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The government has at long last decided to review the workings of debt relief orders, the new, lower-cost option for people to avoid bankruptcy.

Introduced in April 2009, a debt relief order is a less stringent form of bankruptcy but still with the same restrictions as a normal bankrupt. They are designed for people with a certain amount of debt, little disposable income and few assets and are intended to place the least complicated debt discharge cases on a fast track through the court system with no personal appearance at court required.

See Debtwizard guide to Debt Relief Orders.

On paper, debt relief orders sound great and are just what we need to help consumers battle with their debts.

But are they really any good? Rather than detail the qualifying criteria it might be simpler if I identify those of us that won’t qualify for a debt relief order - surprise surprise, most of us.

First off, you will not qualify if you have unsecured borrowing in excess of £15,000 (which includes credit and store cards, personal loans and overdrafts) or if you have assets above £300.

You can work out the value of your assets by establishing the purchase cost and times it by between 5% and 10%. For example, a fish tank you bought for £300 would be valued around £15 to £30.

Now do this for all your possessions - I bet you get to past the £300 mark before you have even done the contents of one room.

And if your assets are £301 then forget the debt relief order.

Even if you qualify up to this point, if you own a vehicle with a market value of £1,000 or more, then you're excluded.

Next up we have the disposable income - this is the sum of money you have left after meeting your normal reasonable expenditure costs. If this is above £50 then, again, the debt relief order is out.

Now we move onto your home. If you own a home then you cannot take out a debt relief order – even if you are in negative equity (that is, the value of your mortgage debt is greater that the value of the property).

Now, on to pensions. If you have a pension pot worth in excess of £300, then you cannot propose a debt relief order. In contrast, in bankruptcy you can keep your pension and still make payments into it.

The government’s review will focus on the criteria for the value of pension pots.

Business minister Ian Lucas says: “Debt relief orders help people who would otherwise be trapped in poverty to get back on their feet. Following representations from independent money advisers, I’m proposing a common sense change to ensure that vulnerable people with a very small pension pot are treated fairly. The government will consult on this change shortly.”

Note the words “common sense change”. If there were any common sense being applied, the government would deal with the whole issue by:

* Increasing the assets amount to around £3,000
* Including homeowners that are in negative equity
* At least doubling the car amount to £2,000
* Increasing the disposable income level to £100

However, addressing these areas would probably push up the insolvency figures - so I shan’t hold my breath...

Read more: Government’s new debt solution isn’t working

 

I have just learnt that as from 6th April 2010 the fee you will have to pay to go bankrupt will jump a whopping 25%, from £360 to £450!  On top of this is  the court fee of £150, and  although there are exemptions for those on benefits it means that generally, the already  struggling consumer will soon need to find £600 just to go bankrupt.  

At a time when insolvencies are running at the highest level since records began back in 1960, this has just got to be total madness. Where is the caring Government that professes to help and support the consumer?  You have got to ask whether this hike in fee has been done deliberately to keep the bankruptcy numbers down and is a ploy to force consumers into other options such as long term debt repayment programmes (DMPs) which offer no debt relief and do not appear in the bankruptcy figures. 

With unemployment levels expected to climb again this year and more house repossessions likely, there will be an increasing need for some to be able to petition for bankruptcy. Ironically the fee prevents many from doing so. 

Take the case of Jo for example; diagnosed with cancer, no longer able to work and without an income her house was repossessed in 2008. This was sold for £25000 less than its true value and now the mortgage lender is pursuing her for the shortfall, interest and legal charges of around £30,000. 

With £9,000 on credit card debts and paying £60 pcm through a debt management plan, it will take her 13 years to clear her debt if the interest is frozen.  Jo is struggling to meet even this £60 pcm and is convinced that the underselling of her property has forced her into bankruptcy. 

Jo told me that in the past she has always supported friends when they had money worries not knowing that in the future it would happen to her. She said to me ‘I have no security, I'm such a home loving person it’s destroying me, I have no hope now’. 

Problem is, with no security and  no assets apart from an aging car which often takes what little money she has, she will struggle to find the fee to go bankrupt, and, having spent much time in helping her face up to the prospect of bankruptcy, I dread having to tell her about this latest increase. 

We need urgent decisive action to help clear the ‘log jam’ of individuals, like Jo, caught in the limbo of being unable to take effective action to deal with their debt situation. Instead of increasing the fee it should instead be reduced in order to enable more to take this course of action and help erase their misery and suffering. 

Any reduction in the fee would obviously have cost implications but it would demonstrate a positive commitment towards a vulnerable element of society and would be welcomed by the debt counselling profession.  

According to the Insolvency Service back in May 2009 a bankruptcy costs on average £1,715 to administer, part of which is met from current fee. The Insolvency Service told me that ‘If the Official Receiver’s deposit were to be waived in its entirety, all the costs of case administration would have to be met from other sources, in particular, the tax payer and creditor.’ 

My response was that that I did not agree as I am convinced that it is often the creditors’ lack of support, together with additional interest charges, that force an individual into bankruptcy in the first instance. If creditors were aware that they would have to bear some of the cost of administering a bankrupt’s estate then they may think twice. I also don’t believe tax payers will need to foot the bill of reduced fees because bankrupts actually do pay something back towards the cost of administering their case.  

All bankrupts are assessed to see if they can make any payments under an Income Payment Agreement (IPA) which is a legally binding written agreement between the bankrupt and the Official Receiver. The IPA will run for a period of 36 months, initial payments will cover the cost for the administration of the bankruptcy order, after which creditors receive a dividend of the surplus funds. If so ordered by the court to pay then this becomes an Income Payment Order (IPO). 

Between 2007 -2009, 41,170 IPAs and 204 IPOs were implemented and which do not account for the selling of any assets such as vehicles or homes that belonged to the bankrupt. So in fact the Government does actually make quite a lot of money from bankrupts! 

Even more money is made, subject to the timing of the petition, in a well hidden scheme whereby an individual going bankrupt and in receipt of an income, will receive a NT tax code and the tax is diverted to the Official Receiver towards the administration costs for up to 12 months. 

Another important point is that many consumers recover from bankruptcy and rejoin the ranks of tax and National Insurance payers and contribute to the income stream, so it is not all doom and gloom for the PM. 

So let’s cut to the chase; why is it so expensive to go bankrupt? When a consumer does not have the ability to repay their debts and cannot afford to enter into any type of repayment programme through lack of funds why is there not more support? 

The last debtor’s prison shut in 1869; come on guys, that’s 141 years ago, society, culture and attitudes have moved on. You don’t hear anyone harping on too much about Portsmouth Football club about to go into Administration with debts of 70 million!

Read more: Bankruptcy fee to leap a massive 25%; can it be justified? No, says Debtwizard.

 

Whilst quietly supping a pint of bitter in my local pub with a good mate of mine, he suddenly blurted out that he hadn’t slept in a week after receiving a letter from a firm of debt collectors, chasing him for a debt he had many years ago. I must admit he did look a bit knackered, and whilst us blokes don’t normally talk about such things, he knew that I knew a thing or two about debts and wanted some advice. 

The letter said that he had to pay £11,003.38p within 14 days or field agents would call at his home to discuss ways of paying the money back. What should he do? Ignore it and hope it would go away again or should he pick up the phone and talk to the Debt Collection Agency (DCA)? Hmmm. harassment, intimidation… that’s for another blog, let’s focus on this one. 

I asked what his Missus thought, silly question as I got the expected, ‘I daren’t tell her’. This was all before they met he said. ‘I don’t know what to do, we are struggling as it is, don’t need this’. 

I knew he has been married for over six years and a  further questioning established that the debt was in his name only, was on a personal loan he had many years ago and that about eight years ago he fell out of work for a year and had not paid or heard anything since. The solution then began to look quite simple as in this case the debt would have been ‘statute barred’ under the Limitations Act 1980 which applies to residents of England and Wales

Under the Act creditors/lenders are given a fixed period of time to chase their debtors/borrowers. The time scale mainly depends on the type of debt and can be extended at the courts discretion. The time limit begins when the named individuals on the agreement last admitted owing the money or made a payment. 

Should the creditor/lender fail to maintain contact with the debtor for a period of six years or more and no payment has been made, it is possible to claim that the outstanding debt is "Statute Barred" under the conditions of the Act. 

After I had explained to my good friend that the letter was likely to be a ‘fishing’ exercise by an opportunist debt collection agency and that they would not be able to pursue the debt through the courts he couldn’t have been more delighted and relieved. Whether he eventually told his wife about the issue I will never know! 

Thousands of people receive requests for payments on debts, mainly on credit cards and loans, from lenders and DCAs. Some demands are fair and reasonable but many are not with the firm demanding the money often having no legal basis to claim and therefore unable to take the borrower to court, even though threatening this in their communications. 

What is worrying is that many people actually respond to these letters because they do not know how to deal with them, feeling guilty or frightened of the implied threat of being taken to court. 

Read the letter carefully, break down the content, what do they mean, are they fishing, do they have anything at all but most of all don’t be panicked. 

Just because someone has written to you demanding money ‘or else’ does not mean you have to pay them. Weed out the chancers and opportunists that have no legal basis to pursue you for the alleged debt. One way to deal with a request for payment on an old debt is just to ignore it but if they persist do not acknowledge or admit the debt. 

You would do no harm in writing something similar to ‘before I can begin to understand the basis of your claim please furnish me with a breakdown of what sum is capital, interest and fees…. the date of the last payment that was made on the account…. under what authority are you writing… do you own the debt or are you an agent, if so who are you representing?  You know the stuff. I write this sort of letter a dozen or so times a year for my clients and have so far been 100% successful in ending things there and then. 

The key to all this is when was the last payment made on the account in question. If not within the last six years by any named person on the agreement (sole or joint names), and neither has acknowledged or made a payment in the past six years, then the debt is statute barred and the creditor/lender or agent cannot take the matter to court. 

There are, as always, exceptions to this and different rules apply in Scotland and in Northern Ireland, more on this can be found on the Debtwizard guide to dealing with old debts

I agree that we should always pay our debts, especially when we have the means to pay. However I do have an issue with lenders or DCAs that cannot get their acts together to ensure the debt is still legally recoverable through the courts as arguably they deserve to have the debt statute barred.

Rules are made to benefit both parties; lenders know these particular rules only too well; consumers now just need to wise up to their rights. 

We have a template letter for you and more information at the Debtwizard guide to dealing with old debts.

Read more: The pint of beer that saved one man £11,003.38p

 

With many home owners struggling to meet their mortgage repayments it is hardly surprising to see that repos are still high, 46,000 or so for 2009, according to the Council of Mortgage Lenders (CML). In fact I think the number, in reality, is even higher!

Although the statistics are collected correctly by the Council of Mortgage Lenders (CML) and the Ministry of Justice (MoJ) in my view they do not accurately reflect current market conditions and I believe the problem is far greater than it appears.

Looking  at the broader picture and I can  offer some very valid reasons why figures are nearer to those of the last big house recession back in 1991 when 76,100 homes were repossessed. Here are my thoughts;

No one has taken into account the number of homes being sold by families to private landlords, under 'Sale and Rent back’ (SAR) schemes, or flash sales. The Office of Fair Trading (OFT) said back in October 2008, ‘It is likely that there are upwards of 1,000 firms, together with an unknown number of non-professional landlords, who have conducted about 50,000 transactions to date’. 

Since that announcement some 16 months ago the SAR industry has gathered momentum leading to the intervention of the Financial Services Authority (FAS) and full regulation being implemented this July, rightly so in my opinion. 

Based on the OFT figures and on increasing consumer awareness of the SAR scheme I estimate that the number of homes sold under SAR in 2009 is nearer the 25,000 mark. 

Another damning factor is that the CML only collects the number of first charge holder repossessions. There are no records of how many second charge holders, usually secured loans that are repossessing homes. How many are there of these that the CML do not know about? 

What is more is that the introduction of the Mortgage Pre-action Protocol in 2008 could be a delaying factor in eventual repossession for some home owners.

The latest annual Moore Blatch 2010 repossessions report, reveals that 67% of mortgage lenders and repossession experts are predicting an increase in the number of repossessions in 2010.

Paul Walshe, Head of Lender Services, Moore Blatch, says: “The Council of Mortgage Lenders revised, and subsequently lowered their 2009 predictions for repossessions from 75,000 down to 48,000.

“However, much of this fall was due to the implementation of a government initiative to provide consistency in lenders’ approach to repossessions; the Pre Action Protocol, as it is known. This created a bottleneck which will start to clear in 2010”.

Read more: House repossessions - look though the smoke and mirrors

 

As the number of personal insolvencies reaches record levels, with consumers battling against unemployment and credit problems, I say the total number of insolvencies for last year in the UK should have been nearer the million mark.

Figures released by the Insolvency Service show that the number of individuals in England and Wales who went bankrupt or proposed an Individual Voluntary Arrangement, (IVA) during 2009 reached 134,142, a massive increase of 27,598, this equates to a rise of 25.9%. This is the highest number of insolvencies since the Service started collating records back in 1960. See insolvency figures since records began.

However, research by R3 has revealed that around 700,000 ‘hidden debtors’, are in long term debt management plans some of whom have no hope of ever paying their debts back in their lifetime and  are technically insolvent. They are instead, languishing in long term informal repayment programmes with no debt, or for many, no interest relief.

I think this is just the tip of the iceberg as too many people have debts that they have no realistic hope of repaying. Some try to offer an IVA to their creditors only for it to be rejected by a lender. There is also the issue of the cost for a person to go bankrupt, currently £510 or £360 if on certain benefits. I have many clients that just cannot afford to go bankrupt, are no longer paying their lenders, and the debt, pressure and stress is building everyday.

Also included in the figures are Debt Relief Orders, (DROs), which were introduced by the Government in April 2009. A DRO is designed to allow those with debts of less than £15,000 and minimal assets to write off their debts without entering into a full blown bankruptcy or having to go to Court. These are proving to only help a selected few and are totally ineffective in helping consumers because of the ridiculous and unreasonable qualifying procedure; still they work for some as 11,831 have been issued since their inception.

Insolvency involves an individual either going or being made bankrupt or successfully proposing an IVA, which is seen as a less stringent form of insolvency. An IVA allows a borrower to enter into a repayment programme, usually for 5 years, and interest and charges are frozen with the remaining debt written off upon completion of the arrangement.

Read more: 2009 Insolvency figures hide true level of unmanageable debt.

 

The Royal Bank of Scotland causes a right royal stink  

I was incensed to read today that RBS is to pay their staff bonuses in shares that can then be cashed in after just 12 weeks. Apparently this is their way of sidestepping Government policy on the 50% ‘share tax’. 

You and I own 84% of this previously insolvent bank and what voice do you have? None, so I will shout on your behalf. 

There is no way the bonuses should be paid in any shape or form. Instead the money should be added to the balance sheet so that the bank can start lending again to the firms and consumers that they so eagerly threw money at before they got in a mess. 

I often hear from commentators that the bonuses have to be paid to keep ‘key’ staff and that the present employees are irreplaceable. Their argument is that if ‘key’ RBS staff leave then the bank will flounder with a risk of it going under then there will be no bank and the public will lose their money. 

All the banks would argue that they don’t want to pay bonuses to anyone, they pay bonuses to retain good staff so they can remain profitable. 

I argue that you should replace the lot as there are plenty of young talented individuals out there looking for work and would be happy just to receive a decent wage in these troubled times and still do a pretty good job as well. 

There are only so many jobs around for these bankers; once the top slots are filled they will be grateful for anything. 

It is important to note that my disgust is not aimed at the other banks. Whilst I am still not happy with the bonuses they are paying, RBS is different because we control it and have kept it alive.  It’s not the staff’s fault the bank got in to trouble – it was management failings and a culture of greed. 

All this is really irritates me as the bank is lucky to still be in existence. Their business model over the past few years has been flawed evidenced by the fact that they were insolvent and rescued by us, the tax payer. 

It is arguable whether RBS should have been nationalised last year and even more so with the recent revelation that the Bank of England (BoE) bailed out RBS and HBOS with a secretive emergency loan of £61.6bn last autumn, apparently to prevent loss of confidence with the financial system. This was probably the best time to have gone for full nationalisation; we didn’t and now look at how the bank says thanks. 

If the consumer/tax payer had not rescued the banks then the board would not be in place nor would the so-called high fliers still have their jobs. RBS staff should be thankful they have work and a regular income which enables them to meet their monthly commitments such as mortgages (subsisised?), food on the table and heating bills, unlike many consumers.   

No-one is irreplaceable.  I feel we should have nationalised the bank and called it the ‘People’s Bank’. Then start in earnest in bringing normality back to those business and consumers that have been stuffed by RBS. 

Read more: The Royal Bank of Scotland causes a right royal stink

 

It is a normal thing for people in financial difficulty to want to stay in their home.  So when faced with repossession, to have a firm or individual buy your home off you so that you can stay there and rent it back and provide stability for the family can be an attractive scenario. 

However in these circumstances it is not uncommon for a house to be sold for between 60 and 80 % of its true value and  I know the purchaser is taking a risk, but come on, be fair and treat those that are suffering financial difficulty with some honesty and respect. 

I have been approached many times and offered very large commissions to advertise this style of service but am proud to say that I stood my ground and, unlike some, have refused these offers. 

So far only around 80 firms have applied for authorisation under the FSA’s new rules which is a worry about what has happened to the remaining 920 firms of the 1,000 that the OFT thought there were operating in this market.  Are these too scared of regulation, are they the cowboys that needed to be taken out? 

I will wait with interest to see how the regulation goes and re- examine how the schemes are helping distressed mortgage holders. 

We will also see how many sales will have taken place from June 30th this year which will have a bearing on the house repossession figures. 

I have always argued that these sales have never shown up on the CML data and believe we could have had as many as 25,000 homes sold this way throughout 2009 alone. Add this to the CML predicted 48,000 homes for the same period and we are looking at a total of 73,000, pretty darn close to the 76,000 figure in 1991, when the schemes were not available. 

Add to this those repossession figures from 2nd charge holders, like secured loans, again which do not feature in the CML stats and I would argue we are above the 1991 level!

In any event I applaud the moves by the OFT and FSA for bringing clarity to this issue and support to the consumer facing repossession. 

The key points of the new rules and what consumers need to do if they find a firm unregulated can be found in our article FSA gets tough with 'sale and rent back' schemes.

Fraudsters target tens of thousand UK tax payers offering false tax rebates

With 9 million people expected to file their tax returns on-line the potential of this scam is huge. I believe we will hear of thousands of consumers being duped into giving away details for their bank accounts and credit cards.

What will simply happen to those that do is they will have their bank accounts emptied or their credit card will get red hot though unauthorised use. 

Read more: Why 'sale and rent back' schemes needed regulating & Fraudsters target tens of thousands tax...

 

Have you lived the lifestyle of your dreams but not within your means? 

I wonder how many people are wishing they had not done just that as their credit card bill hits the doormat with a thud. Well it’s too late now and for some their excesses over the past couple of months have come home to roost. 

Many debt-help firms cite today the 20thof January as probably the Consumer’s darkest day of the year. Just prior to this most credit card providers would have sent out their bills and for those that, shall we say, may have over indulged a little in the run up to Christmas, they will not hold good news 

According to Credit Action, consumers make around 21.9m plastic card purchase transactions every day with a total value of £1.05bn. Another startling figure is that the proportion of credit card balances bearing interest was 73.6% in July 2009. 

For some people opening the bill there will be a reality check but for many there will also be a feeling of desperation as they know they will be unable to clear the balance. Okay, pay the minimum repayment you say. But just read on to see how long it takes to clear a credit card bill of £2,000 at an interest rate of 17.2% and a minimum payment of £29. A whopping 26 years and 2 months according to the ‘thisismoney’ calculator! 

Others will just continue to borrow on other cards or move their balances to a 0% provider and rack up still further debt. Some will plunge further into their overdrafts until they finally show the white flag and surrender. 

Will a 0% credit card balance transfer solve my debt problems? 

Not necessarily and I would urge you to heed this warning. Once you move balances from an old credit card lender to a new credit card provider in an attempt to sort out your debt and you again get into trouble, then the new lender may not support you if you later decide to propose an Individual Voluntary Arrangement,( IVA) or Debt Management Plan, (DMP). 

The reason for this is simple; as they have only just advanced the money as a new lender they require payment as per their agreed terms. Had you sought professional advice with your debts before moving to the new 0% balance transfer then the chances of your credit card company supporting any debt option would be much greater.  

Without knowing the full picture it is plainly irresponsible for anyone to suggest, ‘move your credit card balance to a 0% lender to solve your debt problems’. You have been warned! 

Okay, I don’t need help with my debts, I just need to move my existing balance to a better deal. What’s the problem with that? 

Read more: Have you lived the lifestyle of your dreams but not within your means?

 

One million people have paid their mortgage or rent using a credit card in the past 12 months.

Recent research by Shelter threw up a shocking statistic; one million householders have used their credit cards to pay their mortgage or rent over the past 12 months. This represents 6% of all the homes in the UK, and one in 12 Londoners.

At a time when the government is offering several schemes to help people keep a roof over their heads, the fact that so many people are resorting to using credit cards, often paying around 19% interest, to meet their financial commitments is total madness.

According to Shelter, the problem is affecting all social groups, from those on low incomes to the middle class and other more affluent households.

People who resort to paying the mortgage or rent on plastic are desperate to ward off the threat of repossession – but, in fact, they could be putting their homes further at risk by doing so.

This is because credit card providers can apply to the County Court to have the credit card debt secured on the property if the borrower falls behind with repayments. Therefore, failing to pay your credit card bill could end up with your providers forcing you to sell your home so it can recover its money.

Mortgage lenders have agreed to work with borrowers to ensure that repossession is a last resort for most people, so if you are concerned about paying the mortgage, the lender should be your first port of call.

Be completely honest about your financial situation and see what options are available to help you cope.

All mortgages taken out on or after 31 October 2004 are regulated by the Financial Services Authority, so lenders are obliged to treat you fairly and send you regular statements to keep you informed about your current arrears position. There are also rules covering what the lender must do if it intends to repossess your home - see the FSA website for more information.

There are also three government schemes that could help people who fall behind on their mortgage payments. These are:

1. Mortgage Rescue Scheme
2. Homeowners Mortgage Support
3. Support for Mortgage Interest

You can find out more about these schemes on the DirectGov website, and from organisations such as Shelter and Citizens Advice.

I’m behind with my rent...

If your rent is not paid, the money owed is called 'rent arrears'. Rent arrears are 'priority debts', which means the consequences of not dealing with them are serious - there is a risk of eviction.

Read more about what rights renters have against repossession

Read more: The dangers of paying the mortgage with plastic

 

Poundland   

Sales are at an all time high with consumers spending around 50 million pounds last year in Poundland; an increase of 21%. 

Many think the goods being sold are cheap and of poor quality. What if I were to tell you that often these goods are purchased from liquated companies, firms which have gone bust, like Woolworths?

They also get goods from shops that are unable to clear everything in their clearance sale. Some Poundland suppliers will also offer special deals to move large quantities of goods and of course there is good old China

Poundland sell around 3,000 everyday product lines across 16 categories and 1,000 brands such as Colgate toothpaste, Kodak batteries and Walkers crisps. 

Members of my family go to Poundland and similar shops to buy bird food for around £3 as against £10 in the shop next door. 

This type of shop is not everyone’s favourite as was seen in Gloucestershire last August when around a thousand people signed an on-line petition to oppose the opening of such a store. 

Shops selling goods for under a pound are here to stay and will get busier as consumers continue to feel the pinch with the current downturn in the economy. 

My wife, Mrs DebtWitch, goes to this type of shop and saves us around £25 pcm on items including bird seed. 

Ever see me in one? Just look for the chap with dark glasses and collar up trying not to look embarrassed.

Click on Listen now to hear my contribution to the show on BBC Radio Wales - phone-in about 'Would you shop at Poundland?' 

Read more: Mrs DebtWitch shops in Poundland

 

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