Debt Free Tristan on 13 Dec 2008 02:35 pm
I recently read an article on this subject on a well respected financial portal. I didn’t like the article that much because I found it a little one sided, and focussed solely on the notion that if you are in debt, it’s your responsibility to repay the debts.
Hang on a minute, the people you owe money to (the Banks) are the same w*nkers that have caused the global credit crisis at the moment by being irresponsible with their lending decisions in the pursuit of quick profits and seven figure bonuses, should we really extend anything but contempt to these people?
I propose that if you are in debt, you should seriously think about taking this opportunity to wipe the slate clean – remember, the banks have all been bailed out by the government to the tune of billions of tax payers money, your money, so why not let your own taxes bail you out too?
I know, I know some of you are probably thinking “how irresponsible and anarchic”. Well if so, look at your retirement fund, your ISA’s and the value of your property. The reason they are all significantly less than this time a year ago is because of the aforementioned bankers and the mess they made of the financial system. If you were coming up to retirement age and have just seen 25% or more of your pension value wiped off, are you glad that may now have to work beyond the age of 65 or that you will have 25% or less money to live off than you had hoped for?
Enough of my rant, I’m probably a little biased as I was working as a mortgage broker, doing ok until the credit crunch came along and wiped my business out, so I don’t have any sympathy for lenders given the stress that I went through, not withstanding that as well as losing my business, my marriage failed, largely due to the stress that I went through in losing my business. Hopefully that should give a bit of context to my rant.
So my top tips for getting out of debt quick are, in descending order of speed:
By declaring yourself bankrupt, and choosing how you do it, you could write off 100% of the money that you owe. Clearly there are significant implications for bankruptcy, namely the effect it will have on your ability to obtain credit now and in the near future.
However, the effects of bankruptcy will only last for a maximum of six years, after which, it will no longer appear on your credit file, so will not affect your ability to borrow money. You may be obliged to inform a creditor that you have been bankrupt, but as long as you can prove you are discharged and it doesn’t appear on your credit file it won’t affect your ability to get a mortgage, loan or credit card.
In fact, if the banks don’t learn the lessons of the credit crunch, you may well be able to borrow sooner than that, albeit at a higher rate of interest, to reflect the increased risk that you represent to a lender.
Individual Voluntary Arrangement (aka IVA)
The exact amount that you can write off by going through an IVA will vary, dependent on what your creditors are prepared to accept as an acceptable loss (remember you are writing off your debt, and that becomes a bad debt for the bank on their balance sheet, so it’s in their interest to write off as little as possible). Generally, you should be able to write off 50%, in some cases, as much as 70%.
The IVA process will take five years typically, whereby you agree to pay off what you can afford, in regular monthly payments over sixty months. There is an exception to this rule, the “One off IVA”, which is a one off, lump sum payment that is used instead of paying monthly for sixty months.
Again, as with bankruptcy, the IVA will severely affect your credit rating for up to six years after the end of the IVA, as I understand it.
Debt management plan
Is an informal agreement between yourself and your creditors that is very similar to an IVA. You agree to repay what you can afford, and your creditors agree to freeze or reduce interest payments and charges on your debts. As it is an informal agreement it does not affect your credit file, however, most lenders will only agree to a debt management plan on delinquent accounts, whereby there are arrears or even a default has been issued.
I would suggest if you are going to use a debt management plan, use it as a short term plan for one year, get yourself on your feet financially, then raise enough money to make an offer to your creditors to settle the remaining debt. I would start off by offering 25% of the remaining debt as a “full and final settlement” and increase the offer by 5% increments until all the creditors agree. This way, you will have saved yourself having to pay back 100% of the debt, and will not have had to pay interest for the previous year either.
Debt consolidation loan or remortgage
If you want to keep your credit rating in good shape, but need to clear your debts quicker, then one of the best things to do is look to reduce the amount of interest you pay. If you have various loans and credit cards, calculate how much you owe altogether, borrow that amount from on personal loan or remortgage and use it to repay all the other debts.
This system will only be of any benefit to you if you commit to using the money that you are saving by having all your debts in one loan to be overpaying the loan and thereby reducing the amount owed.
Focus on most expensive interest rate first
If for whatever reason, you don’t want to consolidate or simply can’t consolidate your debts, the next best thing to do is focus on repaying the most expensive card or loan first.
To do this, you will need to pay the minimum payments on all your other debts, work out how much all your repayments come to each month, and then work out how much you can afford to overpay on your most expensive debt and commit to making that payment until it is cleared.
Once you’ve cleared that debt, take the money you were using to pay off that debt and add it to the minimum payment on your next most expensive debt until that is cleared and repeat the process until all the debts are cleared.
Naturally, you will need a certain amount of discipline to do this, and you will also need to ensure you set yourself a budget to live off each month and stick to it. Another useful tip for those that are messy with their money, is to have two bank accounts. One is where your income is paid into, and the other is used to spend money. If you work out your monthly budget for all your outgoings, mortgage or rent, council tax, insurance, utilities, phone etc, you can leave the exact amount of money needed to cover these expenses in the first account, then transfer the remaining money into your spending account. This way you can never overspend and accidently spend money that was earmarked for something important, like the mortgage for instance!
I don’t recommend that anyone takes my thoughts on the subject of debt as advice, because it is not – it is merely my thoughts about the subject and some interesting ideas for those that are prepared to think a little differently…