Debts & Loans

Prior to the "credit crunch" falling interest rates coupled with a buoyant housing market caused many borrowers to live beyond their means, borrowing excessively and leaving British banks dependent on wholesale credit markets to the tune of more than £600 billion. The credit crunch, which started with problems in the U.S. sub-prime mortgage market in August 2007 has however, caused a major downturn in the U.K. economy and coupled with rising prices of oil and other commodities, created debt problems for many consumers. Debt management is the process of bringing monthly outgoings and income back into line without further borrowing – in the form of a "consolidation" loan, for example – but may not necessarily be suitable for everyone. Practical advice and assistance is available from charitable agencies such as National Debtline or Citizens' Advice Bureau, but there also any number of debt management companies that will, for a fee contact creditors on your behalf and arrange an appropriate repayment plan.

Debt Management

If you act quickly enough you may well find that many creditors are sympathetic to your financial hardship, particularly if you are open and honest with them. You may be able to renegotiate the monthly repayment on a debt – particularly a relatively low priority debt such as a credit card debt – so that you repay the full amount over a long period. This may increase the total amount that you repay but in the short-term, you can redirect the money that you save to pay higher priority debts. It may also be possible to convince a lender to reduce or freeze interest repayments so that the debt does not spiral out of control. If you find that you have any money left over once all your priority debts have been paid you use this money to repay more of the lower priority debt, although make sure that your creditor understands that this is an act of goodwill on your part, rather than necessarily, the norm.

If you owe less than £5,000 in total to your creditors, and one or more of them has obtained a CCJ ("County Court Judgement") against you, the court may make what is known as an "administration order" against you. This requires you to make regular monthly repayments against the total amount you owe to your creditors and if you fail to keep up repayments, the order may cancelled and creditors free to recover what you owe them by whatever means necessary. One advantage of this type of order is that there is no administration fee per se, although a small proportion of your repayment is used by the court to cover administration.



An IVA, or "Individual Voluntary Arrangement" on the other hand, is a legally binding contract between you and your creditors, in which you agree to repay a percentage of your debt each month, in return for freedom from harassment or any form of contact from your creditors for the duration of the agreement. An IVA is typically drawn up under the supervision of a licensed insolvency practitione, and lists your debts in priority order – starting with mortgage, or rent, arrears, followed by essential utilities (electricity, gas, water, etc.), followed by essential items (a car, or tools, used for work, for example) – to make sure that you can continue to live, albeit frugally, while your debt is repaid. An IVA typically lasts for 5 years and at the end of that period any remaining debt in written off, legally.



If you are able to act quickly enough to avoid court proceedings – and indeed are able to afford an initial fee of £200, or more plus a monthly fee of typically, 15% of your monthly repayment – a debt management company may be a possibility. The advantage of this approach is that it not only keeps you out of court, but also means that you do not need to deal with your creditors directly. It may also mean that your monthly repayments are significantly reduced, but do bear in mind that extending the repayment term over too long a period may result in you making repayments indefinitely, and effectively never being free from debt. The decision as to whether to employ a debt management company or not therefore depends, largely on personal preference and your exact personal circumstances. Do bear in mind too, that debt management companies are not regulated as tightly as some other financial bodies, so make sure that you read the small print of any agreement particularly in relation to fees and the proportion of your monthly repayment that actually finds its way to your creditors.