Wealth Check: 'I want to free myself of debt, but is bankruptcy the only option'
Saturday 23 May 2009
Faze Al, 28, is a psychology masters student. He has built up £16,000 in debts but, as a full-time student, has been unable to keep up with the repayments. Faze says: "My bank convinced me to take out a £10,000 loan when I took up full-time education, but I already had debts. I had hoped to be self-employed while studying but it didn't work out and now I haven't made a payment for months. I receive threatening calls from debt collectors but don't have any assets for bailiffs to seize. Is bankruptcy my only option?"
Income: Faze is a full-time psychology masters student at the moment with no income.
Monthly outgoings: He says he spends just £60 on bills, food and other essentials.
Debts: Owes approximately £16,000 on various loans and credit cards: £9,000 to NatWest, £3,000 to Egg and £3,500 to MBNA.
Pension: He has no pension commitments yet.
Savings: Faze has no savings.
Advice this week is given by financial advisors Danny Cox of Hargreaves Lansdown, Philip Pearson of P&P Invest, Darius McDermott of Chelsea Financial Services and debt adviser Mike Thomas, head of DebtWizard.com.
While bankruptcy would free Faze from debt, it is a serious financial arrangement that is not to be entered into lightly. Darius McDermott says: "Bankruptcy will lift Faze out of the financial quagmire he is in, but he must understand the ramifications. It will severely affect his credit-rating in the future." Danny Cox points out that credit is about more than mortgages and credit cards, but almost everything we pay for monthly. Critically, bankruptcy could also affect his employment prospects. "Under some circumstances, organisations like the NHS or MOD may not employ Faze. Nor may he be eligible for any position where there is access to money." Mike Thomas says that should Faze feel bankruptcy is his only option, with no available money it is unlikely he would be asked to make any payments to the Official Receiver, who oversees the bankruptcy. He would, however, need to find £510 to cover costs on the day he goes bankrupt. "Faze may be eligible for a fee reduction by using a form EX 160," says Thomas.
Philip Pearson says: "The most effective way of reducing debt anxiety is to draw up an action plan." Thomas agrees and says Faze should write to his creditors, explaining that he is a student with no assets and no job, and asking for a moratorium, a legal term which would mean proceedings are halted until he can start making repayments. "Faze should also ask that all interest and associated charges are frozen until then. The incentive for creditors is that rather than receive nothing, they will eventually receive all or some of their money." If Faze could start earning, he could draw up a debt management plan with his creditors. However, says Thomas, neither option is legally binding. Another alternative, which also depends on a small income, is an individual voluntary agreement (IVA). Thomas says: "An IVA is a legally binding agreement, through which Faze would make monthly contributions towards his debt for a period of, typically, five years. The interest is frozen from the date the IVA commences." McDermott says: "Under normal conditions, after five years the debtor will be considered debt free even if they have not repaid the full level of debt. Another upside of the IVA is that it stops a debtor being harassed by their creditors: an insolvency practitioner oversees the IVA." Pearson says an IVA could still affect Faze's credit rating, but is a private arrangement that would show he is acknowledging his debt. McDermott says: "An IVA is likely to be viewed more favourably by future creditors than bankruptcy." Thomas says Faze should check whether MBNA would support an IVA.
Given that even bankruptcy and IVAs require some payment, Faze should check his entitlements to state benefits or Government social fund loans, says Cox, as these could provide urgent remedial funds. Cox says Faze should also check with HM Revenue & Customs to see if he has overpaid any tax, and with his bank to see if he has overpaid any bank charges. "Faze must consider part-time work, or deferring the remainder of his degree to work full-time." Faze should also contact organisations such as the UK Insolvency Helpline and the National Debtline for free advice, says Cox, but should avoid firms that promise to resolve the issue by consolidating his debt.
Once Faze has faced his debt problems, he must learn how to budget for the future. Thomas says: "Credit was Faze's downfall so he must learn how to prevent this from happening again." Cox says a daily budget is a good idea: "There is hope and Faze's situation can be resolved with good advice and hard work. But he must act quickly: the longer, he leaves it, the worse it will get."
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