DEBT MANAGEMENT

Figures released today by insolvency trade body, R3, show that a quarter (26%) of Debt Management Plans (DMPs) will last ten years or more, even though a DMP is meant to be a short-term repayment plan between an individual and their unsecured creditors.

R3 President, Peter Sargent commented:

“DMPs can play an important role in offering a manageable solution to individuals who are able to pay back their debts. However, the sheer length of some plans indicates that the amount of debt these individuals have is too large for a DMP. By entering into these inappropriately lengthy plans people become slaves to their debts.”

“Moreover, our figures show that a third (30%) of individuals who are currently bankrupt or in an Individual Voluntary Agreement (IVA) used to be in a DMP. The volume of those who go from DMPs into a formal insolvency procedure suggests that, in some cases, DMPs prolong distress when another procedure would have been more appropriate to start with.”

R3′s survey also reveals that twenty-two per cent of individuals in a DMP say that they were not asked for proof of their income or expenditure before their plan began.

Peter Sargent adds:

“It is incredible that organisations set up DMPs without these vital details. If this information is not verified at the start the monthly payments may be set too high, dooming the plan from the outset.”

R3′s research also finds:

- 46 per cent of IPs have seen DMPs fail because the monthly repayments were too high.

- 52 per cent of IPs have seen individuals being ‘pushed’ into DMPs by creditors.

- And 35 percent of individuals in a DMP say that other options for dealing with their debts, such as an IVA or bankruptcy were not discussed before starting a DMP.
 

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If you get a letter telling you someone is making a County Court Claim saying you owe them money, don’t be alarmed. The Court will decide whether you have a debt to pay – and if so, how you should repay it – in a way that’s fair to everyone.

The purpose of a County Court Claim continue

Bailiffs and debt collectors

 If you owe someone money, they may try to collect the debt using a bailiff or debt collector. If these people contact or visit you, you need to know how to deal with them, and what your rights and obligations are. continue

This information is designed to help you understand what debt collectors can and cant do and make it easy for you to complain. Dealing with debt collectors can be very stressful. You don’t know what they can and can’t do and what they can and can’t say. Debt collectors rely on this to get away with activities that are often illegal or questionable. If no one complains they’ll keep getting away with it! continue

There are a number of ways to do debt a consolidation. The basic idea is to replace some or all of your debt payments with a single regular payment. A single regular payment is often easier to manage and you only need to have dealings with one entity rather than a number of creditors. You could end up paying less due to a lower interest rate or no interest. continue

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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 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.