A recent case highlights the dangers of relying on equity release as a strategy to manage spiralling unsecured debt problems.
Mr X approached his mortgage broker to arrange a secured debt consolidation loan. He had previously tried without success, to obtain an unsecured loan of £30k to tidy up his affairs and prepare for the holiday break at Christmas.
You can imagine his surprise when his application was turned down because of the new tighter lending criteria being introduced daily by mortgage lenders. He realised that the old adage “if there is equity borrow against it” is no longer an option for some people.
Tighter controls on income multipliers, cautious property valuations and a general wariness about the housing market in general have led to lenders like Kensington, withdrawing from the market completely.
It has always been questionable as to whether debt consolidation, either secured or unsecured, is a viable option for most people. It opens the possibility of spending spiralling out of control unless the person concerned is extremely disciplined, and ideally cuts up the cards to avoid a re-occurrence of the problem.
If the person were to opt for Bankruptcy instead, this will force the applicant onto the margins for credit transactions for up to 9 years depending on the term of the bankruptcy. Should any institution be prepared to offer a loan, the interest rates charged as a result of the poor credit rating would be very high. Financially, life can become very difficult.
Mr X felt he was out of his depth, and approached EADM looking for a twofold solution. Firstly he wanted to protect his house, as his mortgage was slightly in arrears but was being dealt with on a payment plan with the secured creditor. Secondly, he wanted to protect himself from his unsecured creditors who were becoming increasingly hostile.
The solution was an Individual Voluntary Arrangement. The offer consisted of an affordable monthly contribution, which began immediately, and a possible release of his share of the equity in the matrimonial home, in year 4 of the arrangement.
So now the home is secure, the phones have stopped ringing and Mr X can get on with his life.
CASE
STUDY NUMBER 1 : APPROVED AUGUST 2002
MR
X.
:
SOLE TRADER
In 1991, Mr X had his own limited company
operating as a self-employed aerial contractor. Unfortunately Mr X’s
company failed within a few years, after a very costly and acrimonious
divorce. He then suffered a complete psychological breakdown and had no
income whatsoever until he returned to work in 2001. During this time
Mr X had to rely on credit cards to survive. By now Mr X had built up
debts of 28,000.
Although Mr X originally thought
that bankruptcy would be the answer, he was advised that as a bankrupt,
he would not then be able to claim legal aid. Legal aid was vital for
him to petition for a contact order to enable him to see his
son.
Mr X sought advice from EADM in 2002. His
circumstances were reviewed and he was advised to enter into an IVA. He
needed £620 per month to cover his living expenses out of drawings from
his business of £900. The surplus income of £290 was offered to
creditors as a monthly payment over the 5-year term of the IVA. He
therefore paid back almost 38p in every pound he owed, writing off more
than £17,000 of his unsecured debts. All interest charges and penalties
were frozen so the debts stopped increasing.
In
2005, Mr X received a lump sum from his business and with this, offered
his creditors a final one off payment to end the IVA early.
This was accepted and therefore Mr X finished his IVA and was debt free
some two years earlier than originally
planned.
CASE NUMBER 2 :
APPROVED MARCH 2001
MR AND MRS R – JOINT AND
SEVERAL PERSONAL LIABILITIES
Mr and Mrs R were originally
both in full time employment and lived with 3 their young children.
Like most couples they had a couple of credit cards and one small loan.
The monthly payments on these were paid easily every month until Mrs R
suffered an accident, which resulted in a serious back injury severely
restricting her movement rendering her partially disabled. As a result
the family income was greatly reduced, and it became a real struggle to
maintain payments on the credit cards and
loan.
Gradually, as interest and charges were added
to their debts, Mr and Mrs R began to spend an increasing amount of
their income on repaying creditors. They had less and less money each
month to live on.
Mr and Mrs R then sought help from
EADM, and the couple was advised to enter into an Individual Voluntary
Arrangement each. They had a total income of just over £2,300,
including Disability Living Allowance, while they needed £2,000 to
cover their living expenses. EADM recommended that they each propose an
IVA, contributing £150 per month for the first 2 years, with an annual
increase for the following 3 years.
Mr and Mrs R
initially had built up approximately £19,000 of debt each, and through
the IVA offered approximately 37p in every pound that they owed to
their creditors. There was one joint and several liability of almost
£1,500, who was offered just over 74p for every pound that
was owed.
In March 2001, Mr and Mrs R had their IVA
proposals accepted by their creditors, and their arrangements were
completed in September 2006. They had written off their total unsecured
debts of approximately £24,600, and could look forward to debt free
future.
CASE NUMBER 3 : APPROVED JANUARY
2001
MR R - DIVORCEE
Mr R became bankrupt
several years ago. The trauma that he went through as a result caused
him to have a nervous breakdown. This meant he could not work and
therefore had no income whatsoever. The final blow came when his wife
divorced him, and he was forced to leave the matrimonial home and his
two children. He was devastated.
However, life
started looking up for Mr R when he met a new partner. He also started
working on a self-employed basis. At this time he reviewed his finances
and realised his dilemma. The old debts, which had been built up during
his period of unemployment, were not being reduced. He was being
charged interest and late payment penalties as he struggled to maintain
both the child support payments to his former wife, and also to
maintain his standard of living. His debts were actually increasing. He
realised he was using one credit card to pay off another every month,
instead of clearing the debts.
Mr R then approached
EADM. We identified that his living expenses were £850 per month while
his income was £1,130 per month. The surplus was less than the minimum
monthly repayments he was being charged by his creditors. Mr R then
chose to enter into an IVA, offering £285 per month for the first year,
increasing an annual basis in line with his yearly pay
rise.
Mr R had built up a total of £67,000 in
unsecured debts, and the creditors accepted a contribution of 24p in
the pound, effectively writing off 76p in every pound he owed. This
meant that Mr R was due to have written off almost £51,000 of
debt.
In 2002 however, Mr R had a windfall, and his
creditors accepted a lump sum to complete the IVA early. This meant
that the actual amount paid back to his creditors was only 10p in the
pound, which totalled approximately £6,700. He therefore wrote off over
£60,000 of his debt, and by June 2003 was looking forward to a bright
future, with no debt burden whatsoever.
