Earlier in the year R3, the association of Business Recovery professionals estimated that there are nearly 1 million individuals in the UK struggling with debt.
This level of debt was fuelled until relatively recently by the huge boom in unsecured credit lending by the financial institutions. Lending was easily available to anyone in employment and little regard was given by the banks as to the debtors chances of repayment.
In the majority of cases, this lending was used to enable people to live beyond their means and was spent on consumable items such as holidays, restaurants, socialising etc.
I have often advised debtors who are in work, on a salaries of around £30,000.00 with in excess of Â£100,000.000 of unsecured lending (typically credit cards, unsecured loans, overdraft etc). Every three years, the debtor would typically consolidate that debt in the form of a remortgage on their property utilising the growth in property values.
Then came the housing market crash, credit crunch and recession.
Now there was no further credit available to consolidate previous lending, and no new lending. Coupled with the recession meaning job losses, cuts in overtime etc this led to many people becoming insolvent.
What should someone do if they find themselves in debt?
The Golden Rule – Do not delay act today!
Get good clear independent advice as soon as you can from a reputable professional or the Citizens Advice Bureau. There are many agencies giving advice in the debt arena I personally give free debt advice on a daily basis to any debtors who telephone our office. I also see people in person and after finding out and enquiring as to the personal circumstances with regard to finances etc, I offer a debt solution to their particular problem. Other professionals also carry out similar free advice such as Insolvency Practitioners. Contacting a bankruptcy solicitor or an Insolvency Practitioner will give a debtor peace of mind that the advice they receive will be independent and confidential. Both professions are governed by their respective professional bodies.
The natural human reaction when faced with mounting debt is to ignore the matter and to ‘stick your head in the sand’. This is obviously an extremely high risk course of action as the earlier the advice and action taken, the less painful the solutions usually are.
The important thing to remember is that you are not alone – there are options and people available to help who will give you a solution to the problem.
What are the options available?
While there are many options for sorting out debts, there are two major differences that people must be aware of between a formal insolvency process and a debt management plan or arrangement.
Bankruptcy or Individual Voluntary Arrangement (IVA)
A Bankruptcy is sometimes the best option for a debtor and will depend on that debtor’s personal circumstances. While the unsecured debts will be ‘written off’ once the debtor is made Bankrupt, there are certain mechanisms the Official Receiver or Trustee may use to try to claw back some money to pay to creditors in the Bankruptcy. Typically these are an Income Payments Agreement (IPA) or an Income Payments Order (IPO). This is a facility to enable the Official Receiver or Trustee to get the debtor to pay a monthly amount equivalent to their surplus income for a period of 36 months. Also, if there is any equity in their property the Official Receiver or Trustee will want this paying to them.
An IVA typically lasts between 1 and 5 years and at the end of the term any balance of unpaid debt outstanding is written off.
An IVA is a formal Court-sanctioned agreement between the debtor and their creditors and has a number of advantages for the debtor;
1. The debtor will typically pay back less than the debts owed.
2. Interest is frozen.
3. There is no creditor pressure/phone calls etc.
4. Bankruptcy is avoided.
Debt Management is an option available to many debtors and is becoming more prevalent now remortgage options are unavailable.
I am not a big fan of Debt Management Plans (DMP) as they do not provide any debt forgiveness. The interest on the debts is not frozen and any creditor can take independent action against the debtor during the course of the DMP. This may include a Bankruptcy Petition.
Debt Relief Orders (DRO) are an option available to people on benefits or very low incomes with debts of less than Â£15,000.00 in total. They came into force in April 2009 and can be an alternative and much cheaper option to Bankruptcy. Also the debtor must have surplus income of no more than Â£50.00 per month.
Whatever option is the right option for a debtor, I would strongly urge anyone struggling with debt to deal with it now.
The sooner the problems are addressed and the debt problem resolved, the sooner the debtor can start building a financial future for themselves and be able to plan for retirement.
It is time to start repaying the debts incurred if possible and living within our means. The days of free and easy credit have long since passed and I do not foresee them returning in the near future.