Money Debt & Credit In The Media

The mail on Sunday, 'How I woke up from my nightmare year of loan debts,' July 2, 2006

DEBT us spiralling out of control. The number of people who owe more than £100,000 has almost doubled in the past year. And more than 23,000 became insolvent in the first three months of this year - a massive 73 per cent up on last time. Financial Mail reports on the ways to tackle this growing problem.

The mail on Sunday 'How I woke up from my nightmare year of loan debts'

Roz Cross knew she was in deep trouble with debt when she found herself rushing home from work to unplug the phone so her family would not pick up the calls from her creditors. 'I was getting about seven or eight phone calls a day from credit card companies,' she says.

She fell into the debt trap when she had to take two months off work from her job as training manager in call centre after she was diagnosed with cancer of the spine. Much of Roz's debt had built up over six years as she helped her two daughters through university.

Before her illness in January last year, Roz, 49, had been managing to keep up her repayments, but after her illness and drop in income she fell into arrears.

Her life reached a low point last November when she realised her credit card and loan debts had spiralled out of control, leaving her with £30,000 of debt she could not repay. As Roz and her husband Robert, 54, an auditor, live in rented accommodation in Watford, Hertfordshire, it was not possible to remortgage, so she turned to unsecured loans and credit cards to borrow.

Roz kept her debt problems from Robert and their daughters, Amy 25 and Lynsey, 23, and struggled on while the interest and default charges piled up.

Sadly, Roz's story is far from unique. Consumers' dependence on credit is growing at an alarming rate, with total consumer debt, excluding mortgages, now £191.5 billion, a rise of 7.3 per cent in 12 months.

Roz, who is still receiving treatment for her illness, is working to clear her debts.

'I played the ostrich for too long, burying my head in the sand,' she says. 'But once I decided to do something about the problem, I felt relief was over me.'

She entered into an individual voluntary arrangement (IVA) set up through Money, Debt & Credit in Watford. These arrangements are becoming more commonplace as a less drastic alternative to bankruptcy. Almost 8,000 were set up in the first three months of this year. In Scotland, a similar formal payment arrangement is called a protected trust deed.

The debtor must have a regular source of income and be able to keep up restructured payments for between three and five years. Roz will pay £200 a month for the next five years to her creditors through Money, Debt & Credit. At the time the IVA is set up the debt is frozen. Money, Debt & Credit agrees a sum with creditors and takes up to a 40 per cent cut from them for arranging it.

After five years, her debts will be written off. Unlike Money, Debt & Credit, most companies that offer IVAs charge upfront fees, which can run into thousands of pounds.

'I was considering bankruptcy but the IVA will hopefully mean I can get back on my feet quicker,' says Roz. 'I can't get credit while the IVA is in place, but that's fine. The IVA is manageable on my income and it feels as if a huge weight has been lifted. Eight months ago I was in a desperate situation. Now, things feel much different. It's important for people with debt problems to know they have choices - but they must take action.'

Bankruptcy or an IVA should always be the last resort for hard-pressed borrowers.

Beccy Boden-Wilks, spokeswoman for the National Debtline charity, says there are simple steps consumers should take if they are worried about debt and before they have to consider an IVA.

Find cheaper credit

Anyone with consumer debts should shop around to ensure they are paying as little interest as possible on what they owe.

While this is not an option for those who have defaulted on payments or have county court judgements against them, it is for those with a good credit record, even if their debt is sizeable. For most it should be possible to move the cash to a zero per cent credit card.

Providers such as MBNA, Virgin, and Amazon all have cards with no interest charge for at least nine months on balance transfers.

This could give breathing space to pay off a large chunk of debt. It is important to switch the debt before the zero rate period ends.

The thisismoney.co.uk website contains details of best-buy cards and loans.

Alternatively, if you have equity in your home, remortgaging to consolidate consumer debts on to your mortgage could help cut monthly debt payments. Al low-cost personal loan could also be a sound option.

Change your lifestyle

WHEN debts get out of hand, says Frances Walker of the Consumer Credit Counselling Service, consumers must take a hard look at their lifestyle and accept that they need to make changes.

'Many people get into debt through no fault of their own, for example, through illness or redundancy,' says Walker.

'But for others, debt issues can be quickly turned around by making lifestyle changes, such as cutting back on non-essentials and paying off more of the debt each month.'

Paying the minimum monthly repayment ton a credit card will not erode the debt fast enough so aim to pay off more each month.

Cut up cards to avoid the temptation to spend more. Draw up a strict budget and stick to it. Take money out of the cash machine at the start of the week and use cash rather than cards.

Confront the problem

THE worst thing anyone with debt worries can do is to ignore the problem. If debts feel out of control, seek expert advice from one of the free debt help services such as National Debtline, Citizens Advice Bureau or the CCCS.

'Seeking help is the most important thing you can do,' says Boden-Wilks at National Debtline. 'An expert can talk you through your options and explain your rights. This in itself can often take a lot of stress out of the situation.'

Advisers at National Debtline, the Citizens Advice Bureau and the CCCS can show how to negotiate with creditors, prioritise debts and draw up a sensible budget.

They can also tell you what rights you have. For example, you can request that companies do not phone you to chase debts, insisting they communicate by letter instead.

Teena Brewer, 54, a care assistant from Harwich, Essex, and her husband Barry, 53, turned to National Debtline last year after getting into arrears on their mortgage, a secured loan and an unsecured loan after Barry lost his job as a cleaner.

The couple, who have two grownup sons, were hounded by calls and letters from debt collection agencies and were threatened with court action.

Teena saw details on National Debtline in a newspaper and called it for advice.

'It was like a weight being lifted off me,' she says. 'National Debtline-told me to prioritise debts so we paid the utility bills to keep the electricity and gas on.

'They were able to help us draw up expenditure sheets to negotiate with creditors. We will still have to sell our home and move into rented accommodation, but speaking to National Debtline made me realise we were not alone and that we could overcome the problem.'

Consider debt consolidation or an IVA

IT may be necessary to take a bigger step to solve a debt problem, such as consolidating consumer debts or considering an IVA.

Boden-Wilks says: 'It depends on the borrower's personal circumstances and the nature and severity of the debts, but consolidating debt can sometimes be an option.

'It can work if you haven't defaulted on a loan or card payment and you don't want your credit rating adversely affected, and provided you can afford the payment schedule offered by the consolidator. But check the fees and charges imposed by the consolidation company.'