an Individual Voluntary Arrangement (IVA) and are a cheaper and easier alternative to formal court proceedings.

What is a DRO?

A DRO is a new alternative to an IVA or bankruptcy for people unable to pay their debts.   As it costs just £90 it is also significantly cheaper than these other options.  A DRO is issued by the Insolvency Service and is designed to “fast-track” the less complicated debt cases through the court system without the need for an individual to personally appear in court.

Who is eligible for a DRO?

DROs are aimed at the least complicated, smaller debt cases.  Applicants for a DRO must have less than £15,000 of unsecured debt (credit cards, loans or overdrafts or debts relating to rent, council tax or other utilities) and have assets of under £300.  This means that homeowners will be ineligible, as will anyone who owns a vehicle worth more than £1,000 (unless it has been specifically adapted for a physical disability).

Anyone applying for a DRO must also have less than £50 per month surplus disposable income after all their household expenses have been paid.

DROs are designed to be suitable for people with little surplus income and relatively low debt liabilities but who are unable to pay these debts off in a reasonable time.

Anyone who is already involved in court proceedings for an IVA or bankruptcy is ineligible for a DRO even if such an Order has not yet been forthcoming.  Anyone who has had a DRO in the previous six years is also ineligible.

How do I obtain a DRO?

Moe Nawaz a turnaround consultant explains how to apply for a DRO, first you must speak to an authorised intermediary.  This is likely to be a registered insolvency practitioner, turnaround consultant or debt counsellor who has been authorised to deal with DRO applications.  These can be found through your local Citizen’s Advice Bureau or online through the Insolvency service.

Once the advisor has helped you establish eligibility for a DRO an application must be made online and the £90 charge must be paid.  This fee can be paid in six monthly instalments if required.

The Official Receiver then determines whether all the conditions of the DRO have been met and if so a DRO is issued.  The Official Receiver may also ask for any additional information they deem necessary to make a decision on your application.

What does a DRO do?

Once a DRO has been granted you are protected from enforcement by the creditors involved and you no longer have to deal with them directly.  During the period of the DRO (ordinarily twelve months) you do not have to make any payments towards these debts, although you will be expected to continue paying your rent and other household expenses (plus any debts not included in the DRO).  You will also expect to have to contribute something towards the debts if your financial circumstances improve significantly during the DRO period.

You should remember that as with other debt relief solutions a DRO will remain on your credit file for six years and so will impact on your ability to obtain credit in the future.

Whilst not suitable for everyone (particularly anyone who owns their own home or has any significant assets) a Debt Relief Order is another useful method for dealing with debt issues.  As there are now several options available it is important to obtain specialist advice from an insolvency practitioner or other debt specialist to determine which is the most appropriate path for you.

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There are many solutions available in the UK for people struggling with debt.  One such option is an Individual Voluntary Arrangement (IVA) and recent figures suggest that IVAs are now more commonplace than bankruptcies in the UK.  continue

Kiran Mistry senior partner with WMProserv a firm of Insolvency practitioners and Accountants say’s with the credit crunch biting in deeper than ever people are getting into financial difficulties. Many believe that the only way out of their situation is through formal court proceedings such as an Individual Voluntary Arrangement or even a bankruptcy order.  The reality is that there are other choices open to you and “debt management” is one such option.  There are many advantages to this method over other debt solutions.

What is “debt management”?

Debt Management Plans are arranged by specialist debt management companies in order to agree reduced repayment terms with your creditors.  Debt management companies agree reduced monthly repayments with your creditors on your behalf as well as negotiating with creditors to freeze the interest on your debts.

The idea is that a structured repayment plan is put into place that is both affordable to you on a monthly basis and agreeable to your creditors.  You typically have to have at least two creditors and over £1,000 worth of debt to apply.

How can it help me?

There are many advantages to arranging a debt management plan through a debt management company.  The first is that it simplifies your monthly commitments and removes the need for you to deal with each individual creditor.  The debt management company will arrange for one affordable monthly payment to be made directly to them and they deal with all your various creditors on your behalf by allocating your monthly payment fairly between them.  These monthly payments can also be altered quickly as and when your circumstances change.

Another main advantage of debt management is that it avoids the need for court action.  Once a plan is in force it may stop the need for creditors to lodge “county court judgements” for unpaid debts and it also means that you do not have to obtain either an Individual Voluntary Arrangement or bankruptcy order through the courts.

What else should I know?

One of the main criticisms levelled at debt management plans is that they can run for long periods meaning it may be some years before you are fully out of debt.  The interest payments on such plans can also be quite high meaning that the debts may not be repaid as quickly as through other methods.

Debt management plans are also not legally binding and so it is therefore possible for a creditor to change their mind and back out of an agreement at any time.  It is rare that this happens however as most companies realise that professional debt management plans are affordable, realistic and sustainable.

Other disadvantages

When considering approaching a debt management company to discuss a repayment plan, be aware of the fee structure of the companies you are approaching.  Many debt management companies charge an administration fee of between 10% and 18% of your monthly repayment although some aim to reclaim these fees from the creditors.  There are organisations and charities that offer free debt management facilities so you must carefully research the options available to find the most appropriate scheme for you.

Moe Nawaz a leading business turnaround consultant view on is that, If you are struggling to keep up your repayments on loans or other debts there are many different options available to you.  By speaking to a debt management professional or a Insolvency Practitioner it may be possible to agree an affordable monthly repayment plan with your creditors rather than having to suffer through court proceedings to tackle your debt issues.

Bankruptcy can be a traumatic and distressing experience.  The stigma that people feel when declaring themselves bankrupt can have a profound effect on their lives although the process of declaring bankruptcy can be much less difficult and stressful than many expect.

Bankruptcy is one of a variety of ways of dealing with debts that you cannot pay.  A court will make a bankruptcy order once it has received a bankruptcy petition, most commonly submitted by an individual (although it can also be submitted by one of their creditors.)

What are the advantages of bankruptcy?

Kiran Mistry a leading Insolvency Practitioner says that the main advantage of a bankruptcy order being made is that it immediately stops the harassment you might be receiving from banks, lenders or other creditors.  Any creditors must apply for outstanding monies through either the Official Receiver or an insolvency practitioner dealing with your bankruptcy order.

When a bankruptcy order is made all or most of the debt is generally written off.  It therefore allows you the freedom to make a new financial start as the bankruptcy orders are ordinarily discharged after twelve months.

What happens to my assets?

In the event of a bankruptcy order being made, the control of your assets normally passes to the Official Receiver or other trustee (generally an insolvency practitioner).  However, items that you require to carry out your job or trade (tools, vehicles etc) and essential household items needed for your family are ordinarily exempt and you are able to retain these.

Other assets are controlled by the Official Receiver or trustee and these are ordinarily sold in order to raise funds to pay the outstanding debts.  These assets may include cars, jewellery or other valuable items.

What should I bear in mind?

Whilst there are some advantages to obtaining a bankruptcy order there are also many negative factors to take into account.  Most importantly, your home may immediately be at risk.  Unless you rent your home (in which case you will generally be allowed to continue living there) the home is considered an asset and therefore could be sold to repay outstanding debts.

Secondly, if an Income Protection Order is issued it means that monies can be deducted from your income for up to three years to go towards paying any outstanding creditors.  Indeed, your employment prospects may well be curtailed after bankruptcy as there are various professions (such as the police and some financial roles) which do not permit individuals who have been bankrupt.   A bankrupt is also prohibited from starting their own limited company or taking on a company directorship.

Most seriously for many, a bankruptcy order also remains on your credit file for up to six years.  This will have a significant adverse impact on your ability to obtain credit, whether that is a mortgage, loan or credit card.  In the event that you are accepted for credit it is very likely that this will be at significantly higher interest rates than an ordinary borrower.

Moe Nawaz a UK Turnaround consultant states that although bankruptcy is one route it should be remembered that there are many other solutions available if you cannot pay your debts.  For example, it may be worthwhile considering talking to a “insolvency practitioner or a debt consultant”, but most important of all never leave things till the last minute get expert advice when you know that you need to talk to an experienced professional who can advise you on steps to take in order to rescue your business.  There are also alternatives including an Individual Voluntary Agreement (IVA) or a Debt Relief Order (DRO) which may be more suitable depending on your individual circumstances.