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Clare Francis: We are already hearing that an increasing number of people are struggling to manage with their debts, and the latest figures from the Financial Services Authority reveal that the number of people having their homes repossessed because they can't keep up with their mortgage payments has soared 71%, and with the economy on the brink of recession, unfortunately it looks as though things will worsen before they begin to improve.
If you are struggling with your finances or are worried that you're not going to be able to keep up your head above water for much longer, you're probably feeling pretty desperate, but there are options available to you and there really is no need to panic, you're not alone so the best advice is to seek help sooner rather than later.
Caroline Hamilton, who is a debt adviser with the Consumer Credit Counselling Service, is with me just to offer some advice and some reassurance to those who are struggling.
Q1: So, Caroline have you seen a big increase recently in the number of people coming to you for help?
Caroline Hamilton: Yes, we have seen a big big increase; callers into the helpline have increased by 30% in the last half of the year.
Q2: Wow, that's a big jump isn't it? And who is it that has got problems, because you perhaps associate debt with lower income families who have obviously, money is tight anyway, but we have been reading a lot - because of the housing boom and people taking on bigger and bigger mortgages, and credit cards and loans being so readily available - that it's across the whole of society, and there are a lot of people who are on professional salaries, good or above-average earnings who are also suffering. Are you seeing it across the board?
CH: Absolutely, there is no typical client profile. We see low income families struggling with a small amount of debt, we see people who are high earners who have been able to get extremely high levels of debt. I think the important thing is its all relative - if it is difficult, even if it's a low level of debt, its still a problem that we can help with.
Q3: And what's the root cause of the problem, is it the fact that we are seeing a downturn in the housing market and mortgages are harder to come by, or is it increasing unemployment, or is it relationship breakdowns or is it a multitude of those things?
CH: Yes, I think all of those things really. Quite commonly when we ask clients what the cause of their hardship is, sometimes its just simply when credit has been available they haven't felt the need to budget strictly, or to save for one off's, and now that credit is not quite so available anymore they are realising the flaw in that strategy really.
Q4: Because the doors are shutting -
CH: Yes they can't live like that anymore, exactly. Changes in circumstances have always had an impact on finances. So, like you say, relationship breakdowns, loss of employment, birth of a child, bereavement: these are all things that can have a negative impact on a household's income. And the unemployment situation as it is, the housing market as it is, its not easy for people to undo a situation that they are in - they can't just simply go and get the higher paid job as easily anymore or sell the house that they are struggling to afford anymore. So, yes these are all things that contribute.
Q5: And because of that, it doesn't look as though that situation is going to improve. In the housing market, we are being warned that house prices could fall further, we could be in recession by the end of the year, so unemployment is likely to rise. So do you expect it, unfortunately, to get worse before it gets better?
CH: Certainly, we have a specialist mortgage counselling team, where we can council people specifically now with mortgage issues, arrears, repossessions. We've actually got a specialist team in place now.
We always see a peak in demand at the end of January, beginning of February, when the credit card bills come in after Christmas, and we are expecting that to be much, much, much more marked this year then it has been in previous years.
Q6: So what can people do? What would you say is the first step?
CH: The first step really is to have a well planned household budget. You have to know that you can live within your means and you have to know exactly what you have got left to be able to afford to pay creditors. Don't make creditors an offer until you have completed that step - if you make them an offer without truly knowing what you can afford to pay them the chances are that you may be offering too much and you will struggle even so, even if they have offered you a reduced payment, you have got to make sure its set at a level you can manage.
Q7: And for a lot of people, they probably actually don't know what is going out every month? They might have an idea, but until you actually sit down and write it all down you can get quite a shock can't you?
CH: There are some good websites out there that do have budget planners on them. You have got to make sure when compiling a budget that you include the everyday costs, the monthly bills and the one-offs that we don't always think of: car repairs, hair-cuts, Christmas. These are all things that it would be easier for us to save for.
Q8: For some people I guess it depends on the severity of the problem, doesn't it? What are the options to get yourself back on track?
CH: There are several options. It would depend entirely on somebody's circumstances, and these would range from simply coming to an informal arrangement with creditors to pay back an amount that is more affordable, right through to completely starting afresh and going bankrupt. The option that is right for a particular set of circumstances really is something that would need to be talked through with an adviser. Ourselves -the CCCS - the Citizens Advice Bureau, these are all organisations that can help choose the option that fits best.
Q9: And obviously with regards to yourself and the Citizens Advice, you're a sort of charitable organisations, so there is no fee to you is there?
CH: No, no fee to us, nor do we have a vested interest in the outcome of a particular case, so we wont be encouraging clients to pick one particular route over another. We just simply take an unbiased view of their situation and make recommendations. We are also completely confidential, so even if a client chooses not to take our advice we don't inform their creditors, the information stays with us and they can think about it for as long as they need to before they act.
Q10: Do you think it helps having an independent adviser like yourself to contact the creditors, or can you do it yourself?
CH: Absolutely, yes, anybody can contact their creditors. The danger though, is that the credit industry obviously want to get their money back fairly quickly and people tend to feel they're pulled in more then one direction if they try and negotiate with their creditors on their own. The advantage of coming through one organisation is that we have got a lot of kudos in the credit industry - we have got a good reputation, we carry a lot of weight and the credit industry knows that when people pay through a structured plan they are successful payers usually.
Q11: And how receptive are lenders to offers of reduced payments, because we have heard that with the banks themselves facing higher levels of bad debt that they're less inclined to accept an offer then they were a few years ago perhaps?
CH: I would agree, I think that it is important to prove that you are a hardship case before you actually ask for the banks help. The bank, like you say, is struggling like everybody else at the moment. They need to get their money back as quickly as possible but there is sense in accepting a reasonable offer where somebody really can't meet what the bank is expecting, they're sensible about it, as long as the offer their making is a sensible one we still do have a reasonable success rate at getting the banks to agree.
Q12: And if you can get an agreement and repayment plan in place at that stage, that's not a formal debt management plan is it, or is it?
CH: A debt management would be an informal arrangement between a debtor and a creditor where the debtor simply makes an offer that the creditor agrees to. More formal arrangements are the kind of arrangements that are legally binding, like an Individual Voluntary Arrangement (IVA) for example would actually be logged with the county court and the creditor and the debtor would both be bound to the terms of that IVA.
[If you live in Scotland, IVAs don't exist. Instead you can apply for a Trust Deed - this is similar to an IVA and is a formal arrangement between an individual and his or her creditors]
Q13: And how does it differ from the debt management plan?
CH: An IVA is a little more formal, like I say it's a legal and binding arrangement. There is an idea that there will be some write-off usually. This is for clients who are a little bit less solvent then somebody who can solve their debts buy offering a reduced payment over a longer period of time. IVA's are fantastic for a lot of people but not right for everybody, so if an Individual Voluntary Arrangement is something that someone is considering, the best thing they can do is take some independent advice from ourselves.
Q14: Because is it a 5-year agreement?
CH: It's a five year accelerated scheme and basically what would happen is a client would make an offer to their creditors through an independent third party, an insolvency practitioner. The insolvency practitioner would then ask the creditors to vote on whether or not they accept that repayment offer. If three quarters of the creditors, in terms of value, vote yes (so, somebody with £100,000 worth of debt would need £75,000 of those credit debts to agree) everybody would then be bound by the terms of the Individual Voluntary Arrangement, and you are right that usually lasts for 5 years - any debt that remains unpaid after the 5 years is then written off.
Q15: But, it has a big impact on your credit score doesn't it?
CH: It does, but usually by that point clients have already experienced some adverse credit on their credit file anyway, and credit scores aren't necessarily the most important thing once a client has reached that point - the important thing is finding the best way to move forward.
Q16: And I guess the other option, the final option, is bankruptcy isn't it?
CH: Bankruptcy, yes.
Q17: And how do the implications of declaring yourself bankrupt differ from going down the IVA route?
CH: Well bankruptcy is for people who really stand no chance of repaying their debts, so in bankruptcy you would effectively wipe that slate clean.
Bankruptcy though would take into account somebody's entire situation, so in bankruptcy its not just the debts that get looked at, its assets as well, so where people own property or they have savings and investments, bankruptcy isn't necessarily right for them.
In an Individual Voluntary Arrangement, property and assets are looked at as well but the difference is, the idea is that the client would get to keep those assets, keep the things they had worked hard for, use their value reasonably to repay the debts. For example, somebody that owned property would be expected to release equity, somebody driving round in a very expensive sports car would be expected to downgrade that to something a little bit more modest and use the money that that would generate to pay into an IVA. In bankruptcy these assets would usually be handed over to the official receiver and they'd be gone.
Q18: One of the things people, why they get themselves into so much trouble is they feel embarrassed and they feel that they have got themselves into this position and they try everything they can to get themselves out of it before they admit it to anybody and share it. Is that a mistake? Is it harder to get yourself back on an even keel the longer you leave it, is your advice to speak to people as soon as possible?
CH: As soon as you think there might be a problem, seek some help. The more you borrow, the worse the problem is going to be. You can rarely solve a problem by borrowing more, and its completely understandable why people do leave it. I have had people who are the top salesmen in their area and it has been expected that they have a new shirt and tie every month on payday, that their family have three or four holidays a year, that they drive the biggest, poshest car in the car park because they are the top performing salesmen - and these kinds of things are completely understandable but, yes it really is important that somebody seeks help and makes the necessary adjustment to their life style to stop it getting worse.
Q19: Because there are options for them, aren't there?
CH: Yes, there are options available, indeed.
CF: Brilliant, Caroline thanks very much for that, I think that will be a lot of help to people.
CH: Thank you.
