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This coalition government certainly knows how to kick you hard where it hurts. If the threat of unemployment, wage freeze or pay cut and extortionate fuel prices hanging over your head wasn’t enough then how about Her Majesty’s Court Service (HMRC) increasing the bankruptcy court fee by £25 to £175.

In March 2010 the cost of going bankrupt stood at £510. Now, just 13 months later consumers will have to find £625, that’s the Court fee plus the Insolvency Service fee of £450, an increase of £115 in just over a year.

So where is anyone with no money who has been advised to go bankrupt because they cannot pay into an Individual Voluntary Arrangement (IVA) or debt management program, going to find £625?  When insolvencies are running at the highest level since records began in 1960, this has just got to be insane. Where is the caring Government that professes to help and support the consumer?

We need urgent and decisive action to help clear the ‘log jam’ of individuals caught in the limbo of being unable to take to deal with their debt situation. Instead of increasing the fee reduce it so that more can take the bankruptcy route to end their misery. I know Debt Relief Orders (DROs) are an option for some but the qualifying criteria excludes most consumers in difficulty.

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

According to the Insolvency Service back in May 2009, a bankruptcy cost 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.’

I don’t believe tax payers would need to foot the bill of reduced fees because bankrupts actually do contribute to 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 runs for a period of 36 months, initial payments cover the cost for the administration of the bankruptcy order, after which creditors receive a dividend of the surplus funds.

Between 2007 -2009, 41,170 IPAs and 204 IPOs were implemented. These do not account for the sale of any assets such as vehicles or homes that belonged to the bankrupt, so in fact the Government does actually make quite a bit 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 receives a ‘NT’ tax code with the tax diverted to the Official Receiver towards administration costs for up to 12 months.

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

The only blessing is that some consumers may be able to claim a reduction in the fee if they can show financial hardship or if they qualify under the Court rules for claiming a remission.

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 so little support?

The last debtor’s prison shut in 1869; that’s 142 years ago. Society, culture and attitudes have moved on!

Read more: Coalition targets bankrupts as court fees rise in April 2011

 

So its official then, the Council of Mortgage Lenders (CML) says that only 36,300 homes were repossessed throughout 2010, a drop of 24% on the year before. That’s close to half the number of homes that were taken back by lenders in 1993, so we’re okay: what’s the problem?

The problem is, in my humble opinion, that although the statistics are collected correctly by the CML they do not accurately reflect current market conditions and the situation is far different to how it appears. Here are my thoughts.

The impact of ‘Sale and Rent Back’ Schemes

The first area to look at is the number of homes being sold by families to private landlords, under 'Sale and Rent back’ (SAR) schemes, or flash sales. These schemes weren’t around in 1991 at the height of the last repossession crisis when around 76,100 homes were repossessed.

Back in October 2008 The Office of Fair Trading (OFT) said, ‘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’.  That was well over two years ago!

Since that announcement the SAR industry has gathered momentum leading to the intervention of the Financial Services Authority (FSA) and full regulation being implemented last 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 2010 could be as many as 20,000.

Only first charge holders are recorded in the figures

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

The effect of the Mortgage Pre-action Protocol

We haven’t even thought about how the introduction of the Mortgage Pre-action Protocol back in 2008 could be a delaying factor in eventual repossession for some home owners. Some of these schemes just delay the inevitable and add further debt through delayed payments.

CML uses old data to make the repossession figures

All these aside I now have another argument to put to you; that the data put out by the CML is technically out of date as they can only record repossessions that were finalised during the year.

It can take between 6 and 12 months to have a home repossessed, even longer now with the introduction of various government backed schemes and these latest figures for 2010 are based upon householders who experienced difficulty up to almost a year ago.

So all those home owners that are missing the first payment this month and can no longer meet their mortgage payment, in theory will not surface or appear on the CML register until late this year if not next year!

The good, the bad and the ugly sides of the of Tracker mortgage

On the positive side those on Tracker mortgages and some on Standard Variable Rates (SVRs) have benefited from historically low interest rates for 24 consecutive months and I hear that many consumers are paying over the top each month in order to get their mortgages down.

Equally there are some that have been saved from repossession purely because the low interest rate has meant that their normal monthly mortgage payment has been reduced for example, from £1400 to around the £450 - £600 mark. The latter must be thinking are we about to see an increase in interest rates, is the end nigh for their ‘Honeymoon period’?

Unemployment

You simply cannot ignore the unemployed, more so as their numbers are expected to climb again over the next 18 months as the austerity cuts begin to bite. Repossession figures will surely rise  when those out of work can no longer pay their mortgages having exhausted family and friends with that one more monthly payment before it ‘turns around’.

Redundancy and credit card payers

We also have some people using their redundancy payments to keep up the mortgage repayment and there are an estimated one million people using their credit cards to meet their current mortgage commitments. Wow!

Chasing the mortgage shortfall debt for 12 years or more

Not many house owners are aware that any debt still owed to the mortgage company after the repossession and subsequent sale of the property is recoverable by the lender for a period up to twelve years in the UK. This counts from the date of the last payment or acknowledgement of the debt, and applies on any sole or joint mortgage account. I have many clients still paying back from 1990, that’s 21 years ago!

Struggling to meet your mortgage payments?

•             Your mortgage needs to be paid before your credit card commitments

•             Contact your mortgage lender sooner rather than later

•             Visit the government website direct.gov.uk to see if you qualify for any of the mortgage rescue schemes, also see our Helpful organisations link.

I do not accept that house repossession numbers are stable or falling as much as is being reported. I think consumers are becoming more adaptable and for many a SAR scheme is an attractive proposition when faced with repossession as it can offer stability as the move from owner to a tenant can help keep the children at the same school and the parents to stay nearby to friends. More importantly to many, no one need know what you have done, which can save awkward questions and embarrassment within the community.

I know what it’s like to lose a home. I was one of eight children and it happened to my family when I was 15 years old.

Read more: How accurate are last year’s house repossession figures really?

 

With so many battling debt and unemployment the number of people owing more than they’re worth (insolvent) has, according to The Insolvency Service hit record levels - 135,089 for 2010. My view however is that this figure still does not reflect the real level of over indebtedness in the UK and anyone reading through the figures thinking that consumers have their debts relatively under control is looking through rose tinted glasses. 

This is because The Insolvency Service’s figures excludes the ‘debt iceberg ‘which R3, a leading professional association for insolvency specialists, claims contains up to 500,000 people in unrecorded debt management programs. Then we have another 574,000 that are struggling financially but who have only contacted their creditors informally, not using a debt charity or the commercial sector. Of even more concern are the 961,000 individuals struggling with debts but who have not sought help. This group alone could find themselves in formal insolvency procedures unless they take swift action.

What drives me insane is that the tools that are there to help people resolve and control their debt issues such as Bankruptcy, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs) are just not accessible enough. 

Many cannot afford the bankruptcy fee and fear their names appearing in the papers

I know of many individuals that cannot go bankrupt because of the huge £600 fee. They are no longer paying their lenders and are moving house every six months just to keep ahead of debt collectors or bailiffs. One can only imagine the pressure and stress these people are under.

A recent report highlighted the top two reasons putting consumers off bankruptcy even though they have no alternative. The first was attending court to file for bankruptcy and the second having one’s name and address in the local paper for all the gossipmongers to feed on.

The Insolvency Service is currently conducting a review as to whether bankrupts actually need to attend court to petition and I can hear some of you say this should still be a necessity. I say society needs to be more supportive for those that find themselves with unmanageable debt and I point out that the last debtors’ prison shut in 1869. There are sufficient provisions in place to punish those bankrupts that have been negligent in their borrowing or conduct, and yes, if you commit fraud then yes, you go to jail.

The requirement to advertise a bankrupt’s name and address in the local paper was removed last year and is only necessary if the person concerned is uncooperative or if the Official Receiver deems it necessary. So why are consumers not made more aware of this change?

Individual Voluntary Arrangements (IVAs) fast becoming a more attractive option for consumers

IVAs have advanced over the past year or so, now being supported by most of the High Street banks and credit card providers, probably because they know the alternative would be bankruptcy, and also because there are no upfront cost for fees for the person proposing the IVA; these are taken from the monthly contributions over five years. This is reflected in the overall insolvency figures for 2010 with bankruptcy numbers down 20% and IVAs up 7%. 

Impact of DROS on the ‘bankruptcy’ figures

Included in the insolvency 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 however 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 over 25,000 were issued in 2010 alone.

Personally, I would like to see the qualifying criteria changed in order to appeal to many other desperate and vulnerable consumers that would otherwise be rejected.

My recommendations would be to; 

  • increase the assets amount from £300 to £3,000
  • include  homeowners that are in negative equity, currently exempt if a home owner
  • double the car value amount from £1,000 to £2,000
  • increase the disposable income level from £50 to £100
  • raise the threshold from £15,000 of unsecured debt to £25,000 

Disincentive to work for those on DROs  

Another criticism of the DRO is that once it is granted there is a natural disincentive l to find employment. Under the eligibility rules for DROs the person must disclose if their circumstances and/ or income change over the 12 month period the order is in force. 

If for example the individual were to find employment on month 11 of the DRO then this extra income may well mean that he/she is no longer eligible and the DRO may be revoked. You have to say that a DRO is mainly for those on benefits or unemployed and whilst the concept is good it just needs thinking through more clearly and be better applied

However, if the areas I mention above are addressed they will surely add to the insolvency figures - so I shan’t hold my breath for too long...

Read more: Latest insolvency figures mask the true level of unmanageable debt

 

It’s not uncommon to hear someone in dire financial straits say they can’t face bankruptcy because they will lose their home. I expect some of you reading this will agree, thinking that’s what happens when you go bust, you always lose everything including your home, err don’t you? 

Let me tell you here and now that it’s a myth! I know of many instances where people have gone bankrupt and some three or more years later are still in their home. It’s all down to individual circumstances, getting good professional advice and not listening to your mate spouting off down the pub. 

Bankrupt homes before April 2004 

Prior to 2004 it was an absolute nightmare for bankrupts that owned homes, typified in one memorable case back in 1994 where a lady went bankrupt owing the Inland Revenue, VAT and other creditors some £45,000. At the time the home was valued at more or less the same amount of the mortgage, £70,000. 

You can correctly assume that when bankrupt your unsecured debts, including those owed to the tax man, are written off. However any assets or potential assets you have will be signed over to the Official Receiver and even though there was no equity in the home at the time this lady went bankrupt, potentially there could be many years later. This is exactly what happened here when contact was made by a court appointed trustee in 2002, some eight years after the bankruptcy order was made claiming for £105,000; this was the original £45,000 plus interest. Even though the debts had been written off, unbeknown to our lady a charging order was placed upon the home and over the years this had gained in value to near the £250,000 mark. 

I am pleased to report that there was a relatively happy ending to this story as we got the Crown Departments and other creditors to drop the interest element, the lady remortgaged and paid back the £45,000, the bankruptcy was annulled and struck from the records as if this person was never ever made bankrupt. 

The key changes post April 2004 

Then, welcome major changes came in to force on how bankrupts were to be treated; one being the way the dwelling house is dealt with. 

Briefly, the Official Receiver (OR) or the appointed Trustee has three years from the date of the bankruptcy order to deal with any property owned by the bankrupt.   If nothing is done within this time then any interest in the property/ies, reverts back to the bankrupt: i.e. it is no longer part of the bankrupt’s estate unless the trustee; 

  • applies for an order of sale or possession
  • applies for a charging order on the property to cover the value of the interest.
  • realises the interest or reaches an amicable agreement with the bankrupt regarding the interest. 

Official Receivers don’t look to turf individuals and their families out of their homes: it’s not cost effective as the state generally has to pick up the tab to re-house. Most bankrupts have very little equity, (the difference between the mortgage outstanding and the current value of the home) and if they did have a reasonable equity then they would either remortgage or sell the home and not go bankrupt! 

The new policy change as from January 2011 

Up to the end of December 2010 within the first year of his/her bankruptcy a bankrupt could  agree with the OR how much interest there was in the property. 

However a change in policy, effective from the 1st January this year, means that there will be no agreement to deal with a bankrupt’s interest in a family home until at least two years and three months have passed since the bankruptcy order was made, except if an offer is received which is in the creditors’ interests to accept.  If after this time the value of the interest in the property is valued at less than £1,000, then the OR will take steps to hand the interest back to the bankrupt. 

Anything above this figure will become the basis of negotiation between the bankrupt, his/her family or friend and the OR. 

One important point is that if a property is jointly owned, say with £20,000 equity, and only one of the owners is going bankrupt, then the amount available for the OR would be 50%, £10,000. One would argue that this could then be reduced further by estate selling costs and legal fees which is why, under certain circumstances, the bankrupt, family member or friend may be able to buy back the interest for several thousands of pounds as against the £20,000.  

The OR has the discretion to effect an early re-vesting of the property back to the bankrupt in specific circumstances. 

Why don’t you just sign over the house to the Mrs? 

I am often asked if this is possible and the short answer is no. When someone applies for bankruptcy they have to disclose what assets they have and if they have sold anything of value within the past five years and this includes transferring the home into the Mrs’s name only and it also includes cars. 

If you do that and go bankrupt within the five years of the date of transfer then expect the OR to come looking and I have to agree - one should not remove assets from creditors. How would you like it if you were owed money by someone that did just that, just  changed the names of the owner of the home to avoid having to pay up? 

Bottom line then, those individuals thinking of going bankrupt should first take professional advice to ensure that this is the right course of action for them and if then it is deemed the only way forward, get professional advice about the situation with the home!

Read more: Can you keep your home in a bankruptcy?

 

These rules are not something thought up by the credit card providers in order to level the playing field in the credit card industry; they come instead from a government consultation exercise last year which found that credit card holders needed to be treated more fairly.  The card providers knew the rules were coming and that unless they accepted them as a voluntary code, they would be faced with new and possible punitive legislation.

So what are the key changes?

  • Cardholders’ repayments will be used to reduce their most expensive debt first
  • Those opening new accounts will have a minimum repayment level set that covers all interest, fees and charges during the month, as well as 1% of the outstanding balance
  • Card holders are to be given greater control over their credit limits
  • Consumers will have the choice to remain on the existing interest rate in place before any rate hike
  • Card providers are to work more closely with debt advice agencies in helping those consumers with debt issues
  •  Credit and store card holders are to provide annual statements detailing the cost of borrowing that will be compatible with other providers.

£600m loss to the industry, per year

Credit card companies are bleating that the new rules will cost them £600m a year; I actually read it another way, credit card holders have been mugged to the tune of £600million per year!

For nearly two years now, 23 months actually, the average credit card interest rate has been more or less 36 times that of the Bank of England base rate.  This extortionate rate has allowed credit card providers to fill their coffers well before the new regime actually started and there are reports that card rates are to rise again.

There is no way an industry can afford to lose such an income: are we likely to see credit card providers make redundancies? Impose staff pay freezes? I don’t think so because I believe they only volunteered for the code in the knowledge they will recoup their losses in other ways. Thinking caps are on for the marketing team, so I expect credit card interest rates to remain high, if not increase in the foreseeable future.

Is credit a bad thing?

I see nothing wrong with credit, providing you can afford to pay it back. A credit card can give you peace of mind and confidence that you can buy your way out of a sticky situation, like being stranded when the ash cloud struck last year and there are other benefits such as purchase protection if the supplier were to go bust or the purchase did not arrive.

That aside, to spend and make purchases on goods and services you would not otherwise be able to afford is one recipe for disaster. Credit card companies play on those that wish to live a life beyond their means, offering the funds to acquire  luxuries that for the average consumer would otherwise be out of reach  but for  a credit card, (or perhaps better described as a ‘Debt card’!).

Lending money through a credit card is a lucrative business for the card provider as minimum repayments are mathematically designed to make your debt linger and make the card providers more profit.  For example a credit card debt of £1,000 attracting an APR of 18% with payments of 2% or £5 would take around 26 years to clear with interest payments of £1,885, source Moneysavingexpert.com. 

Are you lying to your loved one about your credit card debt?

I spoke with a client earlier this week who was assured by her fiancé that his credit card debt was reducing; now she has found out that he paid for the wedding on the card and is only making minimum repayments.

He and many others are lying to their spouses and loved ones about their credit card debt. Some turn to alcohol, gambling or even crime in an attempt to solve their problems.  Many I see or talk to are suffering from depression and contemplating suicide.

Morally and socially we have been encouraged to spend and pay later through slick marketing and the easy availability of credit, mainly through credit cards.  From this we have developed a culture of ‘must have now’ that has to change. Will these new rules do this? Not a chance. 

Read more: Expect a credit card backlash as new rules for 30 million credit card holders come into play this...

 

The CEO of MBNA Europe is having dinner with a top banking executive, and up pops the question, “How’s business then Charles in the credit card world?”

‘Err... okay’, stifled Charles with a cough. ‘Slight problem with the UK City regulator, nothing too much really’.

Well if I were Charles I would be very concerned. Not only have MBNA been investigated by the Office of Fair Trading (OFT) but  what they uncovered caused real alarm; simply ignoring UK debt recovery guidelines which many see as bullying and intimidation of the credit card holder.

The official story is that the OFT has ordered MBNA to improve the way they deal with 5 million of its customers should any experience a problem repaying their credit card debt.

Cutting to the chase; they have been told in not so many words to stop pressurising confused customers and start acting within UK guidelines.  If it wasn’t for the Citizens Advice Bureaux raising the issue then how much longer would they have been able to get away with it?

What the OFT uncovered

Having been tipped off by the CAB the OFT found that MBNA had not being sufficiently clear when communicating with customers in financial difficulty who were offering token payments, even though it was proven this was the best they could afford.

Also in some instances they were failing to follow its own policy or procedures by bypassing customers' appointed representatives.

By ignoring the customer appointed representative, whose job it is to negotiate a smaller debt repayment, this meant that the likes of me and any other debt advice firms or debt charities would be disregarded.

Own policy? What about the OFT Debt Collection Guidelines? The MBNA policy is derived from these guidelines and arguably MBNA chose to breach them. It has nothing to do with their own policy which has been found to be somewhat lacking.

The debt collection guidelines that were breached

My interpretation is that MBNA breached sections 2.6f, 2.8c and 2.8d of the OFT Debt Collection Guidelines

He who shouts the loudest gets paid!

It is well known in the debt collection industry that the lender or debt collector that puts the most pressure on borrower / debtor for payment is the one that usually gets paid.

This means that if the lender can badger, confuse, intimidate, hoodwink or simply bully a customer who isn’t aware of their consumer rights then they are going to get paid.

Ray Watson, Director of the OFT's Consumer Credit Group, said:

'Our investigation found problems with the way MBNA communicated with customers in financial difficulties. MBNA has agreed that it will make its debt collection letters clearer and clarify its policies and procedures for dealing with appointed representatives.'

It’s a shame the OFT did not ask me for comment, because if they had, I would have said something along these lines;

‘What the OFT is basically saying to MBNA is stop pressurising customers into paying back what they cannot afford.  MBNA were doing this when they ignored any appointed representative of the customer; usually a debt charity or commercial firm.

This action left the borrower / debtor in a more vulnerable position and under pressure to pay more even though it had been proved they could not. Step out of line again and we will put restrictions on your licence to trade, plus hit you with a £50,000 fine for each breach.’

What’s difficult to understand in that?

If you take a look at the MBNA press release on their website, the line they take on this issue reads somewhat differently. Perhaps that is why I will stick to defending consumers in financial crisis and not go into PR.

Read more: Is MBNA guilty of coercing and bullying non payers?

 

To be able to transfer your credit card debt of £6,500 to a new provider offering a 0% interest rate makes sense, doesn’t it?  After all what could go wrong? For one police officer rather a lot, ending up costing him over £1,800 in penalties and interest, all this on top of his already high credit card debt.

So what went wrong?

With the knowledge that he had been accepted for the deal the officer planned his finances down to the last penny, or so he thought.  Needing cash he withdrew £10 per day on his credit card for the 3 days leading up to pay day, expecting to incur a cash withdrawal fee of £2 each time.

What the officer didn’t realise though was that the fee was £3 and not £2 which subsequently made him overdrawn by a paltry £3.

The deal breaker

Because he was now overdrawn, the 0% deal was terminated and he was also hit with a £12 over- the- limit charge plus interest of £140. On top of this his credit file was marked down and he was tied into a 15 month term, no longer at 0% but instead at a whopping 17%.

Why you must make that first payment on the balance transfer deal

Going over your limit is one deal breaker; another is to miss that first payment. Therefore you must set up a direct debit with the credit card company to pay at least the minimum amount in time to make your first payment. If they delay it, and it is in their interest to do so, and it does not get paid then you will be charged the £12 fee for late payment as well as the balance transfer fee - 3% on £6,000 = £180! You could also find that the special introductory offer has been withdrawn, as happened to the police officer in this case.

Not all credit card companies operate in this way but a number of my clients have been caught out by this practice, having to pay interest on the balance before they can arrange another card provider. A simple way to avoid this happening and for peace of mind is to consider making the first payment manually, in plenty of time. So, make a note of when the introductory offer ends as missing this date could be costly!

The balance transfer fee

This can be anything between 2% and 5% and is often called an ‘admin fee’.  It can be quite expensive if you have only a small balance which you intend to clear quickly, in which case you could consider going for a ‘short term no balance transfer fee’ deal. For large amounts it is important to have a long period on the 0% rate when the balance transfer fee becomes less significant. 

The Holiday/Foreign transaction

By using the wrong card you can be charged between 2.75% and 2.9% on every transaction made abroad and in some cases incur an additional cash withdrawal fee which could total 5.75% or more.

Last year the banks earned more than £630 million in foreign transactions alone. No wonder credit card providers view these dealings with glee!

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

Heed this warning. Once you move balances from an old credit card lender to a new credit card provider then the new lender may not support you in any later debt resolution, for example an Individual Voluntary Arrangement, (IVA) or Debt Management Plan, (DMP).

The reason is simple. Because they have only just advanced the money, as a new lender they require payment as per their agreed terms. Had you sought advice about your debts before moving to the new 0% balance transfer deal then the chances of the credit card company supporting any debt issues would be greater.

If a 0% transfer deal is properly thought through and properly managed, fine, but without knowing the full picture it is irresponsible for anyone to simply say that moving your credit card balance to a 0% lender will solve your debt problems. You have been warned!

Further reading, IVA pros and cons, What is an IVA, IVA information and Debt Management Companies

Read more: What can go wrong with a credit card balance transfer? Actually quite a lot!

 

As from 1st December consumers going bankrupt in the UK will have to pay more towards the cost of the administration of their affairs through Income Payment Agreements (IPAs). 

Previously, bankrupts kept any disposable income (DI) up to £99, above which they would pay back a percentage, ranging from 50% to 70%. Even those that went bankrupt prior to this date are not safe as the new regime could catch many thousands of others under any review.

For example, under the old policy an individual who was deemed to have £85 per month DI would keep all of this. If they had say £200 DI then around 50% to 70% would have been taken, this being £100 - £140, leaving them with £100 - £60 to keep. 

Under the new policy everything above £20 DI will now be taken. 

What is an Income Payment Agreement (IPA)? 

An IPA is a legally binding written agreement between the bankrupt and the Official Receiver (OR) that requires the bankrupt, or a third party, to make specified payments for  a specified period, usually 36 months. If the individual refuses then the OR can apply to the court for an Income Payment Order (IPO). 

How do you calculate disposable income (DI)?

The OR’s staff will review the income and expenditure of the bankrupt, using industry set guidelines and if there is any money left over after paying normal living expenses then this is known as disposable income (DI). For example, the individual takes home £2,000 per month after tax and their expenditure, agreed with the OR, is £1,800 - the difference is £200 which is the DI. Under the new policy the bankrupt will be left with £20 and £180 would go towards the IPA. 

Why the change in policy now?

There are several theories doing the rounds, one is that the Insolvency Service is subject to cutbacks under the Spending Review and because the cost of administering a straight forward consumer bankrupt’s estate is rising, currently standing at £1,725, increasing the income is seen as one way of balancing the books. 

I’m not so sure though as I hear that the Insolvency Service is suffering a downturn in revenue from bankrupts’ estates due to the falling valuations of their homes. Also they took on extra staff to deal with an expected surge in numbers of those going bankrupt which has not materialised.  

Another argument for a change in the regime is that IPA payments should be in line with those in an Individual Voluntary Arrangement (IVA) (where you make monthly payments for 5 years and at the end of the arrangement any remaining debts are written off) and where all the DI is taken after reviewing the expenditure in a similar way to a bankruptcy. This new policy will at least make IPA payments comparable even though the IVA runs for 5 years as against 3 years in a bankruptcy. 

Not surprisingly the move will generate quite an additional income on top of any realisation (selling) of the bankrupt’s vehicle or home, as over the past 4 years there has been a total of 53,694 IPAs and 294 IPOs.

What about those going bankrupt before 1st December 2010? 

There are now a lot of even more worried bankrupts out there and I don’t blame them. I spoke with the Insolvency Service and they informed me that those bankrupts that currently have an IPA and have a change in circumstances, i.e. they have an increase in wages then they will be reassessed under the OLD policy and will not be subject of the new regime. 

However those that are bankrupt before the 1st December 2010 and have not been subject to an IPA and experience a change in circumstances that then produces a DI above £20 then they will be subject to the NEW regime where anything above £20 will be taken. 

Is the government right to do this? 

I believe they needed to level the playing field for bankruptcy and IVAs payments but I would have liked to have seen only 75% of DI taken in both scenarios. 

This then gives the consumer an incentive to work, with any extra DI in their pocket going to help cover any ambiguities or unexpected expenditure and would also help prevent IVAs from failing through too little expenditure allowances, which is all too often the cause. 

A favourite quote from the coalition government is ‘we are all in this together’, and by the looks of things this includes bankrupts as well!

BBC Essex - Dave Monk Show

You can hear Mike explain the key change in policy by The Insolvency Service that will affect all consumer bankrupts post 1st December 2010.

You can listen to the whole show or just Mike's bit by clicking on  BBCiPlayer - BBC Essex - Dave Monk Show, set timer to 01.08.40, ends 1.15.30 (7 minutes)

Remember this is a BBC recording therefore any competitions or prizes are no longer applicable. Will drop off the BBC iPlayer Tuesday 14 December 2010.

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Read more: Bankrupts to pay more under coalition government

 

Debt Relief Orders (DROs) set to soar as pension changes come into effect 6th April 2011

Great news for those over-indebted consumers as Edward Davey, Minister for Employment Relations, Consumer and Postal Affairs announces changes to the Debt Relief Orders to allow those debtors with approved pensions access to the DRO procedure.

Previously any debtor that had a pension fund worth £300 or more was excluded from proposing a DRO to their creditors, even if the pension is not receivable for many years.

The announcement follows a consultation launched in March this year, after debt advice agencies expressed concerns that DROs excluded some vulnerable people struggling with small debts.

The proposals which will come into force on 6th April 2011 will change the rules to allow approved pensions as defined under Section 11 (2) of the Welfare Reform and Pensions Act 1999. This means that the majority of occupational and personal pension schemes will now be accepted.

DRO qualifying criteria

A DRO is designed to provide a fresh start for the most vulnerable people trapped in debt. They must have unsecured debts below £15,000, disposable income of less than £50 per month and assets valued less than £300.

The DRO will help to place the least complicated debt discharge cases on a fast-track through the court system with no personal appearance at court required.

Pensions barred one in eight applicants

Initial estimates suggest that as many as one in eight people who met all other eligibility criteria for a DRO were unable to access the regime due to having a small pension fund in excess of £300.

DRO key stats 

  • In the period 6 April 2009 to 31 March 2010, there were 17,441 DROs granted in England & Wales.
  • At 31 March 2010, there were 1,430 approved intermediaries available to assist debtors in applying for a DRO.
  • The profile of debtors accessing DROs, in terms of age and location, is broadly in line with bankruptcy data. The incidence of women seeking DROs is, however, far higher than for men, a pattern which is the opposite of the profile for bankrupts.
  • London and the South East had the lowest rates of DROs in England and Wales, whilst the South West and North East had the highest. This is in line with bankruptcy rates for the same regions in 2008.
  • The profile of debtors accessing the DRO system would seem to be those types of individuals for whom the relief was intended, i.e. low income, predominantly unemployed, individuals.
  • The total amount of debt scheduled in DROs to 31st March 2010 was £150.5 million.
  • The majority of debt, over 53%, was owed to banks, building societies and credit card companies.
  • The average number of creditors per DRO was 6.
  • The average liability per creditor was £1,358.
  • The average DRO level of debt was £8,700.

Disincentive to work for those on DROs  

The main criticism of the DRO is that once it is granted then there is a natural disincentive for the individual to find employment. Under the eligibility rules for DROs the person must disclose if their circumstances and or income were to change over the 12 month period the order is in force. 

If for example the individual were to find employment on month 11 of the DRO then this extra income may well mean that he/she is no longer eligible and the DRO may be revoked. 

The concern would then be that he or she may only have sufficient money to pay priority creditors like rent and utilities but not the lenders that previously featured in the DRO. 

I personally would like to see the qualifying criteria changed to widen the appeal to many other desperate and vulnerable consumers that would otherwise be rejected.

My recommendations would be to; 

  • increase the assets amount to around £3,000
  • include  homeowners that are in negative equity
  • double the car amount to £2,000
  • increase  the disposable income level to £100

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

Read more: Government gives date for radical change in Debt Relief Orders DROs

 

Keeping your credit file in tip top condition is a bit like servicing your car, if you don’t look after them both then they will eventually let you down, when you least expect it.

So if you are thinking about going on that journey of applying for credit then make sure you service your credit file first, one good way would be to tidy up or remove default notices and any wrong information.

What is a default notice?

A default notice is something that a lender puts on your credit file if you fall behind with your payments.

When you borrow money from any financial institution you usually sign an agreement, in the terms and conditions of this agreement you give permission that should you fall behind with your payments then the financial institution can inform the credit reference agency of this, hence the default notice.

Also, before a debt can be sold on, the lender has to demonstrate that that they have tried to contact you and keep the payments going, once you have two default notices against you then the debt can be sold on.

The default notice has nothing to do with a county court; it merely alerts future lenders that you have not kept up with the payments.

How to remove the default notice

There are several ways you can have a default notice removed, you will have to be patient and persistent but it is worth a try. To have them stay on your credit file will cause problems getting future credit, for some potential borrowers  it will be a complete refusal and for others a much higher interest rate.

The first step is to identify the financial institution (lender) that placed the default on your file; you may already know this, if not then do a credit search on yourself to see which one it is. How to see your credit report on-lin for £2.   

If any of the below apply then you have a chance, you should write to the lender that placed the default notice asking if they would consider removing it.

  • The loan has now been repaid in full
  • You have come to a new arrangement to repay the loan
  • The payments are now up to date and you are no longer in default
  • You can demonstrate that the default was placed incorrectly on your credit file.

If they agree to your request then ask them to confirm this in writing on their letterhead.

Some lenders may charge a small administration fee for the additional work.

If the lender agrees to your request then send a copy of their letter confirming such to one of the credit reference agencies asking them to remove the default notice from your file.

What if the information on your credit file is incorrect?

If the information is correct you cannot expect them to change it because it is embarrassing, only if it is incorrect can you do the following:

  • Write to the agency asking it to either remove or change the entry that you think is wrong.
  • Within 28 days from receipt of your letter the agency should tell you that it has either removed or changed the entry or taken no action.

Notice of Correction

If you are unhappy with the response or would just like to explain the information on your file you can send a Notice of Correction. This is a statement of up to 200 words that will be added to your file as long as it isn’t defamatory, frivolous or incorrect. Again the agencies have 28 days to respond.

If still no action, resend the Notice of Correction. If information is amended the agency must send details to any lender who has enquired in the last 6 months.

If an agency declines your Notice of Correction it then it must refer to The Information Commissioner

Read more: You service your car; why not service your credit file?

 

RAPID DEBT HELP FORM

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