thedebtblog.co.uk

I sometimes feel that this blog is always ‘doom and gloom’ but then again how can debt be anything but gloomy? There isn’t a lot to get excited about when it comes to debts - apart from getting rid of them!

An additional 81,000 people became unemployed between may and July this year taking the official unemployment rate up to 5.5 per cent which means that 1.72 million people in the UK are now unemployed.

These are all more bad signs of an economic slowdown as more people loose their jobs and job vacancies fall at the same time…

The TUC’s General Secretary Brendan Barber said; “Today’s figures show that unemployment is starting to accelerate and it now looks very likely that total unemployment will reach two million during 2009.”

“It is clear that deflation is a much more pressing threat than inflation, and interest rates should be cut,”

This is the highest level of unemployment in the UK since early 1999 and industry experts are warning that falling employment and vacancies will only lead to further unemployment over the months ahead as the demand for labour weakens…

Citizens Advice Bureau issue the credit crunch survival guide

Household finances have been badly stretched in the past year as the cost of energy has increased by 17% and the cost of food by 12%*. And the credit crunch means that the cost of new mortgages has increased, there are fewer mortgages available to choose from, and they are more difficult to obtain. This is making life harder for the 1.4 million borrowers coming off cheaper, fixed-rate mortgages in 2008.

But there are ways to help yourself and organisations to help you cope if you are struggling, according to the Council of Mortgage Lenders, Citizens Advice and Shelter.

No matter the size of your financial problems there are steps you can take to tackle them, and the CML, Citizens Advice and Shelter have worked together to come up with ten tips to help struggling households get through the tough times.

1. Get talking

If you are worried about your finances your first move should be to start talking: talk to your lender, talk to your partner, and talk to a free, independent debt adviser. The earlier you tell your lender, the more options available to solve the problem. Options that your lender may consider include: extending the term of the mortgage, changing the type of mortgage, deferring interest payments for a short period, and treating the arrears as part of the original debt.

2. Get debt advice

There are many organisations which offer free and independent money advice such as Citizens Advice, Shelter, National Debtline, and the Consumer Credit Counselling Service. Their debt advisers can assess your situation and devise the best course of action for you.

3. Plan ahead

If you are coming to the end of a fixed-rate mortgage in the near future start planning ahead for higher repayments and researching the best deals in the market now.

4. Don’t bury your head in the sand

Ignoring your debt problems will only make them worse. Positive action will help you find ways to solve them.

5. Pay your priority debts first

A mortgage is a priority debt as if you don’t pay this you could lose your home. Debt advisers can help you plan your budget and pay your priority debts first.

6. Pay what you can each month

If you can’t afford your full mortgage repayments, you should talk to your lender and still pay what you can afford.

7. Open all your post

Don’t ignore letters or telephone calls from your lender; if you are not sure what they mean ask your lender or a debt adviser. Open all mail that is addressed ‘to the occupiers’; if you are a tenant this is how the mortgage lender will contact you if the landlord has a payment problem.

8. Facing possession proceedings? Don’t panic

Always attend the court hearings yourself. Court proceedings do not mean that you will automatically lose your home. The court process acts as a final check to make sure repossession is the last resort. Some courts have advice desks which can provide last minute assistance.

9. Don’t abandon your property

If you are struggling with mortgage repayments you may be tempted to send the keys to your lender or abandon your property. Don’t do this without advice. You could still be responsible for the debt on the property and may be pursued for it years later.

10. Take care with “mortgage rescue”

Selling your home and renting it back might seem like a quick fix to your debt problems. But, many of these schemes offer very little security. They are also not regulated so you will not have access to the same protections as a mortgage holder.

CML Director General, Michael Coogan, said: “The first step for anyone struggling to pay their mortgage is to contact their lender and get advice. There are a range of options your lender can consider to help reduce or reschedule your payments for a period of time while you get back on your feet. 

“Lenders will treat you fairly and use repossession only as a last resort. If you take positive action to contact your lender, pay what you can, and show up to court and make your case, you are more likely to reach an agreement your lender that allows you to stay in your home. But you cannot just walk away and assume you are no longer responsible for the mortgage.”

Citizens Advice Chief Executive, David Harker said: “We would urge anyone who is falling behind with payments on a mortgage or secured loan to speak to their lender and seek free, confidential, independent advice straight away.

“Getting advice, even at a late stage, can help the majority of people come to a workable agreement with their mortgage lender and can make all the difference between saving or losing their home.”

Adam Sampson, Chief Executive of Shelter said: “Getting advice quickly is crucial in helping struggling homeowners keep a roof over their head. At Shelter we often see people when it’s too late, but the loss of their home could have been prevented if they had sought our help early on.

Standard and Poor a UK credit agency say that increasing numbers of people in the UK are trying to get out of paying their credit card debts by taking out Individual Voluntary Arrangements, more commonly known by the initials IVA’s.

When a credit card customer tries to get out of paying their credit card debt it’s called a ‘charge-off’ - which is repayments and interest that the credit card company think they will not be able to recover. The number of Charge-offs rose from 6.6 per cent at the end of March 2008, to 6.9 per cent by the end of June 2008.

The credit card industry had seen a sharp rise in IVA applications back in 2005 as debt management companies began springing up all over the UK. These companies began advertising heavily promising to write off huge percentages of debts for their customers. As such credit card companies in the UK have had 3 years head start on mortgage and loan companies now feeling the strain of the credit crunch.

Since 2005 credit card interest rates have risen and the lenders have tightened their lending criteria making it more diffcult for non credit worthy customers to open an account.

Even though there is now great public awareness of the credit crunch and managing finances it looks like UK consumers are continuing to spend on their credit cards. June 2008 saw a growth rate on credit card spending of 7.1 per cent, the highest growth rate in 2 years.

If you owe money to a company it’s known as a debt, and taking the help of a third party to get out of a situation of financial debt is debt management.

In the current economic climate many profitable and non profitable organisations have sprung up to help people in financial credit crisis. Spending less than what you earn does of course reduce the chances of you falling into financial difficulty but in extreme cases a debt management plans will help you keep your personal finances under control.

Debt or credit counsellors, trained in money management, budgeting and credit monitoring will help you minimise the heavy debt and damaged credit ratings with their structured repayment plans.

Generally the debt councilor at a debt mangement company will take you, as the debtor, through a step by step assessment of your current financial situation.  A list of your income and expenditure such as rent, loans, mortgage amounts, medical bills, car payments, cost of living and so on is calculated and the total outstanding amount is known as your disposable income.

Next an assessment is completed to acertain what you can comfortably afford to repay towards your debts each month. The debt management company will then undertake a negotiation process with the creditors for payment of debts over a longer period of time and sometimes with reduced interest rates. Most creditors do not hesitate to agree with a debt management plan because, from past experience, they know that the plans are generally successful with regards to repayment of the debt owed.

Sometimes creditors will even lower interest rates and waive certain fees and or charges in debt management negotiations. Debt management plans are generally reviewed at intervals and sometimes with face to face meetings to see that customers are still able to continue repaying their debt until it’s cleared.

A single monthly payment is made to the debt management company who then distribute the required amounts evenly among the creditors, for this service they charge a very nominal rate as service charge, usually 10 to 15 per cent. 

If debt management services are correctly administered, they are a necessary and very useful service for people with serious debt problems.

However, not every fee charging debt Management Company is correctly administered. Some companies may have high principles, poor I.T. and administrative systems means they deliver poor service. There are also a small number of companies that are inefficient and blacken the industry as a result.

The first Debt Management Companies in the UK based their debt help programmes on a combination of the formats used by the Citizens Advice Bureau and the County Court’s debt procedures.

Fee charging debt management companies do not try to act similarly to free debt advice companies and sometimes a free debt management service may be better in individual circumstances.

Most debt management companies operate on the basis of helping people who are experiencing debt problems to consolidate their debts into one affordable monthly payment without further borrowing. For the majority of people with debt problems additional borrowing to repay debt is simply not an option available to them anymore because of missed payments and therefore poor credit ratings.

Most fee charging debt management companies try to establish a potential client’s suitability for debt management by completing an income and expenditure report in order to establish a more accurate calculation of month spending patterns and disposable income.

A fact find like an income and expenditure report will demonstrate a client’s total income, essential expenditure deducted from income leaving disposable income. If there is a significant shortfall between the monthly contractual payments the client should make to repay debts, and the disposable income available, a debt management plan or service may be of help.

The first debt management companies started in the UK in early 1994 because of the alarming debt situation developing at the time. The economy at the time was still recovering from the effects of increased interest rates from the 1980’s and early 1990’s. In the 80’s mortgage and loan repayments rose, because of interest rate rises and so many people found themselves with much less disposable income.

Also, as interest rates were rising very rapidly, at a much higher rate than inflation, it was almost impossible to save any cash in order to buy products. Credit was the main way to make a purchase at the time.

This created the ‘buy now pay later’ environment we know today. This environment also created a vicious circle where people became trapped by debt.

Poor financial understanding and poor financial management resulted in many people being unable to maintain payments to their creditors.

Hence the need for debt management services in the UK since the mid 1990’s.

When a debt management acts as an appointed agent for a client, it undertakes to calculate and disperse any disposable income to a client’s creditors, and as soon as the debt management company is informed by the client of the receipt of collection letters, the debt management company will contact the collectors and ensure they are sent the relevant documentation and payment is made correctly.

A debt management company’s staff should be directly available by phone, post and email to all clients and creditors in order to provide an effective service for all parties.

The first thing a creditor needs to understand is whether a debtor is in the ‘Can’t pay’, or ‘won’t pay’ category.

By receiving good information from a debt management company, this allows the creditor to make an informed decision and can reduce collection costs.

Since legislation came into force in April 1999 and following reviews by the Lord Chancellor Lord Justice Woolfe, the County Courts processes discourage dishonest actions which overload a debt companies systems and it’s up to creditors to justify their actions if they refuse reasonable offers of repayment.

Therefore, if a debt management company acts as an appointed agent for a client; it is unusual and unnecessary for creditors to proceed with legal action.

Many, if not most creditors will reduce or freeze interest and charges when a debtor is trying to repay their debt at the best rate they can afford. This demonstrates the client’s commitment to clearing the debt as effectively as possible by making regular payments. This isn’t a speedy process and many creditors will refuse the initial repayment amount offered ask for higher repayments.

This happens because the creditors have policies to only accept a specific percentage and they think the debtor has a higher disposable income than stated in the income and expenditure report.

There is most certainly a place for free debt help services, just as there is also a need for state benefits where appropriate. However there is also an important role for fee charging debt management companies, for the people who hold up their hands and are prepared to be accountable for resolving their debt problems.

Debt problems are often experienced by people with reasonable to good incomes, who admit to careless overspending.

In the UK over half a million of us spend an average of 25 hours per week worrying. Property and our possessions are the things we worry about the most.

The fact is the credit crunch has had a worrying effect on us all, so much so that there has been an increase in people taking out optional mortgage repayment cover. This is also sometimes referred to as paymentcare by mortgage providers.

It makes sense that areas of London and the South East UK seem to be the biggest worriers because these are areas where house prices are the highest and therefore people will probably be struggling the most in these areas. With the average house price in an area of South East London where I used to live is now £277,519! Over just the last 12 months there has been an increase of 11.6 per cent. If you break this cost down by property type it becomes even more staggering; Detached: £570,634, Semi-detached: £347,396, Terraced: £268,966, Flat: £192,583. If you take a central London area like Ealing, the average price here is even higher at £347,622.

The credit crunch, talk of recession and inflation has only increased the worries and paymentcare or mortgage protection cover may be a good idea to put your mind at rest. The basic idea is that your mortgage will be paid for a specific period of time if you loose your main source of income through no fault of your own.

If you think you might be in need of help with your mortgage repayments or general debt help then do not bury your head in the sand. There are lots of professional debt management companies able to help you and if you’re unsure what to do then visit the Citizens Advice Bureaux or seek professional financial advice.

This is more bad news for the debt industry, particularly with regards to First Plus offering a large number of it’s secured loans to customers wanting to consolidate their existing debts.

First Plus is the largest provider of secured loans in the UK and is owned by Barclaycard. This hasn’t however stopped the announcement that they will no longer be accepting new loan business from 9th August 2008.

It is common practice to use a secured loan in order to pay off existing unsecured debts. The secured loan is, of course, secured against any equity in the applicants property. The worrying consumer trend associated with debt consolidation loans is that around 60 per cent of people who use a secured loan to pay off debt will then go on to apply for, and use additional means of unsecured credit. Plunging them deeper into debt.

It’s no surprise to me that debt in the UK is at its highest level ever and still rising. Uswitch.com have bullet pointed the main facts and it’s concerns, please see them below;

• Firstplus, the market leader in homeowner loans and best known for its adverts fronted by Carol Vorderman, has confirmed that it will be closed to new business from 9 August 2008 and will make 300 job cuts.
• Firstplus is “market leader” in home loans with 128,000 customers, 430 staff and £4.7 billion in receivables. Today’s news is a huge blow to the personal loans market and another signal that the consumer credit market is quickly drying up.
• Their departure will leave just seven players in the market, down from 18 last year before the credit crunch hit.
• A large proportion of business is sent to them via brokers. Brokers will now struggle to help consumers that need secured loans and consumers will in turn struggle to get hold of cheap consolidation loans as companies continue to tighten their lending criteria. Lenders have reduced the amount of credit on offer to applicants and is undoubtedly harder to come by.
• Having the wrong, or uncompetitive, financial products can mean consumers are wasting money that could be put to better use. Anyone with outstanding debts in need of refinancing onto a cheaper deal needs to act now to secure a competitive loan before rates increase any further.