Friends, debt... and how to make sure your help is effective
Jack and Polly had been living together for about a year but something was not quite right. Every time they went out for a meal or had to buy something for their new home, Jack would make excuses as to why he could not contribute towards the cost.
One day it all came out; Jack had a credit card debt of £1,800. He had missed monthly repayments and now the credit card provider was pressuring him to repay the entire balance.
Polly, smitten with love, stepped in, took out a credit card in her name and used the entire limit to pay off Jack's debt in fell swoop. Problem solved, she thought. But was Polly right to do this?
A friend in need...
Several years ago something similar had happened to me. I helped a friend who was behind with his tax, on the verge of having his overdraft called in, while even just another small debt had been ignored and the company was threatening legal action.
Instead of taking out a loan or credit card in my name to cover his debt, I decided to part with £5,000 of my savings. The reason? Like most people with debt issues, my friend was under considerable stress, was often depressed and found sleeping difficult.
Being in the position to help, it is quite natural that I would want to. But, while I don't regret my actions and our relationship is still intact, in this case, it ended in tears for both of us...
The full picture
My friend assured me that £5,000 would wipe out all of his debts and get him back on an even keel. However, a few months after advancing the money and paying off his creditors I discovered that the full picture was a lot more ugly than this.
My friend had hidden other debts from me – a staggering £62,000 worth of loans, credit cards and mortgage arrears!
Through his embarrassment and feelings of low esteem he had not told me everything and, as a result, I ended up facing sleepless nights, let alone my friend!
In short, my intervention of £5,000 did not change or alter his debt position one iota; my friend was still unable to pay the other debts and he subsequently went bankrupt.
Where did that leave me? Just the same as any other high street lender or credit card provider – a creditor in his bankruptcy.
What I have learned from this experience is not to "never lend money to a friend in need", but to arm yourself with the full facts first and be sure that the amount you are offering will make a material difference in resolving the debt issue. If it won't then don't do it – it will just be good money after bad.
So what can you do?
The fact that the debtor has taken their head out of the sand and is talking to you about their debt issues is a welcome sign.
You are now in the position to support and encourage them to talk to a professional and explore their options. By the way remember, you are not that professional!
Even if it transpires that bankruptcy is the only way forward and you still want to help them, you may wish to offer to pay the £600 to cover the petitioning costs.
That way at least you know your involvement has helped resolve matters as all the debts will be taken care of in the bankruptcy order. What's more, it's a lot cheaper than loaning thousands of pounds!
Protect your credit file
If you are connected with your partner, for example on a mortgage, loan or rental agreement then you have an association which will be recorded with credit reference agencies.
These are companies that hold – but do not determine – your credit file, a history of all your previous borrowing that will be scored on how well it is managed.
If the debt is not your fault, it is possible to disassociate yourself from your partner on your credit file by writing to the credit reference agencies and requesting it.
Unless the agency has a good reason to doubt what you tell them, it must not continue to give lenders information about the other people that you have mentioned.
You need only write to the one agency that supplied you with your file, as disassociation information will be shared between the other main agencies.
The agency may wish to make some enquiries or checks to ensure that you are not just trying to avoid a bad credit record. There is no cost for this other than the fee to access your credit file in the first place.
Still want to lend?
If, after reading this, you still feel inclined to advance large sums of your hard-earned cash then perhaps adopt this philosophy; "Only lend what you are able to afford to lose".
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
“Arrears” tend to be associated with debt. If you fall behind and miss payments on any outstanding debt, the amount you failed to pay is an arrear – the amount accrued from the date on which the first missed payment was due.