Wealth Check: 'I want to free myself of debt, but is bankruptcy the only option'

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?"

Case notes

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.
Mortgage: None.

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.

Bankruptcy

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.

Alternatives

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.

Remedies

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.

The future

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."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

News
Bill Gates, founder of Microsoft and co-chair of the Bill and Melinda Gates Foundation
businessUber, Snapchat and Facebook founders among those on the 2015 Forbes Billionaire List
News
news... and what your reaction to the creatures above says about you
News
Homer’s equation, in an episode in 1998, comes close to the truth, as revealed 14 years later
science
News
news
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Day In a Page

    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003