News Releases
|
 |
Personal Insolvency - The Options
Published on: 22 May 2007
As the highly competitive and profitable lending industry has grown in this country, another profitable market, 'debt solutions', has sprung up alongside it.
The existence of a heavily marketed industry designed to help consumers escape their debts has lured more people into massive overspending, comforted perhaps by the notion that if they can't repay their bills, there is a safety net waiting to catch them. "We have become a nation of borrowers, rather than savers," said Carl Faulds of Portland Business & Financial Solutions Ltd. "Increased competition amongst credit card providers has led to massive overspending by those who can least afford it. And when the debt becomes too much to handle, we are too often tempted by promises of easy solutions."
Faulds believes people are turning to the wrong source for their financial education - the highly persuasive, big budget marketing campaigns of debt management companies, rather than qualified experts who can provide advice tailored for individual circumstances.
"Consumers are too often drawn in by promises of low monthly repayments. The latest marketing techniques are being used to sell 'debt management solutions' to those who have borrowed more than they can realistically afford to pay back," said Faulds.
There are four options available to consumers overwhelmed with debt, though these are dressed up and sold in various guises. Each has advantages and disadvantages;
Debt Consolidation Loans are usually advertised as a way to 'reduce the headache of mounting bills with just one small monthly repayment', but are often actually a remortgage of your home. Whilst financially it can make sense to switch from high credit card rates to lower remortgage rates, the interest charged is still higher than a good value mortgage and your debts move from being unsecured (and therefore harder for debtors to reclaim), to secured against your home. "For the sake of getting debt collectors off your back, you could end up with a 25 year loan and potentially lose your home," said Faulds.
As a quick fix, debt consolidation loans solve the short term problem of being harassed by your lenders. The risk is that such an easy solution could lure consumers into repeating this cycle, falling further behind each time they consolidate.
Debt Management Plans (DMP) are the creation of an enterprising debt solution market. For an upfront fee and a monthly commission they take charge of your debts, paying your creditors on a pro rata basis. The attraction of a DMP, like a consolidated loan, is that it removes the pressure of being chased by multiple lenders. On the down side, there is no automatic freezing of interest and it is unlikely that the monthly repayments will significantly reduce the balance owed. A scheme involving small monthly payments could therefore continue almost indefinitely.
The Individual Voluntary Arrangement (IVA) procedure was introduced in the 1980's as a flexible alternative to bankruptcy for individuals in business. Whilst IVAs are still used for this purpose, it is becoming an increasingly popular way of dealing with consumer debt. Over 40,000 people are expected to enter into IVAs this year.
The advertising hook for IVAs is often that you can 'reduce your debts by 75%', because loan and credit card companies have introduced a 'minimum' expected dividend level of 25%. However, institutions will still look to recover the maximum possible, so an IVA will more likely result in debts being reduced by 60%. As with DMPs, fees of setting up and managing the IVA are paid first and the balance divided across the creditors. The great attraction is that the fees are paid out of the monthly installments and that the IVA will usually not last for more than five years. At the end of the agreed term any outstanding debt, including interest, will be written off. Of course, if the terms of the IVA, including repayments, are not met, bankruptcy is the next step.
In bankruptcy, the assets of the bankrupt are seized by a trustee. Reasonable household possessions like the washing machine or TV are excluded, as are tools of trade and a car if required for work. It is the home, or at least the equity in it, that can be seized by the trustee. If the home is jointly owned, the process of seizing the home (or available equity) is more complicated but generally the trustee remains in office until the assets have been realised.
Many traditional down sides to declaring bankruptcy have been removed. For around 12 months the bankrupt is subject to some restrictions including not being a director of a company or a member of Parliament. At the end of the 12 months the bankrupt is usually released from the debts and no longer bound by the bankruptcy restrictions although the trustee may continue to deal with any asset realisation such as the equity in the home. Of course, some debts will still be payable by the bankrupt including student loans and secured loans.
With few controls placed on lending, it's not unusual to see someone falling into debt, taking out multiple consolidated loans, followed by a DMP or an IVA before eventually declaring bankruptcy. Along the way the cost, both financial and emotional, will have been high. For some consumers, declaring bankruptcy should have been the initial solution, rather than the final one. But without professional advice, it is difficult for people to sift through the marketing messages and decide which option is right for them. Faulds explains, "Generally, consolidated loan and debt management companies are only able to offer you their own product and may not be able to advise on other more appropriate options." A licensed and regulated insolvency practitioner, by contrast, is legally required to explain all of your options and guide you in the right direction, rather than simply sell you a product. As Faulds explains "If you have combined debts of over £15,000 then don't be seduced by big budget television advertisements, contact a licensed insolvency practitioner for impartial advice. It could save you a lot of time and money."
|
|
Print this page ]
Back