SERVE UP A LATE VICTORY AGAINST YOUR DEBTS
Tennis star Boris Becker shows how messy debt can get... but there are ways out, says TRICIA PHILLIPS
TENNIS superstar Boris Becker is having another day in court. His bankruptcy has seen the kinds of twists and turns we’d expect from a soap opera, and he’s now facing criminal charges.
But while this is an exceptional case, there’s nothing unusual about running into debt problems, especially in the current climate.
One in five of us face financial problems due to the Covid-19 crisis and one in seven have had to borrow more than usual to make ends meet, according to research from investment firm Hargreaves Lansdown.
If your debt has started keeping you up at night and you can’t see any way of getting back on top of it, it’s worth understanding your options.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, says: “It’s incredibly difficult to face up to, but open all your statements and work out exactly what you owe, and to who.
“Next, draw up a budget. See how much you’re spending each month, and where the money goes.
“It can also help to keep a spending diary.
“Once you know this, try to find ways to cut costs, from your bills, to cutting back on purchases you don’t need.”
You might be able to do this yourself with an online budget calculator – there’s one at Moneysavingexpert.com+
But, if you need help don’t be afraid to ask.
There’s a guide to completing a budget courtesy of National Debtline (nationaldebtline.org), while Citizens Advice and debt charities such as Stepchange (0800 138 1111/ stepchange.org) can help you with the process.
Here are some options for those unable to balance their budget...
DEBT MANAGEMENT PLAN
IF YOU can afford to make payments on ‘priority debts’, like mortgage, rent and council tax, you might be able to sort out a debt management plan.
These are usually done through debt charities, such as Stepchange, where they contact everyone you owe money to, and agree repayments you can afford.
PROS
■ Someone else can arrange this, so you don’t have to speak to people you owe money to.
■ Often banks will agree to freeze interest while you repay.
■ You’ll have one easy-to-manage monthly payment.
■ If your circumstances change, you can repay faster as you’re not tied in for a specific time.
■ It’s free if you use a debt charity to arrange this.
CONS
■ Banks don’t have to agree to it.
■ They don’t have to freeze interest, so debt may not shrink as fast as you think.
■ You’ll be paying less each month, so repaying for longer.
■ It could make it harder to borrow while it’s on your credit record.
■ Companies that organise these will charge and may hide the cost in monthly payments, so be careful.
DEBT REPAYMENT ORDER (DRO)
THIS arrangement means you don’t need to make repayments towards most types of debt and, after a year, the balance is written off. It costs £90 to apply. To be eligible you need qualifying debts of no more than £20,000, no more than £50 left over each month after you’ve paid bills, and assets of no more than £1,000.
You can’t own your home and your car must be worth less than £1,000.
PROS
You can have the majority of your debts written off after a year.
■ It’s not expensive.
■ Organisations you owe money to can’t chase you – as long as they’re included in the order.
CONS
■ If any of the debts are for items bought on hire purchase, you may need to give them back.
■ The order stays on your credit record for six years making it difficult to borrow and to find new rental accommodation.
■ Your bank may close your account.
■ If you have lasting power of attorney for anyone – or anyone has one for you – this will end.
■ Restrictions include: you can’t borrow £500 or more without disclosing your DRO, you can’t run a company without court permission, and you’ll be on the Insolvency Register for 15 months, which can be checked by anyone – so you can’t hide from it.
INDIVIDUAL VOLUNTARY ARRANGEMENT
THIS is a formal agreement to make repayments towards debts for a specific period of time.
It has to be arranged by a qualified insolvency practitioner and agreed by a court. You agree an affordable sum to repay – lump sum or monthly.
The agreement lasts five or six years, after which outstanding amounts will be written off.
It’ll usually cost £4,000-£5,000.
PROS
■ If you can’t afford to repay debts, you only have to pay what you can afford and the rest is eventually written off.
■ It’s legally binding, so nobody can chase you for debts.
■ You won’t have to sell your home.
CONS
■ It’s expensive, so usually not worth it for debts under £10,000.
■ If you use a debt management company, they’ll outsource to an insolvency practitioner and charge you a fee on top – so it’s best to cut out this middleman.
■ Any savings will need to be spent repaying debts. Expensive assets, including a car, may have to be sold.
■ If you come into money during the process, anything beyond £500 will be used to repay your debts.
■ If you have a house, you’ll usually need to remortgage towards the end of the arrangement to free up equity to pay down the debt. If you can’t, the IVA can be extended for another year.
■ It will make it difficult to borrow.
It’s incredibly difficult to face up to, but open all your statements and work out exactly what you owe, and to who
Sarah Coles, personal finance analyst at Hargreaves Lansdown
BANKRUPTCY
THIS is the most serious of options, agreed by a court, when you have insurmountable debt problems. You need to pay a £680 fee, but the real cost is how it restricts your life.
PROS
■ After one year, debts included in the bankruptcy are written off.
■ You can’t be chased for the debts.
■ You can keep a reasonable amount of money to live on.
CONS
■ If you own your home, you may have to sell, and if you rent, your landlord could kick you out.
■ Anything of value may need to be sold – you can keep household items and your car if needed for work.
■ You could lose your job.
■ You may have to make payments from your income for three years.
■ It will be much more difficult to get credit while this is on your record – usually six years.
■ If you have a bankruptcy restriction order against you it can last for up to 15 years.
■ Your bankruptcy will be made public.