You wouldn’t think that banks and other lenders could be magicians, but they are increasingly causing debt management worries by one of their nasty “magic” tricks.
It doesn’t involve a rabbit and a hat, or a scantilly clad Debbie McGee-type assistant being chopped in half, but rather more a worrying financial trick of turning an unsecured loan into a secured version. Yikes.
Many high street lenders, who are still reeling from the effect of bad mortgage debt (defaults, missed payments, repossessions etc) are preparing themselves for an increase in the number of unsecured loan defaults (on things like personal loans and credit card debts).
The main problem for people who can not afford to maintain repayments on their unsecured debts, is the increased likelihood of the bank or building society seeking a “charging order”.
This goes against the main attraction of an unsecured loan, in that it isn’t “secured” to a property. It is unsecured, so your home shouldn’t be affected if you start experiencing debt management issues.
However, if you default on the payments and the lender is successful in their attempt to seek a charging order, this effectively turns your previously ‘unsecured’ loan into a secured one, and places a 2nd charge against your home.
This can be avoided though if you seek impartial debt advice as soon as you realise that you may be unable to maintain any of your credit agreements. Reputable debt help organisations can offer simple debt advice and suggest ways for you to get out of debt that are suitable for your circumstances.
In some instances, they may also recommend a professional debt management solution to alleviate and control your mounting debt problems.
Professional solutions include Individual Voluntary Arrangements (IVAs), Debt Management Plans (DMPs) and Trust Deeds.
A Debt Management Plan (DMP) is a flexible way of repaying multiple unsecured balances, but makes managing them much easier as there is only a single monthly payment to make. This payment is distributed to the people that you owe money to on your behalf and is calculated to always be affordable to you.
It’s flexible (and always affordable) because if your financial situation changes, your payment can be updated to reflect this – so if your income drops you can lower the monthly payment. Likewise if you start receiving more income, through a promotion perhaps, your monthly payment can be increased so your debt problems can be repaid quicker.
The amount you pay is based on your income, minus your priority payments – rent/mortgage, utility bills, council tax, food, travel to work, childcare etc. The remaining amount is called the “disposable income” which then goes towards repaying your creditors.
An Individual Voluntary Arrangement (IVA) works in a similar way to a Debt Management Plan, but is a more formal solution. All unsecured balances are still gathered into a single affordable payment but this is repaid over a fixed period of time (usually five years).
An IVA involves an agreement with the people you owe money to which is legally binding and requires the services of a qualified Insolvency Practitioner. This agreement protects you from your creditors changing their payment demands.
Once the IVA term has been fulfilled, all remaining unsecured balances are written off – so effectively you walk away debt free.
Trust Deeds are in essence an IVA but for people living in Scotland. They are usually repaid over three years.
For immediate debt advice, or for further information on debt management solutions, please call the number at the top of this page.