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Old mortgage debt comes back to haunt fire fighter

Wednesday, 1st October 2014

073-fire-hatFire fighter owes £49,000 from old relationship

The facts

A 34 year old recently married fire fighter unexpectedly received a letter from solicitors representing a bank that had previously advanced him a mortgage.

About eight years ago he and his then partner purchased a property for £210,000 with a mortgage of the same value. Unfortunately the relationship went sour and they separated. As neither was able to meet the mortgage payment the property was repossessed and sold at auction for £166,000. This meant there was a shortfall on the mortgage to be paid back of £44,000. This did not include the additional fees of the estate agents, locksmith, gardener, and window cleaner, to name but a few. In the letter the solicitors were demanding he repay nearly £49,000.

The problem was that he had not told his new wife about the previous partner or about the house they had bought. Handling either of these would be stressful enough, but the two together was even more difficult to deal with. There was yet another issue; he also had credit card and personal loan debts totalling £11,000. This meant he now owed, to various organisations, a whopping £60,000!

The Advice

After completing an income and expenditure form it was soon established that the true amount of monthly disposable income (DI), after accounting for necessary household expenditure and before he paid his other debts excluding the mortgage claim, was £385.

His current home was mortgaged to the value of £180,000 and worth around £195,000 which meant he could not raise any finance on the house. Although he could manage his credit card debts he was unable to raise the £49,000 being claimed by the solicitors.

Consideration was given to the following options; a Debt Management Plan (DMP)bankruptcy or proposing an Individual Voluntary Arrangement (IVA). The DMP option was dismissed as he would have to pay back the debts in full, approximately £60,000, which, at an estimated £385 pcm, would take in escess of 13 years if all the lenders froze interest and any other charges. This was viewed as unworkable and unrealistic by the fire fighter.

He did not wish to go bankrupt, even though the payment term to creditors through the bankruptcy period would be for only 3 years. He had very little assets, £15,000 in his home before selling costs and half of this his wife was entitled to. His vehicle, which was on hire purchase, belonged to the hire purchase company so was also excluded as an asset.

The fire fighter decided to propose an IVA to his creditors as he was clearly insolvent following the claim by the solicitors acting for the mortgage company. The proposal would entail monthly payments equivalent to his disposable income, £385 over a period of 2 years, as he proposed to keep the car and continue to make the hire purchase payments. He would then pay an additional £110 per month once the HP agreement ended, in two years time.

Creditors were contacted immediately, advising them that the individual was seeking professional advice in order to address his financial problem, thus alleviating the debtor from the constant pressure from telephone calls and threats of Court action to recover the debts.

The Outcome

Approximately 9 weeks after the initial consultation, a meeting of creditors was held, to which none attended and the voting was completed by post with the individual’s proposal for an IVA being accepted. All interest and late payment charges could no longer be added to the debt. The solicitors acting for the mortgage company agreed to accept a share the debtor’s proposal of initial payments of £385 per month.  Once the final payment of the hire purchase for the vehicle had been made then this sum would be diverted into the IVA, It was envisaged this would boost the contributions for the last three years by £110 per month.

Both the debtor and his unsecured creditors are bound by the terms of the arrangement and, provided the fire fighter continues to make the monthly payment to the Supervisor of his arrangement, who distributes the funds to his creditors, at the end of the arrangement his unsecured liabilities of approximately £60,000, will be deemed to have been legally discharged.

If the individual had opted for bankruptcy then it was not projected that creditors would have received much of a return as he did not own the car and had very little equity in his home however becasue there was ome equity he was asked to see if he could remortgage in year five and pledge his share of any equity. with a view to re-mortgaging his 50% share of the equity around year 4 of the IVA. If he was unable to remortgage the then the IVA would be extended by one year with the same monthly payments to cover his share of the house equity. In a bankruptcy scenario any disposable income would have resulted in him making payments to the Official Receiver (OR) which would be for only for three years as against five in the IVA.

In the IVA creditors will receive a return of circa 37%, i.e. 37 pence for every pound of their claim provided that the IVA is completed in accordance with the terms. He will be reviewed on a regular basis, usually every 12 months, to see whether he can increase his contribution to the IVA. The fire fighter had no further contact with the creditors.

The fees for the IVA will be paid by the creditors and not the fire fighter as these are met from the contributions over the five years.

Although the individual’s credit rating is impaired, credit was, as in many cases, his downfall and it is probably helpful that he is not able to obtain further borrowing for the time being.  He is now back in control of his finances and getting back in control of his health. Guidance was given as to future money management.

Footnote

With debtwizard.com the fees for preparing a proposal for an IVA are not payable up front, instead they will be withdrawn from the funds paid into the arrangement. IVA's are only suggested as a way forward where it is considered as the most suitable option. Since this case study the IVA Protocol 2014 was launched and has made changes to how the pension and house equity are now dealt with in an IVA. You can read more here IVA Protocol 2014

Debt Solutions Explained & Debt Solutions Comparison Table

Whatever the reason for the problem, you need to understand what help is available if you are financially strapped.

We have detailed below the six options available to you when debt problems arise, all these options, except for No.3 where you pay creditors in full, will affect your credit rating. See Debt Solutions Explained & Debt Solutions Comparison Table

More useful articles re Individual Voluntary Arrangements (IVAs)

What is an IVA

IVA Fees

IVA Pros and Cons

IVA Information / Advice

IVA Protocol 2014

Where can I get free debt advice and debt solutions with no fees?

Take me to free debt advice agencies.

You can follow Mike on twitter by using @debtwizard

This article is intended to afford general guidelines on matters of interest. Accordingly, the information in this article is not intended to serve as legal advice. Therefore, no responsibility can be accepted by debtwizard.com, for any loss occasioned by a person acting or refraining from, acting on the basis of this article. Users are encouraged to consult with professional advisors for advice concerning specific matters before making any decision.

All contents copyright © 2014 Debtwizard.com Limited

 

 

 

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