The Consumer Credit Counselling Service (CCS) has produced figures showing an increase in the number of men seeking debt solutions. The sharp increase over the past three years is put down to a combination of things, such as: pay freezes; rising unemployment and increased household expenditure. The last, of course, has been evidenced by the rising inflation rate as seen in the graph below:

CCS chairman, Malcolm Hurlston believes that men are emerging as the new underclass, with debt being just one of many problems they experience.

As we highlighted last week, the total UK personal debt figure now exceeds our total gross domestic product.

If you are troubled with debt, take action NOW! You could perhaps consider an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO). Whatever action you take, the CCCS or Citizens Advice will be able to give you good, impartial advice.

Probably the first thing you need to know if you are in debt is that you are one amongst many. Okay, so the only debt you are worried about is your own but, just sometimes, it helps to know you are not alone.

The next thing you should know is that getting help is probably easier than you imagine. There are a number of agencies out there who will give you good and reliable debt advice. They will also help you to manage your finances in an attempt to prevent a recurrence of your current financial difficulties.

The type of debt you have amassed is, largely, irrelevant; whether in the form of bank loans, overdrafts, store cards, or credit cards, there are solutions out there.

Debt Management Programmes

When you are in serious debt there is an overwhelming feeling of powerlessness; you owe money that you don’t have but, no matter how long you ’sleep on it’ when you wake up the debts are still there and the money isn’t.

Debt management programmes are a method of bringing you back in control of your finances, whilst at the same time reducing the amount of money you have to pay out every month. Debt management is particularly useful if you are in receipt of a regular income and the amount you owe is not too large. You will work with a personal adviser who, after analysing your income against your total outgoings, will negotiate with your creditors to bring you repayments down. You will pay your debt manager an agreed monthly sum, out of which he will pay your creditors at the lower agreed rates. One of the most attractive aspects of this system is that your creditors negotiate direct with the debt manager, rather than with you. This means that the payment-demanding phone calls and letters will gradually disappear.

IVA

An IVA, or Individual Voluntary Arrangement, is a debt solution that is used where the most probable alternative is bankruptcy. In an IVA, your creditors will agree to write off part of your debts, allowing you to make monthly payments that you can afford over a period of five years. This debt solution is most effective if you have large debts, over, say, £15,000 and no way of paying them at the current levels.

Finding Debt Solutions

There are a number of organisations set up that provide free debt advice. We also provide more information about debt consolidation.

Financing your Debt

It is important to remember that organisations that provide debt solutions are businesses, that is, they earn their money by helping you. Having said that, they are also aware that the reason you are seeking their help is that you can’t afford to pay your current debts, let alone new charges. For this reason, a number of payment solutions are on offer so there will be one that is right for you.

The main message here is that there are many thousands of people in the same situation as you and, that being the case, there are ways on offer to help you get off this treadmill.

Now here’s something we’ve never discussed before on this site – equity release; if you’re a homeowner of 50-55 years and older, equity release schemes are one of many debt solutions you might wish to consider.

What is Equity Release?

To explain how equity release schemes can help, we first need to look at exactly what equity means in the context of the housing market. In very simple terms, The equity in your home is the difference between what your property is worth and any outstanding debt secured against your house. So releasing this money is simply getting hold of money that is yours anyway, which means that there is no tax payable on any funds you receive. There are numerous equity release plans on the market and it really is a case of buyer beware before signing anything.

However, the main points about equity release are:

• You have to be over a certain age (typically over 50) and own your own home
  
• You can get a cash lump sum, a regular income, or both, to use as you wish
  
• You can continue to live in your home
  
• You continue to be responsible for maintaining your home.
  

In essence, there are two main types of equity release scheme – lifetime mortgages and home reversions. In this post we’ll look at the different types of lifetime mortgages and, in the next post, we’ll concentrate on home reversions.

Equity Release: Lifetime Mortgage

1. You take out a loan that is secured on your home (that is, the lender knows they can get their money back by selling your home)
   
2. You continue to own your home, although you will have to pay back the mortgage on it;
   
3. You repay the mortgage from the proceeds of the sale of your home when you die, or if you move out
   

Roll-Up Mortgage

With this type of Lifetime Mortgage, you borrow the cash as either a lump some or as regular income. Fixed or variable interest is added to the loan monthly or yearly. But you do not pay the interest until your home is sold. This could be when you die or need to go into a care home.

The main point to bear in mind here is that interest is compound that is it is charged on the loan and also on all the interest that has already been added. This means that the amount owed grows quickly – particularly if you have taken the money as a lump-sum. As an example, if you took a lump sum of £45,000 at, say, 5% interest a year, this is how the amount owed would grow over 25 year period:

Obviously, the higher the interest rate, the higher the amount you will eventually pay back.

Draw Down Mortgage

This is another type of Lifetime Mortgage. With the Draw Down Mortgage, rather than taking out a single lump sum, you take smaller amounts over a period of time; these amounts can be taken at regular intervals or as and when you need them. Interest is not paid until the loan has been repaid.

Interest Only Mortgage

You borrow a cash lump sum and pay back the interest on the loan each month at either a fixed or variable rate. If you are on a fixed pension you could find a variable rate mortgage difficult to repay if interest rates rise. You don’t pay back the original amount of the loan until you sell your house.

Fixed Repayment Mortgage

Once again, you borrow a cash lump sum but, rather than being charged interest over the lifetime of the loan, you promise to pay the lender more than you originally borrowed when you eventually sell your home. The amount you will repay is fixed when you take the loan out.

The downside of this scheme is that the lender may charge interest on this higher sum from the date you die until the mortgage is actually repaid, thus putting pressure on your loved ones to sell the home.

Home Income Plan

Another scheme where you take out a lump sum, which is used to buy an annuity that gives you a regular income, usually fixed for life. You pay the interest on the loan, usually at a fixed rate, from the income provided by the annuity. The amount you originally borrowed is repaid when your home is sold. This is really a scheme for older people as, if you take the annuity soon after retirement, the income from it will be fairly low. The older you are when you buy an annuity, the higher the income you’ll get, as there are fewer years over which the income will need to be paid.

Shared Appreciation Mortgage (SAM)

With a SAM you agree with the lender that they can have a share in any increase in the value of your home when it is sold in return for them charging you less or no interest on the loan.

Find an Equity Release Adviser

Equity Release Calculator

.

Put very simply, debt consolidation involves taking out a loan with which to pay off all your other debts.  So, in effect, you replace mutliple regular payments with just one.  Seems easy, yes?  Perhaps debt consolidation is the best solution for your current situation but it is vital that you take many things into account before going ahead.  According to leading UK charity, Consumer Credit Counselling Service, taking out consolidation loans to pay off debts can have disastrous consequences for the over-indebted.  When you think about it, borrowing to get out of debt can’t be a good idea because you’ll just end up owing more. 

Reasons for Considering Debt Consolidation

Everybody’s circumstances are, of course, very different.  Here are some reasons why you might want to consider debt consolidation:

• You are finding it difficult to keep up to date with existing debt repayments
• You are having problems affording day-to-day expenses
• Your existing debts have high interest rates and you would like to lock your debts into one, lower rate.
• You want to reduce your regular payments to a new lower amount

Advantages and Disadvantages of Debt Consolidation

Advantages

• Debt consolidation can reduce your monthly debt repayments High interest rates are replaced with a lower rate.
• Debt consolidation will allow you to combine multiple debts into a single one
• Your creditors will go away – satisfied to have been paid
• You will have just one creditor to keep  happy

Disadvantages

• Debt consolidation payments can go on for many years
• Interest rates can be very high – you must check out the total amount you will repay over the period of the loan
• If the loan is a secured one, your house (or whatever you have used as security) will be at risk if you do not keep up the repayments
• You will be in debt for longer than if you paid off your debts individually .
• The contracts for debt consolidation loans are very prescriptive and  you will incur a financial penalty if you lengthen or shorten the period of the loan
• A secured loan will be linked to the Bank fo England interest rate – so your repayments will increase as interest rates increas.  The reverse is, of course, also true.

Debt Consolidation Regulation

Secured Loans

Companies offering secured loans that are based on releasing the equity on your home via a remortgage must be registered with the Financial Services Authority, which makes it compulsory for them to provide you with certain information.

Loans that are not mortgages are not regulated in the same way.  The loan company you use must have a Consumer Credit Licence issued by the Office of Fair Trading. This imposes certain conditions on them which require them not to mislead you.

Unsecured Loans

It is rare to be offered an unsecured loan for amounts above £25,000.  Once again, the Office of Fair Trading are responsible for regulating companies offering unsecured loans.

Choosing a Consolidation Loan

Apart from shopping around for the best terms you can find, you should take the following points into consideration:

One of the biggest bankruptcy questions is can you be thrown in jail for not paying your debts. This only happens in extreme cases, like if you refuse to pay your taxes or don’t pay child support. As long as you pay these debts, there is not much a creditor can do to you. The key is, however, that you must live simply with only the basic needs until your debts are no longer collectable.

For example, a creditor can sue you for the debt you owe and take you to court. However, even if that debtor wins in court, which is most likely, he or she cannot take away your basic needs. Basic needs that cannot be taken include clothing, food, ordinary household items, like your bed and blankets (as long as they are not excessively ornate or valuable), and checks you receive for social security, public assistance, or unemployment. If you have nothing else, the creditor has nothing to take.

Be forewarned that you will not be able to save any money during this time period, nor will you be able to live with anything other than the basic human needs. If you start earning an income, anything you do not use for food and other basic human needs can be taken away. A court will decide how much your wages will be taxed.

After a number of years, the debt becomes uncollectable. The basic plan behind doing nothing is that you will live simply until this time arrives. It will probably be unlike every debt you have, contingent on what kinds of debts they are. However, after that time period, you can again start saving money, living more extravagantly, and even applying for new loans. Of course, you probably will not quality, but after seven years, all past debts are wiped clean from your credit history.

This method takes time and is not for everyone, but if you don’t want to declare bankruptcy, it is an option you have. Talk to a financial professional person if you would like to figure out the best course of action for you and your life style.

All of the time, having credit card debt is easy to do but get away from it can takes a whole of time and work.  Even if you go to an agency or company that specializes in helping people out of debt, it wont happen overnight.  To get out of debt, it will take you quite a bit of time and effort as you get the debt under control and begin the long process of rebuilding your credit.
To properly defend yourself from credit card debt, youll need to know quite a bit about credit, managing your money, and finances in general.  Ordinarily, you can free of debt by managing your ideal budget and save some money whenever is possible.  If you can work this plan then you may avoid credit card debt.

Some people have credit card more than one, such as store credit cards that are known for high interest rates, you should toss them.  If you have a lot of open accounts, you should look into debt consolidation, which will integrate all of your debts into one bill so you can out of debt quicker.  By applying debt consolidation services, you will only have one bill to pay.

When you receive your credit card bill, you must try to pay higher that the minimum payment.  If you only pay the minimum payment, you will end up in credit card debt the whole life – as you could be paying nothing but the interest.  Each month, you better to pay more than minimum amount.  If you pay a lot than minimum payment it will help you to get rid of your debt faster.

It doesnt matter how much your credit card debt is, there is always a way to find financial planners or debt analysts that will help you get back on track.  Even though there are ways out of credit card debt, the best way to get away of it is to keep off it all together.  If you arrange your payment on time – youll always live a debt free lifestyle.

Currently a typical re-mortgage for people with poor credit ratings is approximately 8.5% APR with secured loans at around 14.5% APR.

These interest rates should be lower than the combined average of your current debts; you can check how much you could save by using this simple consolidation calculator.

Debt consolidation allows you to consolidate your outstanding debts into one loan. This fixed monthly payment offers a lower interest rate, which effectively lowers your monthly repayments so you save money.

If you are unable to get a secured loan then you could look towards obtaining an unsecured loan, your interest rates will inevitably be much higher as you are seen as a higher risk client.

If you do take out a secured loan for debt consolidation purposes and it is secured against your home make sure that you are 100% able to pay this back otherwise your house could be repossessed. It is best to write down all your monthly outgoings before signing on the dotted line just to make sure you will realistically pay this loan back and not have your house repossessed.

Debt consolidation secured loans – These allow you to consolidate unsecured debt with a secured loan.

Debt consolidation remortgage – Allows you to move unsecured debt which is usually at a high interest rate onto your mortgage at a lower interest rate.

The first step in bringing your finances under control is to make a list of all your debts. The list should include all companies owed money to (creditors), and the exact amount owed (found on your most recent correspondence/statement).

If any creditors have started legal action, these need to be dealt with as a matter of urgency. If you are unsure how to proceed with this, your local Citizens’ Advice Bureau will be able to assist you.

When you gave finished compiling your list of creditors, you need to sort out the debts into priority and non-priority. Priority debts include:

• Mortgage/rent: if you do not pay any arrears, you may lose your home

• Utilities (gas/electricity/water): if these are not brought up to date, your supply may be cut off

• Council Tax: Although you cannot be imprisoned for council tax arrears in Scotland, the debt can be enforced in other ways – for example, your bank account or salary may be accessed, or your personal possessions seized.

• Fines: You can be sent to prison for non-payment of fines.

• Maintenance: again, you can be sent to prison for failing to keep up with maintenance payments.

• Loans secured on your property: your home could be repossessed if payments are not kept up to date.

• Car loan: if you cannot do without your car, for example if you live in a rural area or are disabled, then your car loan needs to be classed as a priority debt.

• TV Licence: it is a criminal offence to be without a TV licence.

Other, non-priority debts include credit cards, catalogues, unsecured loans, overdrafts, and any hire purchase agreements. These are referred to as ‘non-priority because you cannot be sent to prison for non-payment, but you still need to acknowledge these debts and work out a suitable repayment plan – otherwise, your creditors may take you to court.

The next thing to do is work out a weekly/monthly household budget. Firstly, all money coming into the home needs to be listed, including wages, any benefits, maintenance, and any monies from non dependants. Outgoings then need to be listed, including rent/mortgage, utilities, council tax, food, leisure activities, TV licence, telephone, travel expenses, clothing, and insurance – in short, everything you pay out.

Any money you have left over at the end of the month/week can be used to pay off your debts. You may also be able to generate extra income by claiming benefits you are entitled to, or take on a second job – if you have a spare room, why not rent it out? Any extra money you can put towards your debts means they will be paid off quicker.

If you have trouble drawing up a budget, your local Citizens’ Advice Bureau can assist you – there is also a handy budget sheet to print off on their website.

With priority debts, you need to get in touch with your creditors as soon as possible, explaining your financial situation. It is usually best to write to them, keeping a copy of any letters you send for your records – the Citizens’ advice has a handy section on their website that offers tips on negotiating with creditors.

You need to make an offer of payment to each creditor in order to clear arrears, based on your disposable income (send them a copy of your budgeting sheet).

It is pretty much the same with non-priority debts – if you have any spare money from your budget after negotiating your priority debts, this can go to paying off your non-urgent debt.

Cathie Campbell, Money Advice Manager for Citizens Advice Scotland, says:

“Often people leave problems to last minute, so our key message is to urge them to get in touch with us as early as possible when there is a problem with repayments (such as notice of losing job, an illness affecting future work prospects, or other change in circumstance) and before creditors take any summary action against them.  It’s easier to negotiate and set up a realistic payment plan this way.

Also, the local authorities are becoming more active in taking court action for non payment of council tax, especially against householders with property.

We don’t as a rule class car loans as priority debt, but each individual’s circumstances are taken into account, as outlined above”.

With both priority and non-priority debt, you can negotiate with creditors yourself, or seek the help of the Citizens’ Advice Bureau or debt management company (be careful here, as some do charge a fee for their service, while others, such as Payplan, do not).

Creditors often do accept offers of fair payment, but usually agree to this for a limited period only; say, 6-12 months. After this time, they will want to know whether your situation has improved and you can pay more. However, creditors are not obliged to accept offers of payment and may take legal action against you.

If you do not have enough money to pay anything off your non-priority debts, there are a number of options open to you, ask creditors to wipe off the debt or apply for bankruptcy, especially if you are on a very low income and have no assets – see the Citizens’ Advice website for further details.

On the 6^th April 2009, the Ministry of Justice updated the rules regarding court action: an amendment to the civil procedure rules concerning the pre-action protocol (in relation to disputed debts) states that an early exchange of information should take place before court action is taken

Lenders are obliged to supply sources of debt advice to debtors prior to court proceedings, and if those affected seek such advice from agencies such as the Citizens’ Advice Bureau, they are entitled to 30 days’ grace from companies chasing debt.

The rules regarding debt collection were updated following complaints about the ‘aggressive tactics’ employed by many debt collection agencies. These agencies collect monies owed to various types of company, including utility companies, banks and the government; money owed on loans, mortgages, council tax, utility bills, etc.

Complaints from struggling families have soared since the onset of the recession, with unfair court action and mistaken cases of identity commonly being reported.

Emma Parker, a communications officer for the Financial Ombudsman Service, comments:

“Since April 2007, the Financial Ombudsman Service – the free service set up by law to settle financial complaints – has been able to look at consumer credit complaints. This includes complaints about debt collection in relation to a consumer credit debt, such as a hire purchase, a loan or credit agreement.

Debt collecting firms have a maximum of eight weeks to resolve disputes before the ombudsman can become formally involved. But if a consumer does not know how to contact a firm or would like the ombudsman to write the firm to let them know about the complaint in the first instance, they can call the ombudsman’s consumer helpline on 0845 080 1800.

The ombudsman received around 400 debt collection cases last year. Common themes have been people being pursued for a debt that isn’t theirs and people feeling that they have been harassed. If the ombudsman sees evidence of a systemic problem with a particular firm, it passes that information on to the regulator, the OFT”.

With the new 30 day rule, those affected by debt will have one month from receiving an initial letter from a debt collection agency to seek the necessary help and advice, in order to allow them to take control of their finances and prepare their case for the courts, if necessary.

The Citizens’ Advice Bureau has welcomed these changes, but is still concerned that not enough is being done. They have reported seeing a sharp increase in the number of people becoming the victims of unfair, often harsh, debt collection during the recession.

The charity says that the law needs to separate those who ‘wont pay’ from those who simply cannot pay, and treat each group accordingly; those who are in genuine financial difficulty should have their offers of payment accepted, instead of being continually pressed for more money.

Indeed, it is this group who should be receiving help from debt advice agencies, while those who refuse to pay should feel the full weight of the law.

Alarmingly, it is not only poorer families feeling the strain of the recession; around half of clients seeking help from the charity CCCS were homeowners, with 12% having an income in excess of £30000 per annum. The poor economic climate has seen an increase in the number of debt collection agencies being set up in order to target srtuggling families, and it is important these operate in a fair manner.

The Office of Fair Trading issues licences for consumer credit, and it has seen a marked increase in applications for businesses in the areas of debt management and debt collection. Luckily, the OFT does have the power to reprimand and fine companies that do not comply with the laws surrounding credit collection; one company has already been fined this year for unnecessarily threatening debtors with bankruptcy and court action.

Of course, this means that it takes years to pay off the balance and a huge sum of interest is paid over the term.

Debt consolidation is often a good solution for such people: a debt consolidation loan is used to pay off all existing debts and features a single, affordable monthly repayment. Below is a quick guide to the different types of debt consolidation:

• Unsecured Personal Loan: These are available over various terms (1-7 years) and at various rates of interest (usually much less than the interest charged on credit and store cards). No security is required but an exemplary credit record is needed; lending criteria has been tightened as a result of the credit crunch.

Various amounts can be borrowed, usually from £1,000-£25,000, and with each payment made the balance decreases. If you use this method of borrowing to pay off debts you must be disciplined and make sure you do not run debts up again (it would be a good idea to cut up store cards/credit cards).

• A Secured Loan: these types of loan are secured on a property (thus they are only suitable for homeowners) and are a possible option for those homeowners with less-than-perfect credit histories, the self-employed, those who wish to borrow large amounts (up to £50,000 or more), and those who require a longer repayment period (up to 25 years).

Be aware that this debt is secured on your property and your home may be repossessed if you do not keep up with repayments.

Used responsibly, these two types of debt consolidation loan can save you thousands in interest and can improve your credit rating (providing payments are adhered to).

If you wish to take out a loan, check out an online comparison site such as uSwitch to find the best deals and rates. Obviously, you will need to have an adequate regular income in the form of employment to take out a loan.

Louise Bond, personal finance manager at uSwitch.com comments:

“As we embark on what is expected to be one of the toughest years in the history of the UK, it is vital that borrowers give themselves the best possible chance of servicing their debt in the most economical and manageable way possible.

If consumers are careful about managing their spending, a debt consolidation loan can help to reduce monthly repayments and it can also help to settle borrowings earlier, as repayments are fixed and set for an agreed number of years.

Borrowers need to be aware that taking out a loan or credit cards to consolidate debts must be approached in a disciplined way and should not be treated as a quick-fix solution to debt problems.

Those who consolidate their debt into a single loan should only borrow enough to cover all their debts and no more, and all existing debts must be closed down immediately.  The purpose of a consolidation loan is to reduce debts – consumers should not be tempted to fall into the trap of racking up these debts again as they could end up finding themselves in a vicious debt cycle.”

If you have debts and lose your job, you need to take action fast. Visit a debt advice agency such as the Citizens’ Advice Bureau and they will be able to advise you accordingly. They will work out a debt management plan for you and negotiate with any creditors on your behalf. Repayments will be based on your ability to pay and any interest will be frozen, meaning a big weight off your mind. Payments for people with limited income can be as little as £1 a month.

If you are struggling with debt, whether you are in employment or not, seek the advice of a debt counselling agency (such as National Debtline) as soon as possible.