Standing in the gents loo in a service station on the M76 last week, I was reading one of those strategically placed posters. It gave an example of a couple £30,000 in credit card debt and paying over £700 per month in loans.
The poster claimed that after using the advertised service, they were now paying £300 per month and would be debt free in 2 years. Then I read the very small print, and I was ready to write to trading standards [if only my hands weren’t full at the time].
If I could sum up the pros and cons of 9 of the most often peddled debt-recovery options (including bankruptcy, debt consolidation, and IVAs), then you will gain an insight into why I usually advise against each and every one, and why I almost insist you do too.
Bankruptcy – Huge social stigma attached to it, takes years to shake off afterwards, your self-esteem and credibility will take a hard knock – this is the last resort. It will be displayed in the local newspaper under Public Notices. Anything of value that you have, or acquire, can be seized to pay off the debt. You have to shut down any and all bank and building society accounts so you can’t get paid by BACS. And with no ability to set up Direct Debits, Standing Orders or cash cheques, you’d better get familiar with the Post Office, cos you’ll be in the queue a lot from now on.
Informal agreements – you write and ask for a compromise, and a renegotiated timetable for repayment. Not legally binding though, so they can revoke it at will. Speak to Citizens Advice about it.
Debt management – some companies will offer to act as middle man and will charge a fee to handle your affairs for you. This usually means lower monthly payments and over a longer term. Sounds good, but overall you end up paying more in the long run, so you’re actually getting in deeper.
Credit counsellors – Professional advice freely available. They may even negotiate terms for you with your creditors. Watch out for cowboys who offer to clean your credit record for large fees [I fell for that one once]. Watch out for heavy sales patter and pressure.
Remortgage – borrow more money against the equity in your home. Good way of reducing the interest rate, but beware of adding credit card debt to a mortgage. That £3000 holiday may now take 25 years to pay off, making it more like a £12,000 holiday long term. Hope the beaches were nice. You’ve also just turned an unsecured debt [your home under no risk] into a secured debt [you’d better glue it to the ground!]
Individual Voluntary Agreements – a third party acts as middle man between you and the creditors, usually over 5 years. Repayments are renegotiated, and sometimes small balances are written off. However, there are admin costs and that puts you more in the red.
Administration – If there are CCJ’s against you then an administration order may be issued. You pay through the court, but if you later break the agreement, it’s as bad as bankruptcy long term.
Debt consolidation – you see these ads on TV every day. Pile all of your debts into one to them, and now the only people who need paid is the debt consolidation company. Lower payments, and longer to pay them, which looks good on paper. Simplifies the whole picture, because now its one debt. But the monthly fees stack up and again long term you end up paying more.
Personal loan – you go to your bank and ask for a good deal. As an existing customer they will probably offer you a good deal. But again look what you’ve really done – never mind Peter, you’ve just robbed Paul to pay the next guy in the line…
The simple solution is to dig yourself out of the hole, make amicable arrangements with your creditors, increase your income, decrease your outgoings and get to work working your plan. There's virtually no debt situation that cannot be recovered, and recovered quite quickly.
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