Debt is the word seemingly on every one’s lips. Whether it be concerning governments, financial companies or individuals everyone is interested in whether they have too much debt. With the economic situation going from bad to worse it is worth reviewing your situation to see if you have too much debt and whether you are (or potentially could in the future) be in a debt crisis situation.
Debt Early Warning, Debt Problem, or Debt Crisis?
There are no exact definitions here, but I’ll have a go at defining these states and the likely outcomes if you do nothing. Also what steps you need to take to get yourself free of debt.
Debt Early Warning
Do you worry about the amount of debt you have (whether secured or unsecured). Is it starting to represent a significant proportion of your monthly budget? (If the word budget is a strange one to you then you have more work to do before working out how serious your debt problem is). Can you only afford luxuries like holidays or meals out by putting them on a credit card? If you answered yes to any of these questions but you are still making all your regular payments then I would suggest that you are at the “Debt Early Warning” stage. You really need to do your monthly budget and a monthly balance sheet of all your debts to see if your debt situation is getting worse or better. If your monthly budget shows a deficit or your your monthly total of debts grows each month then prompt action is required to get your situation under control. Do nothing and you are headed down the path to debt problems and crisis. Trim your spending until your budget shows an excess of income over outgoings and your debt total decreases each month. You will have started the path to being debt free.
Debt Problems
Does your debt problem stop you sleeping at night? Are you cutting back on essentials such as food and clothing to pay your debts? Can you only make the minimum payments on your debts by borrowing more? Answer yes to any of these and you have serious debt problems. If you have reached this stage then the most likely outcome is that you will need to use a formal debt solution, such as a debt management plan, Individual Voluntary Arrangement or bankruptcy. However if you do your budget and work out that you can make your monthly payments without starving yourself then there may be a (long) road ahead of you to becoming debt free. I would seriously suggest getting some free debt advice to consider your options, as what many people consider to be the honorable thing to do (struggling to pay off their debts) can actually be very harmful to you and your family in the long-term.
Debt Crisis
Have you started missing payments on your debts? Do you struggle to feed your family or pay other basic bills? Have threatening letters and phone calls started? If so, then you are most definitely in a debt crisis situation. You need to get good free debt advice URGENTLY to plan your escape from this situation. Putting off getting advice is only prolonging the misery and puts off the day when you can be debt free. You are most likely to need a formal debt relief solution, but consult with a qualified advisor before doing anything else.
Tags: debt, Debt Advice, debt crisis, debt help, Debt Solutions
photo credit: Casey Serin
Bankruptcy is the debt resolution of last-resort, which still carries with it a stigma. It is also the debt solution that has the most devastating affect on your ability to get credit or a mortgage in the future. It is difficult to separate fact from fiction in the area of bankruptcy, so what would happen if I declare myself bankrupt?
It is important to note at this point that declaring yourself bankrupt is not something that you should do lightly, and you should seek qualified advice.
A very important point concerns your home if you own it jointly. There may be steps that you can take to sell your share of your home to your partner/another family member which will remove the risk of it being sold. Get specialist advice on this.
You will need to get a form from your local court that you will have to present when you declare bankruptcy. You should also check at this point what the current fees are for declaring yourself bankrupt (485 at the time of writing, or possibly 335 if you are on income support). This form will need to be filled in before you petition for bankruptcy.
Before visiting the court you need to be aware that any bank accounts that you have an interest in will be frozen. You therefore need to make sure that you have enough cash to provide for your basic needs until you are next paid.
Then you would normally make an appointment at the court to declare yourself bankrupt. In actual fact if you turn up with the correct forms and the payment without an appointment during normal court hours you have to be seen, but normal practice is to make an appointment. You will need to take the bankruptcy fees in cash (no cheques accepted). The court appearance will normally be a formality, and you will then be free of you unsecured debt immediately.
After you are declared bankrupt your bank accounts will be frozen and you will need to attend an interview to discuss your financial situation and the reasons for your bankruptcy. The insolvency service will want to find out whether you have any assets that can be sold to pay money into your bankruptcy. Also, they will go through your budget to see if you can afford to pay any money from your earnings towards your bankruptcy. All of this detail needs to be discussed with a qualified adviser, but it is worth pointing out one key fact. If you are part of a couple, then the insolvency rules do not apply to your partner, i.e. they cannot insist that your partner pays anything towards mortgage/rent or utility bills etc. This is very important since if you fill in the forms showing that you pay half of the mortgage/rent this may result in you having a monthly surplus. If so, you will be ordered to pay some of this money to your creditors for up to 3 years (continuing after your bankruptcy is discharged). If you don’t have any surplus then you will be relieved of any responsibility for paying your creditors when you are discharged, which could be after only 6 months but certainly within a year.
The insolvency service will want to know if you have any assets that can be sold. They will only be interested in high value items such as your home, cars, boats etc. Current practice in the UK is that bankrupts homes are very rarely visited to assess whether there are any personal items that can be sold. The time and effort is simply not worth the small amounts of money that would be raised (unless your home is full of antiques).
Your car may be at risk of being sold unless you can prove that you NEED it for work (i.e. you cannot travel to work by public transport).
If you live with a partner/family and own your own home (and haven’t already taken steps to sell your share to someone else) then the insolvency service will not sell it for at least a year from the date that you are declared bankrupt. This can give time for your partner or another family to buy back your share.
Once your bankruptcy is discharged (normally in less than a year) you will be free to start re-building your life debt free. You will probably find it almost impossible to get unsecured credit for a number of years. Mortgages are more available, but the rates will be higher. It pays to shop around, because the rates on adverse credit loans can vary widely.
Tags: Bankruptcy, Debt Advice, Debt Solutions
A lot of sites concentrate on the practicalities of debt problems and solutions, and there is a lot of this type of information on this site. However most of them overlook one of the most important and difficult factors: Why did you get into debt in the first place?
Different Routes to Debt Crisis
When you look at the reasons why people have go into debt, I think it is possible to split them into two groups, those thrown into a debt crisis situation by things outside of their control (or the actions of others such as their spouse) and those that have been to some degree or other reckless.
“Blameless debtors” would include those in debt as a result of ill-health, redundancy, or the accumulation of debts by a partner/family member without their knowledge.
“Reckless debtors” would include people that habitually spend beyond their means. Perhaps they took out a much bigger mortgage than they could really afford. The sort of people that are always driving the latest car and wearing the latest fashion who might be the envy of their friends, but in reality everything is going on the plastic. If their spending habit is really out of control they might be able to get themselves into a debt crisis situation without any external influences. Less reckless debtors might be able to keep going as long as nothing goes wrong, but as soon as they suffer any drop in income they are in trouble.
You might be interested to know what kind of debtor I think I was. The answer is somewhere in between. I had always used credit and paid it back, but I gradually started to use it a bit too much. I then suffered redundancy and had to accept a job paying a lot less money. This was enough to tip me over the edge.
What Should You Do About Your Debt Habit?
If you think you are a “blameless debtor” then there is nothing to do but wish for better luck in the future.
If you feel that in someway you were responsible for your debt situation then you might want to consider whether you have any personal issues (e.g. low self-esteem) that have contributed to your desire to spend money. Some people spend money to help them deal with depression or low self-esteem. Seeking advice with these issues could help to prevent you getting into debt in the future.
Tags: causes of debt, Debt Advice, Debt Problems
