The wrong way out of debt

Financial difficulties are a great source of stress for many people. Often, the desire to recover the situation as quickly as possible can lead to the wrong choices – making things even worse.

There is no fixed route to recovery for everyone, the solutions need to be tailored to each individual and will depend on the types of debt, the amounts outstanding, available assets and the amount that can be paid off each month.

However, there are some roads you probably should not go down in your attempts to escape the clutches of debt.

Firstly, it is important not to attempt to run away – you can’t. Even if you left the country, you will soon be traced on your return, for example through National Insurance numbers or credit checks.

Another knee-jerk reaction is to take out another loan to pay off creditors, but further borrowing is unlikely to solve the situation.

While television is full of adverts for consolidation loans promising to combine all your debt into one reduced monthly outgoing, it often comes at a price – high interest rates over many years with your home as security.

Consolidation loans might stave off the wolves for a while but it is unlikely to provide an acceptable long-term solution.

If you do decide to go down the loan road, it is imperative you use a legitimate, authorised source – the provider should at least have a consumer credit licence and preferably be licensed by the Financial Services Authority. This rule out loan sharks – a highly risky and dangerous option.

Speak to family and friends who may be able to help out with a situation by lending money or even purchasing – and therefore securing – assets such as your home. This may at least give you comfort in the knowledge that your house cannot be taken from you.

It is also worth speaking to your creditors and asking them if you can come to some alternative repayment arrangement. Most organisations will accept alternative arrangements for a short time – though beware if you are making reduced payments that you are not just paying off the interest rather than the capital amount.

If you can reach such an agreement then budgeting is key and any scope to maximise income and reduce expenditure should be explored.

Debt management plans and the Scottish Executive’s failed Debt Arrangement Scheme could feasibly leave you paying your debts off over a very long period of time, often in excess of ten years.

Debt crises need not end in bankruptcy. A solution may lie in Protected Trust Deeds – whereby your assets are signed over to a trustee who liaises with your creditors to come to a mutual arrangement regarding repayment.

Creditors are more open to Protected Trust Deeds than sequestration as they are more likely to recover more of what is due to them because the costs involved in the process are lower.

Debtors and creditors both benefit from the finite duration (usually three years) of a Trust Deed.

If you have more than one creditor it is important you deal with them equally – do not pay off one in full and not the others. By law you are not allowed to prefer one creditor over another and payments could be challenged later.  Accordingly, be careful with payments to family members and friends.

Finally, do not be afraid of the law surrounding personal debt – it is there to protect both the creditors and the debtor. Use it. If you need help, seek expert debt advice from an insolvency practitioner.