Once your priority debts are taken care of, the remainder of your debt is then re-arranged by careful negotiation with your creditors, arriving at a solution that is affordable.
The following glossary article “What is Debt Management? Managing your Credit explained!” takes a look at the escalation of the consumer debt problems in the UK today, and the various solutions that may be open to you so that your personal credit is managed effectively, along with the advantages and disadvantages of each type of solution. It also explains how Shire Direct may be able to help you.
What is Debt Management?
Is there a difference between Debt Management and Credit Management? No, both are terms that describe the arrangement of your financial commitments to:
a) Ensure that your priority debts, i.e. your mortgage or rent repayments, other secured debts, and utility bills (such as gas, electricity, water rates, council tax etc.) are all paid before your unsecured debts, such as credit cards, etc.
b) rearrange your unsecured debt by negotiation with your creditors to arrive at a solution whereby you have a repayment plan that is affordable.
Managing your Credit explained!
Here at Shire Direct we’ve been providing our customers with a range of financial services products for more than 20 years and have recently introduced a new range of Credit Management Solutions.
By providing an extensive range of solutions, our aim is to help our customers to regain control of their finances. Our principal objective in these situations is to focus on the priority debts, such as mortgage (or rent) repayments.
Once your priority debts are taken care of, the remainder of your debt is then re-arranged by careful negotiation with your creditors, arriving at a solution that is affordable.
Debt problems in the UK today
Debt problems in the UK have increased substantially over recent years, and more especially in the last few months, principally because of the “credit crunch”. The credit crunch is a worldwide problem, and has seriously affected the international banking system, which in turn has impacted on UK interest rates and a sharp downturn on our economy.
More and more people are finding that the recent rises in the cost of living, coupled with increasing interest rates and the credit crunch crisis have meant that their household budgets are strained to a point were expenditure is now substantially exceeding income.
The following list is an indication of why, and how quickly your debt problems can get out of control:
- Mortgage (or rent) payments have increased.
- Net income has dropped due to loss of overtime, bonus or commission.
- The sharp increase in fuel costs to £5 per gallon or more has taken a further large chunk out of your Net Income.
- Rises in utility bills, such as gas, electricity and Council Tax has put even further strain on your family budgeting.
- Even cutting down on luxuries is no longer stemming the flow.
- You start robbing Peter to pay Paul, and worse still you start to borrow on credit cards or loans to keep up your repayments!
- Soon your credit lines are exhausted.
- Your expenditure is substantially exceeding your income – monthly repayments are being missed, credit defaults and even county court judgments are being served on you, your mortgage (or rent) instalments have not been made – and eviction is looming.
Debt Management Solutions available
By providing an extensive range of solutions, our aim at Shire is to help our customers to regain control of their finances. Our principal objective in these situations is to focus on their priority debts, such as mortgage (or rent) repayments.
In addition to our traditional mortgage and loan products, we now offer a range of credit management solutions, including:
- The Debt Management Programme
- Individual Voluntary Arrangement (IVA)
- Full and Final negotiated Debt Settlement
- Sale & Rent Back of your property
Let’s now consider each of the products in detail, and see how they may benefit you.
The Debt Management Programme
If you are experiencing pressure from your creditors and finding it hard to cope, borrowing more money is unlikely to be the ideal solution. With a Debt Management Programme, your monthly payments could be reduced by up to 70%, usually leaving you with one single lower monthly repayment. Highly skilled advisors will negotiate with your creditors in order to reduce your monthly outlay.
The object of the Debt Management Programme is to leave you in a position where your monthly payments are affordable, especially taking into account your ability to be able to maintain your mortgage (or rental) obligations.
How does a Debt Management Plan work?
Carefully structured Debt Management is designed to enable you to pay one simple lower monthly payment, thereby taking away the stress and worry of day-to-day dealings with your individual creditors. Once your creditors can see a regular pattern of monthly payments being made to them, they will usually be happy to negotiate the freezing of charges and interest on the accounts.
Debt Management Programme: Case Studies
Case Study 1
Miss D was struggling to maintain her financial commitments.
Her rent payment was £260 per month, her monthly household bills were £440 per month and the contractual payments for her £8,000 of unsecured credit totalled £195 per month. This represented total monthly commitments of £895.
Her net monthly income was only £750 so it was therefore determined that the amount available to fund her credit commitments was £50 per month.
A Debt Management Programme was proposed with a monthly payment of £50 resulting in a total saving of £145 per month. This immediately relieved the pressure and enabled Miss D to maintain her rent payments.
Case Study 2
Mr L was struggling to maintain his financial commitments.
His rent payment was £187.50 per month, his monthly household bills were £489.50 per month and the contractual payments for his £4,268 of unsecured credit totalled £265 per month. This represented total monthly commitments of £942.
His net monthly income was only £780 so it was therefore determined that the amount available to fund his credit commitments was £103 per month.
Therefore, a Debt Management Programme was proposed with a monthly payment of £103 resulting in a total saving of £162 per month. This immediately relieved the pressure and enabled Mr L to maintain his rent payments.
It is often possible to combine products like the Debt Management Programme with other products in order to provide the best solution. For example an Individual Voluntary Arrangement (IVA) can often be used in conjunction with a Debt Management Programme to provide financial relief at the earliest possible opportunity. This is demonstrated in Case Study 3 below:
Case Study 3
Mr & Mrs H were struggling to maintain their financial commitments.
Their rent payment was £525 per month, their monthly household bills were £1,141 per month and the contractual payments for their £45,548 of unsecured credit totalled £1,011 per month. This represented total monthly commitments of £2,677.
They only had a joint net monthly income of £2,133 so it was therefore determined that the amount available to fund their credit commitments was £467 per month.
Proposed Solutions:
a) Debt Management Programme
Because an IVA can usually take between 3-6 months to set up, a Debt Management Programme was initially proposed with a monthly payment of £467. This resulted in a total saving of £544 per month, and immediately relieved Mr & Mrs H’s financial pressure and enabled them to maintain their rent payments.
b) IVA
Following on from the Debt Management Programme, an IVA was then proposed, again with a monthly payment of £467 and a saving of £544 per month. During the 5 year term of the IVA Mr & Mrs H will have paid back £28,020, representing a 39.5% reduction in their total unsecured debt. Their creditors will then write off the remaining £17,528.
Is a Debt Management Plan appropriate for me?
If you cannot meet your current contractual credit repayments, and you are paying out more than you have income coming in, then a Debt Management Programme is highly likely to be an effective way of managing your debt, keeping your head above water, and keeping you in your home. However, after your priority debts (mortgage or rent payments), you must be able to afford to pay your unsecured creditors at least £50 per month.
However, you should bear in mind that a Debt Management Programme is not intended to be a long-term solution. It is an effective method for you to pay your debts each month at a level you can afford, until your situation improves or a more appropriate alternative long-term solution can be found.
What are the advantages and disadvantages of a Debt Management Plan?
Advantages
- You have the benefit of one lower regular monthly payment
- All communication with your creditors is handled by an experienced advisor
- You can usually review your account online
- It is often possible to have interest payments frozen on unsecured debts
Disadvantages
- Debt management can have an adverse effect on your credit record
- It will take you longer to pay off the full amount of your credit balances because your monthly payments have been reduced.
IVA – Individual Voluntary Arrangement
The Individual Voluntary Arrangement (IVA) is a government scheme to help people out of serious debt problems. The IVA is based on schemes that have been successfully operating in Australia and Canada for several years.
The IVA is a legal process that provides legally binding protection from your creditors by entering into a repayment agreement with them. Whilst in operation, the IVA will be supervised by a licensed Insolvency Practitioner, usually a Chartered Accountant, who initially prepared your proposals for entering into the IVA.
Initially, we will carefully consider your financial circumstances, and come up with the most appropriate scheme for you. We will of course explain how we can help you to become debt-free over a five-year period (60-months), and help you to have up to 70% of your unsecured debts legally written-off. At the same time, you will only have to commit yourself to paying just one affordable monthly payment.
How does an IVA work?
A licensed Insolvency Practitioner (IP) will supervise the IVA arrangement. The IP, or your Supervisor, is responsible for all the payments required under the terms of the arrangement. You will normally be required to make regular monthly payments, usually over a five-year period, after which any balances remaining on your debts will be legally written off.
If you are a homeowner, you will normally be required to release any available equity from your property. This will usually be achieved by arranging a remortgage or secured loan, the proceeds of which will be paid to your creditors in part-settlement of your debts.
Once your IVA is agreed, all interest and charges on your unsecured debts are frozen. Your Supervisor is required to review your financial situation at the end of each year, and as a result, the Supervisor may require that your monthly payment is altered.
An Individual Voluntary Arrangement (IVA) does not have the stigma that is usually attached to bankruptcy, and so the impact on your reputation is likely to be minimal. The IVA will not be advertised in the press, although the transaction will be recorded on your credit record, as well as on the IVA Register, which is held by the Department of Trade and Industry (DTI).
IVA Case Studies
Because an IVA can usually take 3-6 months to set up, a Debt Management Plan will usually be proposed initially so as to rapidly put you back in control of your payments, and is intended to take the pressure off your financial situation until the IVA is approved and started.
Case Study 1
Mr and Mrs H were struggling to maintain their financial commitments. Their rent payment was £525 per month, their monthly household bills were £1,141 per month and the contractual payments for their £45,548 of unsecured credit totalled £1,011 per month. This represented total monthly commitments of £2,677.
They only had a joint net monthly income of £2,133 so it was therefore determined that the amount available to fund their credit commitments was £467 per month.
Proposed Solutions:
a) Debt Management Programme
As an IVA can usually take 3-6 months to set up, a debt management programme was initially proposed with a monthly payment of £467 resulting in a total saving of £544 per month. This immediately relieved the pressure and enabled Mr & Mrs H to maintain their rent payments.
b) Individual Voluntary Arrangement (IVA)
Following on from the Debt Management Programme, an IVA was then proposed, again with a monthly payment of £467 and a saving of £544 per month. During the 5 year term of the IVA Mr & Mrs H will have paid back £28,020, representing a 39.5% reduction in their total unsecured debt. Their creditors will then write off the remaining £17,528.
Case Study 2
Mr & Mrs S owed a total of £143,630 in unsecured borrowing with 19 different creditors. Their monthly contractual payments were now £2,419 a month. Mr S’s income had dropped due to a lack of overtime and a short period where he had been unable to work due to illness. This had led to multiple missed payments on many of their accounts and they were now finding it hard to maintain their ongoing monthly commitments.
Proposed Solutions:
a) Debt Management
Due to the complexity of the case because of the number of creditors, the time taken to set-up an IVA is likely to be 6-months or so. Accordingly, a Debt Management Programme would generally be proposed, with an affordable payment of £725 each month. This action would result in a reduction of £1,694 each month and the be much more manageable for Mr & Mrs S.
b) Individual Voluntary Arrangement (IVA)
Following on from the Debt Management programme, in this case, an IVA would be proposed with the same affordable monthly payment of £725 per month. At the end of the 5-year period, Mr & Mrs S will have paid back a total of £43,542, resulting in almost £100,000 being written off, representing an approximate 70% reduction in their total debt.
Is an Individual Voluntary Arrangement (IVA) appropriate for me?
If you cannot meet your current contractual repayments, and have at least £15,000 of unsecured credit, with at least three different creditors, and can afford to pay at least £200 per month, then it’s very likely that an IVA could well be an appropriate solution for you.
What are the advantages and disadvantages of an IVA?
Advantages
- You have the benefit of one lower regular monthly payment.
- You will be able to maintain your mortgage (or rent) and utility payments.
- You will be debt-free after just 5 years.
- Up to 70% of your debts could be written off.
- All communication with your creditors is handled by an Insolvency Practitioner
- Interest and charges are frozen on unsecured debts
Disadvantages
- An IVA will have an adverse effect on your credit record
- An IVA is not available to everyone as certain criteria must be met
- Failure to maintain your payments under an IVA may result in your bankruptcy
Sale and Rent back plans
The Sale and Rent Back scheme is a different approach to dealing with certain debt management problems that have arisen with a homeowner, and is usually associated with one of the following circumstances:
a) In instances where the borrower has fallen seriously in arrears with his mortgage and/or secured loan repayments, and is facing eviction.
b) A quick sale is necessary because the family may be moving area or even emigrating
c) The desire to remove the responsibilities and uncertainties relating to mortgage contracts and conditions.
d) Where property repossession is looming, but the family does not want to move away from friends, neighbours, schooling etc.
So, here at Shire Direct, we have developed a portfolio of schemes, where we have access to a range of investors who are willing to purchase properties and then rent them back to you as the seller, or if you prefer, just to buy the property from you very quickly.
For those who do need to sell the property, and relieve themselves of the responsibilities of being a mortgage-payer, but wish to remain in the property as a tenant, we have a variety of plans to suit differing needs and requirements, and will usually incorporate one or more of the following features:
- This service can enable you to release cash from your property, whilst you continue to live in your home
- Some plans incorporate the opportunity to buy-back the property at the original valuation
- With certain packages, your rent will be prepaid for the first twelve months, thereby enabling you to get back on your feet financially
- Repossessions can be stopped
- You don’t have the ignominy of being thrown out on the street with nowhere to go!
- Confidential. There are no “For Sale” boards, and no one else will be aware of the transaction, or difficulties you have faced.
- Our investors are usually able to complete on these transactions within 7-14 days.
Sale & Rent Back: Case Studies
Case Study 1
Mr & Mrs P have decided to emigrate abroad and are due to leave the country within the next few weeks. However, they have been experiencing difficulties with selling their property, which has been on the market for several months.
Solution:
Arranged the immediate sale of their property using a Sale & Rent Back scheme. This transaction is usually very quick and fuss-free. The plan, in this case not only cleared the mortgage, but also left a sizeable lump sum.
As Mr & Mrs P did not wish to continue living in their property, the flexible nature of our Sale & Rent Back schemes provided an appropriate solution, by removing the ‘Rent-Back’ option.
Case Study 2
Mr R had a repossession hearing in 6 days. He had missed his last 4-months payments and so had been unable to obtain a remortgage, or secured loan to pay off the arrears. He also had an unsecured loan of £8,400 that he had also started to miss payments on.
Here the most appropriate scheme is a Sale and Rent Back plan. This scheme will allow Mr R to remain in the property, and also pay-off his mortgage, clear his arrears, and will leave him with a small cash surplus.
This product also includes 12 months prepaid rent, and therefore has the benefit of providing Mr R time to get back on his feet financially, without having to worry about making rent payments for a whole year.
Using the surplus sum left over from the sale, the next step would be to arrange a Full and Final Settlement on his unsecured debt, which amounted to a 30% reduction.
At the end of the 12 months - Mr R will have a number of options. He can:
- remain living there paying the rent figure that was agreed at sale-time.
- move out and find a more suitable property for his needs
- have the option to buy the property back – should his situation have improved significantly.
What are the advantages and disadvantages of a Sale and Rent Back?
So to summarise, let’s just consider the advantages and disadvantages of the “Sale and Rent Back” scheme:
Advantages
- You have the benefit of remaining in your property
- You may be able to release some equity from your property
- You may be able to clear your unsecured credit
- Up to 12-months rent can be prepaid with some schemes, whilst you get back on your feet
- No ‘For Sale’ boards will be erected
- You may even be able to claim state assistance towards your rent payments
Disadvantages
- You will lose ownership of the property
- The future rent payments could be higher than your current mortgage payments (especially if there is only a small balance on the mortgage)
Full and Final Settlement
Negotiations will be entered into with your unsecured creditors in order to settle the accounts at a discounted amount. This can be as little as 60% of the outstanding balance. This option can be extremely useful if you have acquired a lump sum, maybe from an inheritance, or gift from a relative, that may not be quite sufficient to repay all of your unsecured credit. Similarly, if you own a property and have a proportion of equity that can be offered to your creditors, a one-off payment in full and final settlement of your debts could well be acceptable to your creditors.
What are the advantages and disadvantages of a Full and Final Settlement?
Advantages
- You may able to settle your unsecured credit at a substantially discounted amount.
Disadvantages
- Your credit file may be affected by noting that some of your credit accounts have not been paid in full, but have been subject only to a partial settlement.
Full & Final Settlement Case Studies
Let’s just have a look how this works in practice with a couple of worked examples:
Case Study 1
Mr & Mrs Q were struggling to maintain their financial commitments on two personal loans which had total amount owing of £16,200 and a combined monthly payment of £589. They had started to default on their payments….
One of Mr Q’s family members had recently left him an inheritance of approximately £11,300. Our experienced advisors then arranged a “Full & Final” settlement on their two loans, which enabled them to settle their debts using this sum as the final payment. This equated to a reduction of 31% on their loans as well as becoming debt free!
Case Study 2
Mr R had a repossession hearing in 6 days time. He had missed his last 4-months payments and so had been unable to obtain a remortgage or secured loan to pay off the arrears. He also had an unsecured loan of £8,400 that he had also started to miss payments on.
The Solution: Arrange a Sale and Rent Back scheme. Firstly this repays his mortgage in full, and ensures Mr R is able to remain in the property. This action will also clear his arrears and will provide him with a small cash surplus.
Furthermore, with the product selected, 12 months rent is also included, and this means that Mr R will not have to worry about making further rent payments for a whole year.
Using the surplus sum left over from the sale, Mr R would also be in a position to make a “Full and Final” settlement on his unsecured debt, which would amount to a 30% reduction.
At the end of the 12 months - Mr R will have a number of options. He can:
- remain living there paying the rent figure that was agreed at sale-time.
- move out and find a more suitable property for his needs
- have the option to buy the property back – should his situation have improved significantly.
Professional Credit Management with Shire Direct
As we have seen, Debt problems in the UK are presently running at an all-time high. It really is important that, when tackling the management of your debts, the full extent of the options available to you are carefully examined and discussed.
It’s important to be aware that many cases may involve a combination of solutions. This will ensure that you receive the best possible advice according to your individual circumstances.
At Shire we pride ourselves in being able to provide our customers with the individual attention that many of our contemporaries lack, and we always strive to make the process as fuss-free and painless as possible. Our aim is to leave you with the simple task of signing the documents, in the sure knowledge we have carefully weighed up your situation, discussed the various options open to you, and completed the paperwork on your behalf.
Naturally, we will undertake to perform an analysis of your financial situation to work out what priority debts you may have. (Priority debts are classed as Mortgage/rent payments, gas/electricity/ water/council tax, plus any arrears that might have built up). This analysis will also include the basic costs of living such as food and your general household living costs.
It is only after these figures have been taken into account that we can see what remains, and it is this sum, which will determine the proposed payment to your unsecured creditors.
By doing so, we should be in a position to provide you with a budget that is both manageable and affordable, and is designed to put you back in control of your financial situation, and in many cases – will help you to keep your home.
My credit is out of control – can Shire help me?
If you have been struggling to make your money stretch, but find you can no longer meet your outgoings, the chances are you’ll be approaching the end of your tether, and you may well be feeling that there is nowhere else to turn…. or is there?
Well, yes there is!
Here at Shire Direct we’ve been providing our customers with a range of financial services products for more than 20 years and have recently introduced a new range of Credit Management Solutions.
By providing an extensive range of solutions, our aim is to help our customers to regain control of their finances. Our principal objective in these situations is to focus on their priority debts, such as mortgage (or rent) repayments.
So it’s highly likely that we can come up with an appropriate solution for you. Thus if you are experiencing problems with debt, and have difficulties in making ends meet, we would strongly urge you to give one of our Advisors a call.
We will carefully examine your circumstances, needs and requirements. Amongst other facets, we’ll take into account your income and present outgoings, as well as the extent and type of the credit you have outstanding. The object of the exercise is to put you in the picture, discuss the options available to you, and provide you with advice and a recommendation on the most suitable solution.
If managing your debt sounds appealing, please do not hesitate to contact us in confidence. You’ll find our approach to be friendly and helpful, and not in the slightest bit judgmental or stuffy. Just ring our Help-line on 08000 282 281. We are open until 10.00pm daily, including weekends, and the call is free and without any obligation.
Make that first step of regaining control of your finances – call us today!
