Q&A: Dealing with Debt

I take full responsibility for the debts and blame myself for getting in this position. Over the past three years have I have paid all my creditors on time but due to a few defaults back then, my credit rating is poor and I am finding it impossible to apply for 7.9 per cent loans which are advertised, and which I see as a means of reducing my outgoings through simple transfers. When I did find one company to assist, they offered me a rate of 19.9 per cent.

Name and address withheld

Geeta Varma of the CCCS responds: As you recognise, you are overextended and need to take drastic action to reduce your debts. You have made a positive start by following two important principles: keep in touch with your creditor and always make some form of payment (even if you can only manage £5 per month).

You now need to take a more systematic approach to paying off your debts. First, prepare an income and expenditure sheet detailing all your income and living expenses. Be realistic about these. You must allow enough to pay for rent or mortgage, secured debts, utility bills, food, transport and other essentials. Then make a list of your creditors and the amounts owed. The surplus in your budget (if there is one) can be used to repay your unsecured creditors (it is usually best to pro-rata this between your creditors).

Write to your creditors and tell them what you can afford to pay enclosing your budget and your list of creditors - as you mentioned some may agree to freeze or reduce interest.

If you are experiencing problems negotiating with creditors or devising a realistic budget contact an organisation such as CCCS, who can provide you with further help.

WHO OWES WHO?

My sister has ended up taking on her boyfriend’s debts because he left home. She now has a substantial debt including a mortgage payment that she cannot afford. The mortgage lender has nearly taken the house off her because of missed payments on two separate occasions. She now cannot sell her house because the lender has put a restriction on the house. Is that possible?

Name and address withheld

Richard Talbot writes: In circumstances like these it is important for her to first check that she is actually responsible for the debt. This can be done by checking in whose name(s) agreements were made.

It is possible that the lender could have been granted a charging order on the house. This doesn’t normally restrict the property from being sold but when the property is sold the debt, together with any court fees or costs plus statutory interest must be repaid out of the balance of the proceeds of sale after payment of any prior mortgages or charges. If she wishes to sell the property then she should let her lender know and make sure she has the means to provide suitable alternative accommodation for herself and any dependents. If the property is in joint names, then both partners will need to agree the sale.

Bankruptcy may not be the most appropriate solution in this case. If she goes bankrupt then she will be asked to give up her interest in her home, but following recent increases in property prices many people have significant equity in their properties.

SOLVING THE STUDENT NIGHTMARE

I am a medical student entering my fifth year of training. I am not earning any money and rely on two loans, an overdraft, and money from my parents to fund my study, rent, food and leisure.

By the time I finish my training I will have an overdraft of £2,000 (interest free), student loan of £18,000 (approximately 3 per cent interest), a bank loan of £10,000 (7.7 per cent) and a huge debt of gratitude to my parents. Which should I pay back first, and in the meantime, how relaxed can I be about having this hanging over me?

Jamie Parker, Cambridge

Geeta Varma writes: First don’t panic - your financial position is not too bad having been a student for five years. Your overdraft is interest free, and your student loans are at a low rate. The main thing you have to concentrate on is ensuring you do not develop more debt once you leave university.

It is unlikely you will be able to choose which debt to pay back first as both your bank and the student loan company will demand payments as soon as you start earning money.

The main thing to remember is to be careful once you have left full-time education, many people find this is the time when their debt problems escalate. Living in a city, in housing which is no longer subsidised and dealing with monthly pay packets can all require financial discipline.

As soon as you start earning money set your self a realistic budget and stick to it. The other thing to remember is to communicate with your bank manager. They are used to dealing with people in your financial situation and as a good future customer they are likely to be very sympathetic to your situation if they are kept fully informed.

You can find budgeting advice on the CCCS website http://www.cccs.co.uk/budget/budget.htm.

CAUGHT IN A DEBT CATCH 22

I am in a bad situation. My husband could not acquire debt as he had just started a business, so I acquired the family debt. My husband has subsequently left me, and has not paid a penny.

I am in a Catch 22 situation: I am working, therefore do not qualify for legal aid to start divorce proceedings to try to get some of the debts paid, but I can’t afford to pay a solicitor myself. So with debts in the region of £26,000.00 that I simply cannot pay off, I am thinking of declaring bankruptcy. What I should like to know is how do I go about this? In real terms what is the cost and what are the implications for the future?

Tracey Lennon, Twickenham

Richard Talbot, from Credit Action, advises: Bankruptcy could be an answer but it depends on Tracey’s individual circumstances and additional questions need to be asked before advice can really be given. She should discuss these with an organisation that provides free, independent advice like her local Citizens Advice Bureau (CAB) or the Consumer Credit Counselling Service (CCCS) free helpline on 0800 138 1111.

Bankruptcy can free you from overwhelming debts so that you can make a fresh start, subject to some restrictions and it also makes sure that any assets you have are shared out fairly among your creditors. I assume you don’t own a house, as you say you are paying rent. If you do, you will be asked to give up your interest in your home. You will also be asked to give up any possessions of value, although there are certain items which are excluded.

You can find out more details in the Insolvency Service Guide to Bankruptcy, by calling 0121 698 4241 or visiting their web site www.insolvency.gov.uk.

CAN I GET A MORTGAGE AT COLLEGE?

I am in my second year of a three-year degree course, and I have heard that it is possible for student to get a mortgage to buy a house. I wanted to try to do this, and then after university let the house out. After some research I can’t find anywhere that offers mortgages to students. Do you know anywhere that does and also the pros and cons of entering this area?

Daryl Mellor, Nottingham

Credit Action’s Richard Talbot writes: Daryl should contact a local specialist mortgage adviser to answer this question. It is unusual to get a 100 per cent mortgage in this type of case and the size of the deposit which Daryl can pay will influence the type of mortgage that can be obtained. Daryl’s parents may be in a position to provide a deposit or take out the mortgage. Before taking out any new finance, Daryl should complete a personal budget which lists his income and his outgoings to ensure that he can afford the loan as well as any other additional expenditure, such as Council Tax, utilities, maintenance and so forth.

SHUFFLING THE ZERO RATE CARDS

I paid £9,000 for a classic car two years ago, £7,000 of which I put on a credit card. The car gave a lot of trouble so I sold it, banked the proceeds, and am having another classic car restored. I have paid £3,300 towards the new car, also by credit card. I have moved this debt five times via 0 per cent balance transfer deals from one card provider to another, and as a result I have never paid interest on it all. By making the minimum payments every month, I have also got the outstanding balance down to around £8,000. I have an Accucard with cashback for normal spending, which I pay off in full every month.

Since remortgaging, I have enough money to pay for the completion of the car I am having restored and to pay off the card debts as well. I am reluctant to do this since it would leave me with no emergency cash and the debt isn’t costing me anything. In fact, I am earning interest on the reserved cash.

I would like to keep transferring this debt until it is paid off, but this will take about another four years or so. Will I find I can’t get new credit cards at some point? Most of the 0 per cent deals seem to originate with three or four companies. I’ve been turned down by one, and I think this was because they didn’t want to increase their exposure to me.

Am I going to run out of lenders or can I, at some point, go back to others I’ve used in the past, and get a new credit card an a new 0 per cent deal? Will my habit of transferring balances every six months or so adversely affect my credit standing, which is currently good?

James Hilton, London

Geeta Varma, of the Consumer Credit Counselling Service, replies: It is a misconception that everyone has a fixed credit rating. However, all lenders to use a technique known as credit scoring. This is a risk-based technique which aims to predict your likely actions from a range of data. The actual scoring systems are never published and differ from lender to lender and product to product. Repeatedly changing your cards can damage your credit limit with some lenders, although as you have found you have been able to do this several times without ill effect. However, it is difficult to predict whether you will be able to sustain your debt at zero rates for four years.

Most importantly, the strategy you propose is a high risk one. First, four years is a long time and the card market may have changed substantially in this period. What happens when there are no more zero-rate offers?

Second, you risk spending the money you have raised through re-mortgaging on day-to-day living expenses, thus substantially increasing your overall debt.

It could leave you with no reserves with which to pay off the debt if your circumstances or the marketplace changes.

You can contact Credit Action via its website, www.creditaction.org.uk, or freephone 0800 138 1111.

The CCCS website can be found at www.cccs.co.uk. For a quick assessment of the state of your debts, go to www.cccs.co.uk/check/quickass.htm.