As an increasing number of people struggle with debt, moneysupermarket.com editor Clare Francis talks with debt expert Paul Wilson about ways to manage your debt and what solutions are available...
Video Transcript
Clare Francis: There are worrying signs that an increasing number of people are struggling to manage their debts. A recent survey from the Financial Services Authority, the city regulator, found that more than one million homeowners are concerned about how they'll cope financially when their current mortgage deal comes to an end.
Here at moneysupermarket.com, we asked whether or not consumers are worried about their financial situation - so far we've had more than 2,300 responses and 30% said that they are really concerned and don't know how much longer they can cope.
When credit was readily available, borrowers were able to juggle their debts without facing up to the fact they were walking a financial tight-rope. But with many sources of borrowing now drying up, action is needed.
I'm here at moneysupermarket.coms head office to talk to Paul Wilson, a debt expert, and ask him what people should do, and how they can cope and manage their debt problems.
Q1: Being in debt is very stressful, and obviously a lot of people try to ignore their problem and not face up to it in the hope that it will go away. But obviously its not going to go away, so what do you need to do if you have got debts, and how do you go about repaying them?
Paul Wilson: You need to start by prioritising your debts really, and make sure you pay the essential bills first - so things like your mortgage, your rent, your council tax and utility bills - all those things have to be paid every month and need to be paid first. The more non-essential items need to be at the bottom of that list, and that's where you need to be looking for cost savings, try and free up some cash in your budget to start paying off those debts.
Q2: And I guess also see if you can reduce the interest owed on any of them by seeing what interest rate you are being charged on your credit cards and store cards, and looking to see if there is any way you can save money that way by switching to a cheaper option?
Paul Wilson: Yes, absolutely, and the thing to remember here is that if you are able to switch more expensive debt into a cheaper credit vehicle, then its really important that you don't use that as licence to go out and spend again on that credit card. Its all about getting out of debt - not building up more.
Clare Francis: So it's changing your habits, as well as focusing on paying the debt down?
Paul Wilson: Yes, that's absolutely right.
Q3: For some people the debt may be too great for them to be able to clear it on their own. We are hearing stories of some people who owe 50, 60, 70 thousand pounds. What are the options available to these people, when the amount you owe is obviously far greater then the amount they are earning every year?
Paul Wilson: For people in that situation, loans aren't the answer. Its not about consolidation, you can't borrow yourself out of debt in that situation, so debt solutions here are really your IVAs, debt management plans, possibly even bankruptcy.
Q4: IVAs, let's start with those. What is an IVA?
Paul Wilson: Well an IVA is an Individual Voluntary Arrangement, and an IVA is a legally binding agreement between yourself and your creditors. It will be set up using a solicitor, the term is an IP, which stands for Insolvency Practitioner, and what they will do is take you through a budget basically. They will understand all the incomings, exactly what you are earning, what's coming into your budget, where expenditure is and also the level of debt that you're having to service. Assuming that three quarters or 75% of the outstanding debt is approved by your creditors, so the people who you owe the money to agree that this is a realistic and fair solution, you will enter that legally binding arrangement with your creditors then pay that monthly fee for the term, which is about 4 to 5 years. Once you have come to the end of the term of the IVA, it means that your debts are effectively paid off and you are back to square one.
Q5: And debt management plans - where do you get those from and how do they work?
Paul Wilson: There are three main areas that go into a debt management arrangement, there's fee charging services out there, there [are] also non-profit organisations out there so places like the CAB -
Clare Francis: That stands for Citizens Advice Bureau?
Paul Wilson: Yes that right, and there is also the Consumer Credit Counselling Service (CCCS). Finally you can actually do a debt management plan on your own, so you can do it yourself and approach each individual creditor and propose your own repayment plan.
Q6: It's basically forming an agreement with the creditors on how much? You can say 'well, I can't afford to pay this amount every month, but I can afford this', and coming to that sort of an agreement, is it?
Paul Wilson: That is absolutely right yes, so using the fee-charging services as an example, what they will do is they will go though a budget exercise with you, they will look at exactly what you have coming in, exactly where your expenditure is going and also the level of debt you have to service, and they will go to your creditors on your behalf and basically put forward a repayment programme for you. So lets say you have been paying £1,000 a month out, but can only realistically afford £400. They will go to each of your creditor with a proposal to say 'this is what Clare can afford to be repaying on a month-on-month basis'. Once that has happened - say you had to pay £200 to credit card one, £100 to credit card two, £15 to a store card etc., they take all those debts in for you and you just pay one monthly payment and they distribute it on your behalf.
Q7: And the final thing is obviously Bankruptcy, is it still the case that this really is the last resort, and that people shouldn't be seeing this as an easy way out?
Paul Wilson: Definitely yes. Bankruptcy should really be when you have got no other options, bankruptcy really is for someone who has got a debt that they can't pay off and they can't really even service. The advantage of bankruptcy is that it quickly draws a line under your debts and gets them paid off. Bankruptcy can be voluntary, so you can choose to go bankrupt yourself, or it can be involuntary which is when your creditors force it upon you. The down side of bankruptcy is that you will have to liquidate assets, so it might mean you have to sell your home, maybe even your car, so its not one to go into lightly, you definitely need to do the research and to seek independent advice as well.
Clare Francis: Great, thank you Paul.
So the message is if you do have debt problems don't hide under a stone in the hope that they will go away - they won't. You really to need to tackle the problem, but equally you don't need to panic. There is help out there so go seek it before it really does become too much of a problem.
