The Debt Trap
What to do if you find yourself in debt but unable to repay what you owe.
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debt management information from Peter Roe, Abacus TP
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UK INFORMATION
In this country (the UK) there is a crime which is not a crime, an offence which you can commit without doing anything, yet which allows you to be stripped of many of your ordinary rights, deprived of choice, placed at the mercy of time-serving pen-pushers, arrogant self-important beaurocrats and petty bullies.
The offence is to be unable to pay your debts.
You may at some time (particularly if you have ever been self-employed) found that when money is owed to you by a big company, that there was very, very little that you could do to make them pay you in any reasonable time. But the situation is very different if you find yourself in debt to them or any other large company or organisation. With astonishing speed you receive threats and warnings by post and phone of the dire consequences which will follow if you do not pay. At a time when you are desperately short of money, you are notified of fines, charges and other penalties for defaulting on regular repayments or exceeding your credit limits. You begin to receive telephone calls at unsocial hours from credit companies and debt collectors demanding that you make promises there and then about how you will repay your debts, starting immediately, even if it means that your family goes hungry.
You will rapidly learn the real meaning of some of the obscure conditions and convoluted legal language in the documents you have signed at one time or another - all designed by corporate legal experts to put you at a complete disadvantage, unable to fight effectively because you don't know the rules of the game (how could you? - you are playing to their rules).
Eventually, just opening the mail, hearing a knock at the door or answering the telephone is enough to induce an attack of anxiety. You become tired of hearing your own excuses, begin to lose sleep, find yourself alternately depressed and despairing, or seething with anger and frustration. If this is familiar, the worst thing you can do is to do nothing! - it is absolutely essential that you take action now to prevent the situation becoming worse or even terminal.
First Steps
The moment it becomes clear that you are going to have trouble making regular payments, whether these are for loans, mortgages, pension plans, insurance policies, or tax, you should take action. Letting things drift is a recipe for disaster, and this is especially true if you have already missed payments and creditors are already asking if there is a problem. Although no-one lends money with the intention of foreclosing on the loan and seizing a borrowers collateral, if you miss payments and do not take the appropriate action, many creditors will react hastily if they think you are going to default.
The speed with which the situation becomes very serious can then sometimes be just a matter of days, and a sort of ‘ratchet’ effect sets in which can be very difficult to reverse. Whenever the lender is forced into such a situation, everybody loses; the borrower stands to lose his possessions, and the lender ends up with a fraction of the money he originally loaned out. Therefore creditors will initially tend to be inclined to work with the borrower, as long as he or she continues to show good faith in attempting to repay the full amount of the loan (or at least for as long as the creditor thinks there is still a chance that repayments will be resumed).
So the most important thing a borrower should do when it becomes clear that there is a problem, is to get in touch with all major creditors and ask what they suggest can be done. The creditor will usually either suggest some arrangement to take some of the heat off the borrower or will set up a meeting in order to adjust or work out a more convenient repayment schedule.
Although this sounds simple and straightforward, it is actually a negotiating situation, and many people are nervous about any form of bargaining. Some are actually terrified to death at the thought of people from a bank, building society of other creditor telephoning them. There is still a fair amount of social stigma about having problems managing money and many people are embarrassed about it. So instead of openly seeking help, they attempt to cover up the problem, and then hide from or avoid the very people who can help them. The first thing to realise is that a temporary inability to repay debt is just a business situation, and every attempt should be made to distance oneself from the problem so that it can be seen (and dealt with) objectively.
Advisors
If things have already become serious, then it is time to introduce a third party – someone who can keep your creditors at arms length, provide advice and act as an intermediary during negotiations. Apart from the relief of having someone on your side, this step has the very useful side-effect of cooling things down, as everything has to go through this third party before agreements can be reached.
A professional debt counsellor can be engaged, but this is likely to cost around £100 in two or three payments. Your first stop should be your local CAB advisor who will provide some limited assistance free of charge. Although the CAB debt counsellor’s advice is likely to be limited to how you should divide up whatever meagre resources (if any) you have, they may offer to write some letters for you and advise on replies, and this can be a very useful offer. During this process, the advisor will assist in drawing up a balance sheet summarising your financial affairs. Although this is intended as a simple means of establishing who (if anyone) and how much you can pay, it has other more significant uses against creditors (described in our publication The Debt Survival Manual).
Reduced Offer of Settlement
When creditors start getting threatening, although this may be bad news in some ways, it may also mean that they are becoming desperate. This means they may be open to any reasonable offer, and could be an opportunity to try a reduced offer of settlement, perhaps for only a tiny fraction of what is owed. This can only be successful with certain types of creditor, but there is a simple way of forcing suitable prospects to give very serious consideration to such offers even when they might normally reject them out of hand. This simple but very effective technique for reducing your debts at a stroke is described in full in The Debt Survival Manual.
Administration Order
If matters go beyond this stage, particularly in cases where the total amount of debt is large, then one option (depending on your circumstances) may be to apply to the County Court for an Administration Order. Seeking an Administration Order basically involves asking the court to intervene on your behalf by instructing your creditors to accept whatever repayments are within your reach, or to refrain from pressing you further for some agreed period while you try to get your affairs in order. Once such an order is in place, you are then in a position to go back to the court to ask for further reductions or extensions on any agreed moratorium, if you are still in difficulty. The debtor or his agent needs to draw up a proposal (the CAB could help with this) to pay off his debts over some time (a three year period is often used), based on some plausible view of how his income will increase in the not too distant future. If the court accepts the plan, creditors are obliged to accept it.
It should be realised though that if a debtor fails to keep to the terms of an Administration Order, this can be annulled, leaving the debtor open to bankruptcy proceedings, which will often follow quickly. For this reason, it may be preferable to try to arrange what is known as an Individual Voluntary Arrangement with the creditors before any party obtains a County Court Judgement. This strategy can be used under certain circumstances to suspend indefinitely any court proceedings which have already begun.
Individual Voluntary Agreement (or Arrangement)
Over the past few years, small business bankruptcies have been soaring to record levels, and these failures can leave the business owners with some very serious debts – sometimes way beyond anything they could hope to repay. Many people in this position are advised to file for voluntary bankruptcy as protection against their creditors, but because of the far-reaching implications, this should be avoided at almost any cost. Not only is an ‘undischarged bankrupt’ stripped of virtually all his possessions (even when their value is many times the amount owed), but all sorts of other humiliating restrictions are placed on him, and he will end up completely at the mercy of a petty official known as the ‘Trustee’ who has quite astonishing powers to act more or less as he sees fit in connection with the bankrupt's possessions and finances.
By far the better alternative, if it can be arranged, is an Individual Voluntary Agreement (IVA), which is basically a binding arrangement agreed between an insolvency practitioner acting on behalf of the debtor, and all of the creditors. An insolvency practitioner can be (but is not necessarily) a solicitor who is engaged by the debtor for this purpose for a fee (which can be quite large). A very useful spin-off is that once an application for an IVA has been made, creditors may not take any further legal action for the time being.
If personal debts are large in relation to income, an IVA is often preferable to an Administration Order. The reason for this is that unlike an Administration Order, which simply lapses when the agree timescales expire (although as previously mentioned, they can be extended), an IVA is normally for a fixed period and upon the expiry of this period, the matter is at an end; any remaining debts will usually be written off. An IVA almost invariably reserves a specified amount of income for your own use and that of your family, and no repayments are made until you produce an income over this reserved amount. The effect is that although life can be pretty restricted for the period of the IVA, you can start with a clean slate after this period.
In our publication, The Debt Survival Manual, you are shown in detail how and under what circumstances to go for Administration Orders and IVAs to protect yourself and how to get the best deals going (such as settling all your debts for a fraction of the total amount owed).
Going to Court
The main threat a creditor can use is that of seizing your possessions and selling them to repay the debt - a course of action normally only possible in the case of a secured debt. If you allow significant arrears to arise, the creditor may then be able to obtain a county court judgement (CCJ) against you then apply through the court for permission to take possession of the secured property. If successful. he can then sell the property at any price he can get for it. If this is insufficient to cover the debt, you will remain legally liable for the deficit unless you have insurance which covers this eventuality and the premiums for this are up to date.
For unsecured debts, the creditor is on much weaker ground but still has the option of obtaining a judgement against you in the court, and then asking the court to enforce payment in some way, depending on your assets and resources. If a judgement in the county court goes against you the creditor can demand immediate payment, or payment in instalments, and can request the court to enforce this in a variety of ways.
There are however a number of legitimate defences which can be put to the court and these are often successful in buying some time or forcing a creditor to accept very small payments. There are also several sources of free legal help in doing this, including the courts themselves. All these matters are covered in depth in The Debt Survival Manual, and you are even shown how you can have a CCJ legally annulled and removed from the records, if the worst comes to the worst.
Charging Order
If you have some property and only have one or two large unsecured creditors (e.g. the Inland Revenue) you need to get under control, you might consider a Charging Order. This effectively converts an unsecured debt to a secured one, so assuring the creditor that he will get his money eventually. This might well be an acceptable alternative to bankruptcy, which would be unlikely to profit the creditor under these circumstances. If you make such an offer to a creditor, then under the terms of the Insolvency Act 1986, he is obliged to accept it.
Bankruptcy
Bankruptcy law in the UK resembles a leftover from less enlightened times when a peasant could be hung for stealing a sheep, transported for trespass, or flung in jail for owing rent to his landlord. Until you come into contact with this process it is hard to believe that such astonishingly harsh and arbitrary sanctions can be practised in a supposedly civilised country, sometimes in respect of relatively trivial sums. Unfortunately, this is the case. Furthermore, the Insolvency Act 1986, which directs bankruptcy proceedings, is vague and contains many omissions, leaving judges and other officials to ‘feel their way’ through complex situations, often setting contradictory or illogical precedents. If you are made bankrupt, you can lose virtually everything you have ever worked for, possibly on the basis of an arbitrary ruling, or at the hands of a vindictive ‘trustee’, and there is almost no appeal. You and your family may be deliberately kept poor and periodically humiliated for periods of years, and allowed no chance whatsoever to recover for so long as you remain bankrupt. Be warned.
A Petition for Bankruptcy is the ultimate threat a creditor can make, although in practice such a step is unlikely to benefit anyone other than the treasury and a variety of bailiffs, auctioneers and insolvency practitioners. A petition for bankruptcy may be initiated by a single creditor, or two or more acting together. Bankruptcy is sometimes also voluntarily entered into by debtors whose total liabilities far exceed their assets and who have no realistic prospects of ever being in a position to repay them. This is sometimes the case when a debtor is being hounded by his creditors, and is looking desperately for any solution which will keep them at arm’s length. However, this course of action has little to recommend it except in extreme circumstances, such as in the case of a debtor who owes very large sums but has limited income and few assets, and none he cannot live without. Under such circumstances, a voluntary arrangement or arbitration order may be difficult, if not impossible, to arrange and bankruptcy may be the only option.
In theory, you can only be made bankrupt under the Insolvency Act 1986 if you are insolvent - that is, if your liabilities exceed your total assets. In practice this requirement is often simply ignored, and regardless of the worth of your assets, you could find yourself being made bankrupt without being given any chance to voluntarily sell assets to clear the debts, by someone who is keen to make an example of you. There is also a minimum total sum which must be owed before any proceedings can be begun; however since this is at present only £750, an amount which has not been increased for well over a decade, this is unlikely to act as a bar against such action. If you trade as a limited company, the company cannot be made bankrupt, only liquidated (wound up), although you will remain liable for any personal debts, or debts that you have personally guaranteed.
Although technically it is a method of enforcement, the implications of bankruptcy are far more pervasive than other civil legal procedures, or indeed many criminal proceedings, and can be devastating for individuals and families. Some 30,000 people are made bankrupt every year. The scope of bankruptcy differs from that of voluntary arrangements in that it is means of compelling you to repay all your debts, not only those which give rise to the court order. It also has the effect of giving control of all your assets and most of your income to a third party, sometimes for the rest of your life, and you will have no say in how they are then dealt with. This third party will normally be the Official Receiver in Bankruptcy, or a Trustee for Bankruptcy, acting on behalf of the insolvency service (a section of the Department of Trade and Industry - DTI).
Because of the relatively extreme effects of bankruptcy, every effort must be made to avoid it. Simply letting events roll over you is a sure recipe for disaster. Fortunately there are a number of steps that can be taken to prevent a petition for bankruptcy succeeding, and even ways to have a bankruptcy order annulled, either on a technicality, or because your circumstances have changed. These procedures are all examined in depth in The Debt Survival Manual.
Summary
These are the basic options available if you find yourself deeply in debt, but there is much, much more that can be done by the informed insider to protect his assets and deflect his creditors from taking any effective action against him. The key is information – the sort of information that cannot be found in mainstream books, and which debt advisors will never reveal to you (even in the unlikely event that they are aware of the tactics and strategies involved).
But you have already taken the first step toward sorting out your problems by sending for this report. By taking action, you have shown that you are not prepared to lie back and let your creditors walk all over you. You are not as helpless as you may think - there are ways out - ways of using the system against itself to hold off creditors and enlist the help of others, ways to improve your situation, steps you can take which are tried and tested.
If you act now, the 'insider' information and action plans contained in The Debt Survival Manual can give you the 'edge' you need to beat the odds stacked against you. The information is not censored in any way - if it is of use, and actually works, it has been included. Sharp practice? unethical? - maybe, but when a faceless corporation is preparing to seize your home (perhaps because of a relatively small amount of arrears) or creditors are threatening to send in the bailiffs, ANY action, provided it is legal, is justified to keep a roof over your family's heads and to keep the possessions which you have taken years to acquire and which allow you to live a normal, decent life.
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