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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. 

Following on from my post Government’s £9 million extra to help Citizens Advice Bureaux

Haddington is home to the Citizens Advice Bureaux’s new offices, and during July it started more than 200 new cases, of which 70 per cent involve consumer debt problems. This is the highest volume of new cases in nearly 20 years and unfortunately for me signifies the need for money advivce throughout the UK.

At the Haddington office all face to face debt counselling meetings are fully booked until the second week in September. In the last quarter of the year the Haddington office has handled more than 1000 calls and helped 25 people file for bankruptcy in the midst of rising bills and mortgage payments.

If you’re struggling with debt problems then you can get free debt advice from your local Citizens Advice Bureaux. Look through your Yellow Pages under debt or debt management services to find the details of your local offices. Whatever you do make sure you speak to someone and do not bury your head in the sand, this will not help you to pay off your debts.

How to Deal with Debt Stress

In the present fast sedentary lifestyle, debt stress is a very common phenomenon. It can affect almost anyone, from a college student, to any employed person; the advent of the credit card has brought its side effect; stress. In stress both a person’s emotional and social life can be hampered followed by physical discomforts.

The symptoms of stress in a persons life are very obvious, irritability, forgetfulness, lack of concentration. Physically it can get take it’s toll in the form of migraine attacks, and in more recent times it has been the reason for many modern day suicides. People who find it difficult to manage their finances and give in to peer pressure unfortunately fall into the debt trap.

Falling into debt, missing payments or even being declared bankrupt can be shameful and people think this is seen as a failure in life. More often than not most of us prefer to keep debt problems a secret from others but good communication can be the starting point to solving all your debt problems. It is always advisable to speak about your debt problems to someone, be it partner or sibling and more importantly you need to communicate with the bank or whatever companies you owe money to. Simply burying your head in the sand and ignoring your debts will not make them go away.
 
Managin your money is very essential part of modern day life, and you should set priorities by working to a budget and save accordingly. It does not mean that you should stop living life but be realistic about what you can and cannot afford. If saving a particular amount per month can be made into a habit then brisk spending can be avoided, and so is the stress associated with it. Open a savings account and set up a monthly direct debit from your monthly salary per can also be a wise decision because the money is gone before you notice it.

Credit card stress is extremely harmful because most people do not feel the need to regulate their spending once it starts. It’s only when the monthly bill arrives that people realise they cannot pay back the debts they owe. Fixing the credit limit on a credit card is also a good way to avoid over spending and avoid debt stress.

If you’re struggling to afford payments on a credit card debt or a loan debt, maybe you’ve fallen behind with your mortgage payments? You should speak to a professional adviser as soon as possible, contact your local citizens advice bureaux http://www.citizensadvice.org.uk/

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.

Almost every edition of lunchtime and evening news headlines on the TV has finance related news these days, the financial markets are plumeting and every month, sometimes every week another bank asks for additional funding.

The first casualties of the credit crunch both in the USA and UK is the mortgaged homeowner.

Here in the UK it started with interest rates being cut to try and encourage consumer spending and bolster the economy. Then house prices stalled and are falling, although they’re still up on 12 months ago.

Next mortgage products were pulled off the high streets by lenders worried about their lack of funding and losses in the adverse mortgage market. Something like 60 per cent of all mortgages available in the UK have been pulled, fixed rate products and 100 per cent mortgages made up the majority of the 60 per cent. This is because most consumers were looking for some certainty and grabbing fixed rates as quickly as possible. The 100 per cent mortgages were pulled because they are too risky an investment for the banks going forward.

Today you’re unlikely to get a mortgage unless you have a deposit saved up and if your deposit is less than 5 per cent you might be restricted in your choice of lenders.

The thing that really irritates me is that around 8 years ago, when I bought my first property, it was standard practice to have a 5 per cent deposit. OK, I admit 100 per cent mortgages were available and infact the housing company from whom I bought my house offered me a 100 per cent mortgage.

However, I knew that a 100 per cent mortgage wasn’t the most sensible way to start off on the property ladder and so after following the advice of my parents I saved up a 5 per cent deposit.

It’s only within the last decade that banks have jumped on the marketing bandwagon and made finance and credit into some sort of superbrand marketplace. People are almost encouraged to use 0 per cent credit cards and low rate loans to basically get what they couldn’t normally afford.

The rise of the internet over the last decade has also contributed to this and it’s made getting finance even easier for everyone; even people who shouldn’t be getting more finance and perhaps shouldn’t have been approved for finance in the first place.

So mortgage rates are increasing and lenders are also increasing the upfront fees on mortgages. Even though the cost of getting a mortgage is increasing but people shouldn’t panic.

The fees can be high, sometimes upto a staggering £5,000, but I think that now the banks are insisting on a 5 per cent deposit it’s only a good thing. Consumers should be thankfull that this is happening again. If only the banks had continued to insist on a minimum deposit, with every mortgage, over the last 10 years, then maybe some of this could have been avoided?

In my opinion, if you cannot afford a 5 per cent deposit then you shouldn’t really be thinking about taking out a mortgage. Similarly, if you don’t have at least 50 per cent of your monthly take home salary left over after your mortgage payment has been made then perhaps you should consider not going for a mortgage at all.

Today in the UK there are more people than ever looking for advice on repaying their mortgages. Are these the people who borrowed way beyond their financial means?

January and February this year have seen record breaking numbers of people asking for professional debt advice about their mortgages. Recent figures reveal that more and more people are concearned enough to get help with their mortgage arrears - so these are people who already have defaults and arrears, let alone the hundreds and possibly thousands of people who are about to default on their mortgage.

There has been a huge 35 per cent jump in mortgage related debt enquiries in the UK, over January and February 2008 compared to 2007. The good news is that people seem to be learning not to continue spending on credit cards as the credit card related issues fell by 9 per cent.

Of 5.7 million issues dealt with in 2007 almost a third of these enquiries were related to debt; a rather worrying trend. As well as mortgages, the ever increasing energy bills and general household bills are huge contributing factors to the 215,000 new debt related enquires taken this January and February.

The combination of huge increases bills like petrol and diesel prices plus rising housing costs has put additional pressure on day to day finances when they are already stretched to the maximum.

The usual Christmas credit card debt enquiries have fallen by 9 per cent in January and Febraury this year compared to last year, however overdraft enquiries are up 7 per cent on the same time period. So it looks like people are just shifting the debts to other forms of credit, it will be interesting to see the number of debt consolidation loans and general unsecured loans taken out and the number applied for in January, February and when we get to the end of March this year. I bet there are lots of people trying to shift debt to unsecured loans, although the credit crunch has lenders tightening their lending criteria, making it more difficult to get accepted for a new loan.

If you are struggling you should tell whoever you owe the debt to as soon as possible if you’re struggling to make repayments.