Spend even a short amount of time watching TV and you are bound to come across an example of those irritating loan advertisements. They make wonderful sounding promises with enticing interest rates, hassle-free applications and no credit checks - anything to entice you to call that number. Others prey on the desperate customer whose finances have quietly gotten out of hand promising to combine competing bills into one easy payment. Is this new breed of financial institution the best solution for dealing with debt?
Are you in debt?
Most of us owe a certain amount of money at any one time but it's important to keep an eye on our finances before they become unmanageable. There are signs to note of rather than continually postponing dealing with the issue. If you think you might be facing debt problems there are a few questions you can ask yourself.
Have you missed more than one repayment on a credit or store card?
Do you owe money to friends or relatives?
Are you paying off the interest on loans without ever reducing the loan itself?
Have you borrowed from one credit card or bank account to pay off another?
Dealing with debt
Mounting collections of bills and final demands can seem like an impossible situation to deal with. How can you cope when your outgoings exceed your income?
Prioritise your debts
Some debts are clearly more important than others. By making a list of all your creditors and the amounts you owe you should be able to see which bills are most urgent. Deal with secured loans like mortgage payments or rent payments above unsecured loans such as credit cards or store cards. A money advisor can help you to prioritise your bills.
Speak to your creditors
The Banking Code commits banks to dealing with customers facing financial problems sympathetically. If you have missed some payments get in touch with your lenders to explain you situation. Try to renegotiate your payment plan to clear any arrears at a pace your finances can keep up with.
Make a budget
Once you have realised that you are facing financial difficulty a budget will help you see the full extent of your situation and help you plan how to deal with your debt. Assessing your income and your essential outgoings is necessary to enable you to draw up a realistic timetable for repayments.
Get some independent, impartial advice
Professional, independent advice is the first thing you should seek when you realise you cannot make your payments. There are several free, independent services you can contact for advice and help in dealing with your debt. They will also be able to make sure you are receiving all the tax and other benefits you are entitled to and ensure that your income is maximised to its full potential.
StepChange (formerly the Consumer Credit Counselling Service)
StepChange is a charity providing advice and help on budget and debt management. They have a helpline which provides free and independent advice.
0800 138 1111
Citizens Advice Bureau (CAB)
You should be able to find your local CAB in the phone book or through their website. They can advise you on legal as well as financial issues.
The National Debtline offers confidential, free advice to people facing debt problems in England, Wales and Scotland.
0808 808 4000
Alternatives to bankruptcy
Bankruptcy is not an appealing prospect for anyone. The loss of your assets, the other long-term impacts as well as the humiliation of such a public financial meltdown mean bankruptcy should be a last resort. It's also not cheap; to file for bankruptcy you will need to pay a fee of £705.
Fortunately there are now alternatives.
Debt Management Programme
This gives you some breathing room with your debts. Debts are repaid over a longer period of time with the agreement of lenders. It is important to note that this is an informal arrangement with your creditors who can change their minds about any time-scale agreement. This form of agreement also doesn't guarantee a freezing of interest rates and may include an administration charge. Organisations such as CCCS and the National Debtline can help you set up a debt management programme.
Debt Arrangement Scheme (DAS) (Scotland only)
This scheme is designed to help you if you owe money to several creditors and some surplus income to make regular payments. With the DAS a money advisor negotiates with your creditors to arrange a single regular payment to an approved payments distributor. This scheme allows you to pay your debts at a lower rate over a longer period of time.
Individual Voluntary Arrangement (IVA) (England and Wales)
An IVA is a legal agreement between a debtor and creditors committing the debtor to a regular payment plan but reducing the amount of money to be paid off as well as freezing any interest owed.
To begin IVA proceedings you'll need to hire a licensed Insolvency Practitioner who will liaise between you and your creditors to make all the necessary arrangements.
An IVA will usually last for up to five years, and at the end of this time, even if your debts have still not been completely repaid (which is unlikely if you have a lot of debt and are making smaller repayments) the remaining debt will be written off.
For the IVA to go ahead, at least 75% of your creditors (in terms of how much you owe them) will have to agree to the arrangement, although they are likely to agree because it means they are at least getting some money from you rather than chasing you for payments that may never otherwise materialise.
The scheme was criticised for the large fees paid to companies administering IVAs as well their aggressive marketing of scheme with promises to wipe out large volumes of debt. However a new voluntary code of conduct has been drawn up and the charity CCCS has recently launched its own IVA service. Debt is an important issue, especially in the current financial climate.
Fortunately the debtors' prison is a thing of the past and there are several sources of help for those of us dealing with debt.