HELP! – DEBTS, REPOSSESSIONS, IVAs & BANKRUPTCY

A debt is a sum of money owed from one person or institution to another person or institution and can be split into unsecured and secured debt.

Typically “unsecured” debts involve smaller amounts of money and consist of credit card debts, bank overdrafts and small loans for which you have not been asked to put up any security. The lender (bank, credit card company or other financial institution) cannot seize any of the borrower’s possessions if the balance remains unpaid. However, they may engage the services of a collection agency or even a lawyer to recover the debt through the Courts.

Secured debt is money loaned against “collateral”, which is usually a tangible asset such as your home or car. A legal charge is created over the asset. Examples of secured loans include mortgages or a car finance agreement. If the borrower doesn’t keep up to date with the loan repayments, thus breaching the terms of the loan agreement, the lender can take possession of the asset and sell it in order to recover the loan amount outstanding.

Since September 2007, Subprime Lenders and the subprime market (also known as the “adverse market”) have been in the news. A subprime lender charges a finance rate that is higher than the "prime" rate offered by conventional lenders. This is typically because they are approving secured loans for individuals who may have a poor credit history or no credit history, or who have other characteristics (e.g. high loan to value, property type, job) that justify a higher rate to counter the perceived risk to the lender.

You may have heard of consolidation loans whereby several debts are combined into one loan with a view to reducing the annual percentage rate or the amount you have to pay back each month, usually by extending the repayment period. As well as reduced monthly payments, it is easier to make one payment each month than try to keep track of several payments to various lenders. However, as the period over which you repay the loan is longer, you are likely to repay more over the term of the loan as a result of the interest charges.

Consolidation loans can be unsecured or secured, depending on the sum borrowed. Remember that if your consolidation loan is secured, you risk the loss of property used as security if you cannot keep up repayments.

A little over a year ago, the Guardian newspaper reported on the growing trend of those in financial difficulty taking out consolidation loans. There were concerns that borrowers struggling with personal loans and credit card debts were being pressured to take out consolidation loans, even when it was clear that they would not be able to meet the repayments and this would result in the loss of the borrowers’ homes.

Before taking out a consolidation loan, it may therefore be sensible to think about how you got into debt in the first place and see if you can change your spending habits. It may not be wise to take on more debt to repay existing debts.

You could draw up a monthly budget and check whether or not you have the funds to meet the monthly repayments due under the terms of the consolidation loan.

You may wish to concentrate on clearing one credit card balance at a time whilst maintaining the minimum payments to any other unsecured debts if your finances are tight. When a particular credit card is clear, don’t cut it up. Return the card to the issuing financial institution and ask them to cancel your account.

If you really start to struggle to meet the repayments of your unsecured borrowing, the lender may agree to you paying a reduced amount each month. If they are unwilling to accept a reduced amount each month, you may wish to talk to a debt counseling service, such as the CCCS or Citizens Advice, or a private firm specialising in debt management and insolvency such as The Debt Helpline. Such organisations can offer advice about rescheduling your debts, arranging a debt management plan or proposing an individual voluntary arrangement or “IVA”. An IVA is a formal agreement between a person owing money ("debtor") and his or her creditors, under which the debtor undertakes to make certain payments or realise certain assets, or both, in full and final settlement of their debts.

However, if the borrower falls into arrears and has not been able to negotiate an agreement with the lender, the lender may seek a county court judgment (CCJ) against the borrower to get repayment. If the borrower fails to respond to the CCJ, the lender may then endeavour to secure a charge over his/her property. This means that even if the borrower cannot meet the monthly repayments now, the lender has some assurance that it can reclaim the value of the loan when the property is sold, provided the property is sold for a sufficiently high sum to cover all charges secured against it.

As a last resort, an unsecured lender may petition for the borrower’s bankruptcy - a formal insolvency procedure used to deal with the affairs of individuals whose liabilities exceed their assets and are unable to pay the debts as they fall due. However, petitioning for a borrower’s bankruptcy will not guarantee that the lender recovers the outstanding loan. Settlement of outstanding liabilities is dependent on the realisation of the borrower’s assets, if they have any.

With regard to mortgage charges and loans secured against the borrower’s property, Yahoo has recently reported that home repossessions have hit an 8-year high.

Yahoo reported that during 2007 more than 27,000 homes were repossessed and that figure was expected to rise to 45,000 in 2008. However, we are a long way off the all time high of 75,000 repossessions in 1991.

Home owners are under increasing financial pressure as a result of interest rate increases, the credit crunch making it more difficult to remortgage, ever increasing council tax and utilities bills, not to mention the growing trend of the “buy now pay later” culture.

In cases of persistent arrears, mortgage lenders may instruct solicitors to apply to court for an order for possession and sale of the property against which their loan is secured. If the borrower is not able to settle the arrears or find an alternative resolution, the lender will enforce the possession and sale order leading to the borrower’s eviction from the property. The lender will then place the property on the market for sale. Once the charges and legal expenses have been settled, any surplus sale proceeds are returned to the borrower.

Secured borrowing, such as mortgage charges, cannot be included among the liabilities in an individual voluntary arrangement. However, that is not to say that a good debt advisor cannot offer you advice to help you find a resolution to your financial difficulty and initial advice is often free. Negotiations with your existing mortgage lender or a remortgage could provide the solution you need.