Debt Defined
What is debt?
Debt. It's a very immotive word isn't it? You see it in the press. You see it everywhere. What does debt mean? Well, very simply, debt is a description of money that you owe. Money that you owe perhaps on a mortgage. Perhaps on a car. Perhaps credit cards. Perhaps loans. All of it represents debt. And, as a nation, we owe many many billions of pounds.
What does good debt and bad debt mean?
Is all debt bad debt? No, clearly not. If you borrow money to buy a property and you can afford the mortgage payments. Yeah, arguably that's a good debt. If you borrow money to start a business and the business is successful. Clearly, that's a good debt. You might argue that if you borrow money as a student, so long as you're confident that you're going to get a good job afterwards. Yeah, that's a good debt. Bad debt on the other hand is when you're borrowing the money, when really, you can't afford it. So, a holiday that you can't afford, a mortgage to get on the property ladder, when really, you can't afford it. So bad debt simply is money you borrow, when really, you can't afford to be paying it.
How can i avoid getting into debt?
The best way to avoid getting into debt is careful planning. The best thing to do is not to have an overdraft on your bank account and use debit cards rather than credit cards. Pay your way when it comes to big ticket items like a holiday, a new TV, wait until you can afford it. A mortgage is fine as long as you can afford the monthly payments. The two biggest costs for most households is transport and accommodation. Always think before you sign up to the mortgage or the rent, can you actually afford it? Similarly for an expensive car. If you find that you are struggling, again look at those two things. Could you find somewhere cheaper to live? Could you live closer to where you work? Could you actually have a smaller car? That could you save quite a lot, cheaper tax, cheaper insurance, cheaper petrol, cheaper repair bills. You can save on the environment as well. Shop around for the best deals for your mobile and utilities. Look at all the links on the website and record how much you spend each month so you can look back and see where your hard earned money has gone.
What's the difference between secured and unsecured debt?
One of the things that is really important to understand is the difference between secured debt and unsecured debt. A secured debt is where you've borrowed money for a house, a car, a high purchase agreement; with a secured debt if you don't keep up the repayments the company can take you to court and repossess the house the car etc. Unsecured debt is typically a lone credit card, and when you haven't borrowed the money for anything specific it is actually much harder for those companies to get their money back. You'll find unsecured you'll get lots and lots of phone calls, letters etc. Whereas with a secured debt you'll get a few letters, and suddenly you're in court
Is debt always the result of careless spending?
Debt is by no means always a result of careless spending. As a debt doctor I have many many people that come to me and very often the conversation goes “and then”. And then I lost my job and then I lost my health, and then I became ill and then there were problems with the kids and suddenly a situation that was manageable becomes unmanageable. And also very often when there is crisis what do people do? Well they rely on credit. And it is only when the dust is settled and they have .. all the bills and it is oh my goodness! How did that happen? Reality is you cannot plan for everything. Stuff happens.
Where can I get advice on getting out of debt?
There are lots of different places where you can get advice in relation to debt. An obvious place is the internet. But be aware that many websites do have their own agenda. They might be trying to get you to take out another loan, or they might be promoting IVAs. You can go to free services, like the Citizens Advice. But be aware that you may have to wait. You may well be given advice, but you actually have to do the work yourself. And they may not be able to help if you have property. Finally there are companies which charge for the service. Check them out, because they vary a lot in terms of the quality of what they deliver.
How do I calculate what I really owe?
How do you work out how much you owe? Well, actually, its not quite as straightforward as you might think. The first obvious thing to do is to add up how much you've borrowed. But it's different to the amount you're going to have to pay back. And that can be at least twice as much as the amount you've borrowed. So if your debts are twenty thousand, you may well, if you make small payments over many years, pay back forty thousand, which means you'll probably have to earn sixty thousand. Makes you think, doesn't it?
What is a debt management company?
You'll find if you look around there are lots of debt management companies. What a debt management company will do is it will contact all the people you owe money to, explain you're in difficulty, and offer small monthly payments which may, very often, be accepted. Remember, though, that debt management is a good short term option whilst you sort things out, but its not a long term solution very often to problems of debt.
Who can help me put together a debt management plan?
Well, there are really three options. You can do it yourself. You can go to free services. Or you can go to a reputable debt management company.
What are the advantages and disadvantages of getting someone to deal with my debt on my behalf?
The advantages of getting someone to deal with debt on your behalf is that you don't have to deal with the people that are constantly phoning you every day, rushing you twenty letters a day. Someone else can do it on your behalf, and whereas somebody phones you they are trying to get you make even a small payment, that someone phones me and I am on your behalf. They won't be bothered to do it again. So that is one of the advantages. The other advantage is really peace of mind, if you have got someone who is working through a solution that you have agreed. The disadvantage is that very often you have to pay someone for the work do to you, and the other disadvantage is that you may not be completely on top of what is happening.
Am I responsible for debts accrued after my card was stolen?
If someone has stolen your card, its really important to let the credit card companies know straightaway. So long as you let them know, and so long as you haven't let someone else get hold of your PIN number, you should find that you're not liable for those debts.
What is an I.V.A. and what does it mean?
An I.V.A. stands for an Individual Voluntary Arrangement, and essentially, it's bankruptcy lite. Strangely, while its called voluntary, it's not really. It's a formal arrangement between you and your creditors where you agree to repay some of the money over, usually, a five year period and some of the money gets written off. Be aware that if you have property you may well be required to remortgage. Remember, I.V.A.s are one solution to debt, but they are only one. They are very heavily promoted because typically companies get paid at least £7,000 for administering them. So think carefully and check that its the right solution for you.
What is a dischargeable debt?
A dischargeable debt is one which is written off, i.e. disappears in bankruptcy. Typically, it's credit cards, loans, anything which isn't secured against property, although, it doesn't include this years council tax. It doesn't include anything in terms of fines. And, unfortunately, it doesn't include any more debts which are backed by the government which are taken out as a student.
What is a non dischargeable debt?
A non dischargeable debt is a bit like a stubborn stain. It's a debt that doesn't even get written off in bankruptcy. That includes your mortgage or any other secured loans. It includes this years councils tax, any fine that you may have from any court, and it also unfortunately now includes any money that you've borrowed that was backed by the government as a student.
