Supporting Chartered Accountants, their dependants and family members since 1886.

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FACT SHEETS

DEBT

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Getting into debt

It happens so easily. We live in a world in which everything happens ‘now’. We see endless quantities of attractive things in the shops or on the Internet, offered at temptingly low prices. We see wonderful holidays offered at “this week only” prices. We know that the children really need a new computer and that the kitchen has simply got to be replaced. We forget the considerable skill that commercial organisations use to sell their goods, to get customers to part with their money.

Money is freely available. We may not have it now but no matter – a credit card makes everything possible. And if we have run all our cards up to their limits, we simply take up one of the endless offers of money that come through our letterboxes every day – homeowner loans, re-mortgages, secured loans – all offering deceptively low payments. As they spread our debt repayment out over many years, the monthly figures look great, but the total repayable may be deceptively large.

So now we have cleared our credit cards, what happens next? Do we cut them up or do we start to use them again, promising ourselves that we will be altogether more careful this time. At the end of the month what do we find? Can we pay off the entire balances, or do we tell ourselves that we will do so next month?

Something may have happened to suddenly stretch our finances beyond their limits. An economic downturn, a spate of redundancies including perhaps our own, a marriage break up, the death of our partner or simply a fall in overtime or bonus payments. It can be something completely outside our control but suddenly our income has been reduced and we are facing a crisis. The brown envelopes with final demands start to arrive and we find we can barely bring ourselves to open them. Indeed some of us simply put them in a drawer and avoid the issue.

The problem does not go away. Our creditors want their money back and will eventually go to court to recover it. We may remember now the line at the bottom of all those forms we signed: “Your home is at risk if you have used it to secure a mortgage or loan and fail to keep up the repayments.”

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The Consequences

The consequences of not facing up to the problem and taking steps to do something about it can be terrible and make life very difficult in the future. You may be ‘black-listed’ by credit companies and find it impossible to get credit in the future. Bailiffs may arrive on the doorstep to remove valuable and treasured property. You may lose your home and could even be forced into bankruptcy, which could have a huge impact on your future ability to work as a Chartered Accountant.

There are the emotional consequences as well – the feelings of guilt, shame, anger and despair.

If you would like to talk to a professional counsellor, in confidence, call
0800 107 6163.

If you are struggling to meet your daily living expenses, call CABA on + 44 (0)1788 556366 to speak in confidence to a Financial Support Officer.

Let’s look at some practical steps you can take to deal with your debts.

Begin to practice Financial Discipline.

If you are concerned that you might be running up large bills or have taken on loans which are now difficult to repay, look at ways in which you can either avoid adding to the bills and ways to manage repayments on credit cards and loans.

  • Where is the money being spent?
  • Can you make any savings?
  • Who is spending the money? – It may not be you
  • Does anyone owe you money?
  • Talk to your creditors

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Where is the money being spent?

Sit down on your own, with your family, or with a professional who can help you look realistically at your finances and work out what you are spending your money on. It may be helpful to make a note of every item you purchase for a week or so. You will be amazed at how much you spend on very minor items – a sandwich, snack and drink for lunch at work each day, a newspaper, parking fees – all small amounts of money which over time really adds up. If you are used to paying for most things by credit card, the amount spent can be even less visible – until the statement arrives. Try using cash only, for a week. Every trip to a cashpoint to withdraw your cash will register as you punch in the amount you need – adding cashback at the checkout doesn’t really work. With cash in your pocket you have much more control and are more likely to check yourself on unnecessary little luxuries every day.

Can you make any savings?

Check your statements carefully, if you don’t already do so. This will help you see how much you are spending on Direct Debits and you can consider whether you can reduce payments by changing service providers for household fuel, insurances etc. You can also see how often you use the cashpoint and check the large amounts on your supermarket spend, which is probably inflated with cashback.

There may be other savings you can make, such as cancelling paper deliveries, monthly journals, club memberships such as the golf club or gym (especially if it is not used very much).

If the debt is large, you may feel that minor savings are going to make such a small difference that it is not worth doing. Part of the problem may be your attitude towards money and if you can make small savings you will begin to feel as though you are taking back control and other, more major savings can follow.

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Who is spending the money

If you are the one who has allowed the debt to mount up, you are the one who can now take control by doing something about it – setting realistic budgets, cancelling non-essential services and making manageable arrangements with your creditors.

If you are not the one who is running up the bills, you may have tough decisions to make to challenge whoever is incurring the debt. If this is your spouse or partner, this could be difficult and it might be helpful to involve a third party such as a debt counsellor or advisor, when confronting the problem with your partner. Hearing the true level of your financial problems and the likely consequences of ignoring the situation from a third party, may mean that any decisions on how you are going to deal with the situation are taken seriously.

It may be your children who are pushing you into debt.

We all want to do the very best for our children – but it should not be to the detriment of the rest of the family, a secure financial future for ourselves, especially in old age, and our own mental well-being.

If you are struggling to pay expensive private school fees, talk to the Bursar to establish whether the school is able to help, perhaps by extending the length of time you can settle the bills. You may need to consider removing the children from their schools and this will be a very difficult decision. Their ages and the stage they are at in their education may have a bearing. If they are still quite young, they should adapt to a change to a state school quite easily. They may need extra support whilst they get over losing contact with friends and establish new friendships. Older children may be at a critical stage in their education and a change might be very disruptive. If one child is already in a private school or has finished, you may feel you have to do the same for any other children. It may be possible to discuss the situation with older children who will then better understand your decisions. They are probably already aware that you are very worried about ‘something’.

It may be that you are ‘bailing out’ a child or children who have left school. There can be a multitude of reasons – university fees, helping with living costs whilst they are at university, paying off loans they cannot service, regular ‘loans’ as they rush out to a party or the pub which they always promise to pay back, allowing them to live at home with no contribution to the household bills etc etc. You may have to practice some tough love and explain that you can no longer pay for their financial commitments. It will be a hard lesson but one which will stand them in good stead in the future when they have to take responsibility for themselves.

You may be getting into debt because of other family members or friends. It can be very difficult to say ‘no’ to family members or close friends, especially if they seem to be really desperate and promise to pay back the loan.

Your parents may have been financially dependent on you for some time, which has caused the present difficulties. You may have taken on a regular payment such as a household bill or if they are in residential or nursing care, payment of the fees or a contribution to the fees. If you have signed a ‘third party agreement’ with the Home this payment could be very difficult to avoid. Talk to the Home to see if any reduction is possible. Ensure that your parent/s are receiving all State Benefits to which they are entitled for the level of care they are receiving.

If you would like more information on selecting a Nursing or Residential Home and about payment of fees, please call CABA on + 44 (0)1788 556366.

The Nursing Home Fees Agency is also able to provide very useful information and advice. Their website address is www.nhfa.co.uk and their Advice Line number if 0800 998833.

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Does anyone owe you money?

If you have lent anyone any money and they have not repaid the loan, ask if some arrangement can be made for them to pay the money back. This can be difficult or embarrassing but you should not allow friends to take advantage of your generosity.

Make sure that you claim any tax refunds due, any State Benefits to which you might be entitled and otherwise maximise your income in any way you can.

Priority Debts

Some bills and arrears must be paid as a priority. Anything that is likely to put your home at risk or you at risk of imprisonment must be prioritised. These would be your mortgage, rent and Council Tax. Any existing fines or penalties for previous offences, orders made by a family or domestic court such as CSA claims for child support, most educational loans and some other liabilities and claims are generally non-dischargeable.

Talk to your creditors

You may be surprised how helpful they can be. All lenders know that sometimes things will go wrong. Usually they will simply want to resolve matters and will often bend over backwards to help if it means that they can eventually get all of, or at least some of, their money back. Interest payments may be frozen and repayment programmes agreed that will allow you the time you need to recover.

The sooner you contact your mortgage lender and other creditors and begin to deal with the problem, the better your position will be with the possibility of a manageable solution being found. Your lenders will take you seriously and be will want to help you to find an acceptable solution. Lenders do get very frustrated with borrowers who have known for a long time that there are problems and have not spoken to them.

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Negotiating with your creditors

You can contact your creditors by letter or by telephone and explain to them the difficulties you are experiencing. You can ask for interest to be frozen and make them an offer of a much reduced repayment. You will need to work out very accurately what your budget is and how much you can realistically afford as a repayment for each debt. Allow something in your budget for occasional unexpected bills for repairs to electrical goods in the home or maintenance on the car.

Only agree to repayments that are totally realistic and can be met. You will very probably find that your lenders will agree to lower monthly figures than you might have expected but they will take a dim view if you don’t maintain them.

Keep up the payments

It is extremely important that you make the payments you have negotiated. If you fail to do so, the creditor is quite likely to commence court proceedings to recover whatever money they can. If you do find that you continue to find it impossible to pay the new level of repayment – talk to your creditors again. They may agree to a period of non-payment but it is essential you communicate with your creditors and do not just allow a situation to develop. Try to remain in control and to do so it is vital to communicate with creditors.

Further Advice and Support

Using the expertise of a debt advisor can really help with these processes. A third party can look more dispassionately at your situation – sometimes we can feel overwhelmed by the burden of the worry. Recognised Debt Counselling organisations are also trusted by the financial institutions and they are more likely to agree to a suggested repayment plan if it is proposed by one of these organisations.

Advisors at the Citizens Advice Bureau are used to dealing with clients’ debt problems and will be very helpful.

Other agencies which can help are:

  • Consumer Credit Counselling Service – 0800 138 1111 – a free debt service funded by the banks
  • National Debtline – 0808 808 4000
  • Money Advice Trust – + 44 (0)20 7489 7796
  • FCL – 0800 716239 – for people in debt who are in receipt of an income

A Debt Management Programme can be set up by a specialist company. They will manage all the above procedure for you and will take a percentage of your re-payments as their fee for doing so. Figures of around 17.5% are typical so this is not a cheap option. If you can manage to go through this procedure yourself, as outlined above, then 100% of whatever you can afford will be put towards the re-payment of your debts, rather than perhaps 82.5%. However, if you are not in a position to deal with this on your own, this is an option which might suit you. The company will provide guidance and have a certain amount of “clout” with your creditors.

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Insolvency

You may be advised to see a qualified insolvency practitioner. They will be able to look at your financial situation and to advise you on your options which may include setting up an Individual Voluntary Arrangement (IVA). Insolvency Practitioners can be found on the website and some sites provide useful information and fact sheets on communicating with your creditors and the various options which might be available to you.

They will be able to help. The two main ways forward are:

An IVA is a legally binding arrangement with your creditors, which allows you to repay your debts in affordable monthly payments over a fixed period of time.

If you are a Chartered Accountant and decide to enter into an IVA, you must report this to the ICAEW. Early notification of your decision is not likely to affect your membership.

Your proposals are put forward to creditors and are lodged into Court. Naturally your creditors also receive a copy. If your assets are at risk because of action taken by creditors, application can be made to Court for an Interim Order, which means that they cannot take any action against you and your assets unless the Court permits it.

A meeting of your creditors is held and they vote on whether to accept, alter or reject your proposals. As long as your proposals demonstrate a genuine desire to repay as much of your debt as you can afford, it is likely that creditors will accept. Your insolvency specialist will know what is likely to be acceptable so that you have the best chance of success.

Once your IVA is approved, all interest and charges on your unsecured debts are frozen. An IVA allows you to repay a proportion of your debt, so as long as you adhere to the agreed terms, the remaining balance of your debt may be written off.

Bankruptcy: Also usually managed for you by an insolvency practitioner, this is the ultimate step – he or she will advise whether it is appropriate in your case. You should consider this step very carefully.

You will need to report your bankruptcy to the ICAEW and this is generally likely to lead to you losing your membership of the ICAEW and therefore, your ability to practice as a Chartered Accountant.

A petition is presented to Court and the order will be made if the Court Official considers bankruptcy appropriate. This is followed by an interview with the Official Receiver, who initially acts as Trustee in Bankruptcy. The Official Receiver has 12 weeks to decide whether an independent Trustee should be appointed to manage the bankruptcy and if so, whether a meeting should be held to appoint the Trustee.

As of 1st April 2004, the discharge period for bankruptcy is twelve months after the date of the Order or sooner if the Official Receiver reports that there are no matters of concern.
Whilst bankrupt, if you have surplus income after taking into account your reasonable costs of living, the Trustee will ask for a monthly contribution from your income for a period of three years; as such payments continue beyond the discharge period.

The assets excluded from bankruptcy comprise:

  • Personal possessions of a reasonable value
  • Tools of trade, for example a car that is needed for work purpose
  • Equity in property of £1,000

However, the Trustee can insist that assets which have a material value, for example expensive cars, furniture, etc are sold and replaced with cheaper alternatives.

The bankruptcy proceedings are advertised in a local newspaper and in the London Gazette.

New laws have been introduced which are aimed at protecting the public from those bankrupt's whose conduct has been either reckless or irresponsible.

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Bankruptcy - The Pros & Cons

There is more to bankruptcy than as a way of finally putting an end to harassing debt collectors and nagging creditors. One big side effect of bankruptcy is that your life is subjected to microscopic inspection.
The main reason for considering this action very carefully is that you are likely to lose your membership of the ICAEW and you will, therefore, no longer be able to practice as a Chartered Accountant. You must report your bankruptcy to the ICAEW. It would be sensible to seek advice from the Ethics Advisory Service on + 44 (0)1908 248258 or a Support Member on 0800 917 3526 before making a decision to file for bankruptcy.

The Pros

  • Removes the uncertainty and stress caused by dealing with numerous creditors.
  • Once an order is made, a third party takes over all administration.
  • Can be cheaper than an IVA.
  • Creditors may be forced to accept that they will get back less than was owed.
  • Creditors cannot do other than accept whatever the Court decides so will usually withdraw.
  • Once discharged, debts are written off and creditors cannot then pursue them.

The Cons

  • As a Chartered Accountant, you must report your declaration of bankruptcy to the ICAEW and your membership of the institute will cease.
  • Any realisable assets are likely to be sold and lost to the debtor.
  • Your home may be one of these assets.
  • A business may also be sold if it is of value.
  • Professionals will usually be barred from practice, you cannot become an MP, a councillor or a magistrate and you cannot be a company director.
  • You can trade only in your own name, the name under which you were made bankrupt .
  • If you rent your home, your lease may contain a clause that entitles your landlord to terminate and evict if you are declared bankrupt. Finding another lease may be difficult.
  • Some banks will not allow you to hold an account.
  • Can be expensive.
  • Places real restrictions on your ability to obtain credit.
  • The debtor has to disclose all their financial affairs – withholding can be a criminal offence. You must also disclose every change in your financial affairs and if you achieve a higher income, some or all of it may be taken to repay creditors.
  • Your name will be published in the London Gazette and in your local press.
  • Certain debts cannot be written off: fines, maintenance/child support payments, other Family Court Orders, debts to secured creditors, debts from personal injury claims, debts incurred through fraud.
  • Debt arising from orders of the Criminal Court and student loans made under the Education (Student Loans) Act 1990.
  • Bankruptcy does not affect the rights of secured creditors. Where there are joint debts, creditors can still pursue the non-bankrupt debtor.
  • Although it has eased a little, there is still a stigma attached to bankruptcy. The debtor may feel judged and humiliated.

There are many websites providing information and support both from the Charity/Voluntary sector and the business sector.

If you would like to talk to a counsellor, in confidence, about your concerns, either for yourself or about someone you know, please call 0800 107 6163

If you are struggling with day-to-day living expenses, please call CABA on +44 (0)1788 556366, e-mail enquiries@caba.org.uk or visit www.caba.org.uk

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