UK in trillions of debt
Credit Action’s latest figures might reveal that personal debt levels are down year on year (from £1.455trillion in November 2010, to £1.451trillion in November 2011), but debt problems still have a hold on many UK residents.
The problem is made worse by the steady increase in the cost of living and rising unemployment which had reached 2.62 million by the final quarter of 2011. Royal Bank of Scotland, for example, has recently announced 4,450 job losses as part of a business reorganisation.
But if you are struggling to keep on top of your debts, what can you do about it?
Don’t miss payments
One thing not to do is to start missing repayments as it will result in expensive penalty fees. Credit card companies for example, can charge a ‘default fee’ of up to £12 if you’re late with a payment – and a further £12 if this pushes you over your agreed credit limit.
This means that you could find yourself having to stump up an extra £24 before you have paid off even the minimum amount on your credit card balance.
You could be hit in the pocket by your bank too. Barclays charges an £8 ‘Returned Transaction Fee’ for each unpaid item if there are insufficient funds in your account.
And if you have agreed a ‘Personal Reserve’ on your account (which is a pre-authorised amount you can borrow beyond your overdraft limit), Barclays will also charge £22 for every five days you use the reserve.
Any defaults you make on repayments will also be noted by credit referencing agencies who will downgrade your credit score accordingly.
This can affect future credit applications and, even if you are still eligible for credit, you may find you can only take out bad-credit credit cards or bad-credit loans, both of which come with sky-high rates of interest.
Ignoring your debts also means that you will be regularly contacted by your creditors as they try to get their money back. If you continue to ignore them they are entitled to withdraw their line of credit and sell the debt on to an external debt collection agency which can prove highly stressful.
You could also be subject to a County Court Judgement (CCJ) whereby your creditors will apply to the court to recoup their money. The court will then decide whether there is a debt to pay and issue you with a CCJ, which sets out and enforces how the debt is to be paid.
Continue to put your head in the sand and you could even find bailiffs knocking at your door to claim back the debt in the form of your possessions.
In short, failing to recognise your debt problem will only serve to make it worse.
On the other hand, taking action could well mean everything is not lost. If you still have a good credit score then it may be possible to reduce your payments by transferring any credit card balances to a card with an interest-free period, although bear in mind a balance transfer fee of around 3% is likely to apply.
You may also be able to lower the payments by consolidating your more expensive debts into one larger loan which is likely to come with a much lower interest rate than the one applied to credit cards.
However, it must be stressed that any new borrowing should only be used to consolidate existing debt and not to run up more!
Contact your creditors
If you can’t find a way to make your monthly payments, it’s crucial that you pick up the phone to the companies you owe money to and let them know.
Explain your situation, how you arrived there and ask if there is any scope to reduce your monthly payments. This could mean that you have the interest frozen on the account, or that you just pay the interest and not the capital to lower your payments.
Another option could be to freeze your account for an agreed period, during which time you pay a nominal fee of say, £1 per month. This will give you time to sort out your finances and, hopefully, return to your normal payment schedule. However, this is completely at the discretion of your creditor.
If you are still struggling to manage your debt or your creditors are not receptive then help is at hand from debt charities such asCredit Action and the Consumer Credit Counselling Service.
They offer free, confidential and independent advice and can be contacted via a Freephone number. You should never pay for debt advice.
When you contact debt charities, they will talk you through a range of solutions appropriate for your debt level and circumstances. So what might they be?
Debt Management Plan (DMP)
A DMP involves a third party (such as one of the above charities) contacting your creditors on your behalf to arrange more manageable monthly payments. This is something you can also do yourself.
You will then be required to draw up a budget that details all of your income and expenditure. Any disposable income you are left with at the end of the month will go towards paying down your debt at the manageable levels that you have arranged.
This payment is made directly to the charity or company that has organised you DMP, who will then distribute the payment among your creditors in agreed proportions.
If you are using a third party to arrange your DMP, be sure that it offers the service free of charge.
Debt Relief Order (DRO)
If you can’t afford to pay enough of your debts as a DMP requires, you may be recommended a DRO. This is a more serious option than a DMP as it is a form of insolvency and it therefore granted by the Insolvency Service. DROs are often handed out to people on a low incomes or benefits.
Unlike a DMP, there are certain criteria you must fulfil before you can enter a DRO.
You must not:
- Owe more than £15,000
- Be a homeowner
- Have more than £300 in assets (not including a car up to the value of £1,000)
- Have more than £50 a month in disposable income
When you enter a DRO your debts are frozen for 12 months and creditors cannot pursue you for the debt during this period. If you cannot pay back a reasonable amount each month after this 12 month period then the debts are written off.
A DRO requires a fee of £90 before it can be arranged.
Individual Voluntary Arrangement (IVA)
Another option is an IVA. This is a legally-binding arrangement between you and your creditors that sets out an affordable monthly payment aimed at clearing your debt within five years. No interest will be added to your balance during this time unless your financial circumstances change
As an IVA is a form of insolvency, your unsecured debts must be greater than the value of your assets, including any property you own.
You will need to enlist an Insolvency Practitioner (IP) to apply for an IVA, who will draw up your proposal and try to get it accepted by your creditors. An IP will also offer guidance throughout the duration of the arrangement.
However, IPs will charge for their services and this will normally form part of your monthly repayments.
An IVA will appear as a default on your credit file for six years from its start date, but once it has been concluded it should be cleared from your record after one more year.
If all else fails and you can no longer service your debts then personal bankruptcy becomes an option. A bankruptcy means your creditors will write off your unsecured debts completely. However, this does not mean that is an easy way out.
Bankruptcy is the most serious form of insolvency. If you have any valuable assets you may be asked to sell/surrender these as part of the bankruptcy and you may lose your home as part of the process.
Your bankruptcy will normally last for a year, though it could last up to three years. During this time, you cannot borrow any further money and must declare any changes to your financial circumstances.
Any bank accounts that you have will be frozen and you will have to take out a basic bank account with no cheque or overdraft facilities and your credit rating will be affected for six years from the start date of your bankruptcy. This will make it very difficult to obtain credit in future.
Furthermore, personal bankruptcy is public information and details will be recorded on the Insolvency Register, which is available online and details of your bankruptcy may be recorded in your local newspaper.
However, it should be noted that any debt management plan will affect your credit rating and remain on your credit file for a period of up to six years from the start of your arrangement.
This means that it will be difficult to obtain any further credit during this period and you will have to work to rebuild your credit score even when the insolvency has been removed from your file.
All the more reason why it makes sense to take action earlier, rather than later.
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