Becoming free of debt is getting easier
Getting into debt was never easier than during the past 20 years. There was a surplus competition ready to lend, companies and the public were positive and the financial outlook for everyone was strong. As the economy boomed, inflation was conquered and we were promised a period where there would be no bust but steady growth with low inflation and interest rates. As a result, we borrowed to buy the things we wanted rather than saving until we could afford them.
And then it all went wrong – big time.
The last two years have been a painful reminder that we had it all too easy. Harsh lessons have been learnt by both the lenders and the consumers as we now struggle to afford the debt incurred in the good times. Job losses are increasing and workers being asked to reduce their salary or hours to help struggling companies survive.
One of the positive side effects of the last twenty years has been that the consumer legislation around borrowing and lending has been toughened and yet simplified. As we became one of the biggest per capita borrowers in the world, the environment to help us understand our obligations and sort out any problems has evolved. As a consequence, it has probably never been easier to get help and advice or to sort out debt problems.
There have always been people with debt problems – even in the better times. Nowadays, the tools and techniques developed to help the few are starting to be used by the many. Debt counselling services are as busy as they have ever been. Free advice from agencies like the Citizens Advice Bureau are the starting point for many as they seek to understand what they can do to get themselves back in control of their finances.
For relatively small debt issues, the recommendation may be to establish a debt management plan with lenders. This is an informal agreement with your creditors where you seek a period of lower payments to tide you through until you get your income back to former levels. Developing a plan means a rigorous look at your income and expenditure areas and making some changes to your lifestyle to help free up cash to pay debts. Many lenders will look sympathetically to a request for a lower payment with a longer time to repay since it is in their interest to have you repay what you can afford rather than have to take expensive action for recovery against you.
If you cannot get your lender or lenders to agree or your debt is more serious then you may have to consider an Individual Voluntary Arrangement (IVA). This relatively new device was developed as an aid to borrowers to help them write off some of their debts without having to declare bankruptcy. It is a formal arrangement, approved by a court and arranged by a licensed Insolvency Practitioner. You will have to undertake a thorough review of your finances and disclose all facts to your insolvency practitioner in order for them to negotiate with your creditors a reduced payment plan for a period of up to five years. If at least 75% of the creditors (by the total amount owed) agree to the proposal then the IVA will be drawn up and approved by the court.
The Insolvency Practitioner becomes the plan administrator and your creditors can no longer harass or chase you for money. All interest and fee charges are frozen and the payment plan will come into place. Provided you make the necessary monthly payment agreed, at the end of the IVA period any remaining debt owed will be written off by the creditors and you will emerge with a clean sheet to start again.
IVA's are an increasingly popular way to write off some of the debt you owe and will not usually result in you losing your home. Do not underestimate the severity of the terms as any breach by you could still result in you being declared bankrupt. If your circumstances change then you may be able to pay off the IVA early by agreement with your creditors and administrator.
The final step in debt management is bankruptcy. Whilst not carrying the stigma it once did, it still has significant restrictions on what you can borrow and may impact on the type of job you can have. You will almost certainly have to sell your home within a short period. Unlike an IVA, full details of the bankruptcy petition are published for any person to see. Those bankrupt for the first time can expect to be discharged within a year, although the ramifications may be felt for much longer.