Know your debt rights
The credit crunch means it’s a tough time to borrow money, but that hasn’t seemed to lessen the UK’s personal debt mountain. British households now owe more money in debt than they earn, with some people owing up to 169% of their annual income, according to Confused.com.
Its research reveals that our collective personal debt has grown so dramatically that the average household now owes £1.02 for every pound they earn.
Gemma Stanbury, head of savings, loans and debt at Confused.com, says: "As we face continued uncertainty and increased financial pressures, it is good advice for all to become more aware of what they are spending and on what. Where spend and debt can be reduced, efforts should be made to ensure it is done.”
Of course, not all debt is bad. Mortgages, for example, are essential for most of us if we want to get on the property ladder and a credit card, when used wisely, can actually make more sense than spending on a debit card.
But what if you are so deep in debt that you are struggling to cope? What help is available and how can you protect yourself?
Credit card and loan debt
Since 6 April 2009, borrowers who get in touch with an accredited debt adviser must be given 30 days’ breathing space by their creditors. The new rules, agreed by the government and the Credit Service Association (CSA), which represents debt collection agencies, mean creditors cannot pursue any money owed for 30 days. It is hoped that this breathing space will give people time to work with advisers to find a solution to repay their debt.
Gareth Thomas, consumer minister, says: "The new 30-day rule will give people breathing space to help them take control of their finances as well as encourage them to seek help from debt advisors."
If you have missed one or more mortgage repayments, or are concerned you will struggle down the line, then contact your lender as soon as possible to talk through your payment difficulties. The Council of Mortgage Lenders, the trade body for the sector, says its members are committed to helping borrowers during the current recession. Be open and honest with your bank or building society and there is potential that a solution, which suits both parties, can be reached.
For example, your lender may be able to find you a cheaper mortgage deal or extend your mortgage term, thus reducing your monthly payments. It may also may agree to reduce your payments for a set period, offer you a payment holiday or move you onto an interest-only repayment plan.
If you’ve already missed payments then your lender should suggest an affordable way you can repay this debt, or even agree to delay them for a while.
Because of house price falls and restricted credit, the government has introduced new schemes designed to help homeowners struggling to meet their mortgage debt and at risk of repossession.
The first, the Mortgage Rescue Scheme, is for people suffering serious difficulties paying back their mortgage and potentially involves selling all or part of your home to a registered landlord and then renting it back.
The second scheme, called Homeowners Mortgage Support, allows you to defer your mortgage payments for up to two years.
Dealing with debt collectors
Whether you live alone or have a family, the idea of being actively pursued by debt collectors or bailiffs is a pretty scary notion. While it’s important to try and co-operate with your creditors it’s also worth remembering that you have rights too and you shouldn’t let debt collectors take advantage of your vulnerability.
A bailiff can only be called in to collect debts with County Court approval. A creditor must first apply for a County Court Judgement (CCJ) stating you must repay the debt. It then has to ask for a warrant of execution, which (if approved) allows it to appoint a bailiff.
However, if you owe money to HM Revenue & Custom or you have failed to pay your council tax, then a bailiff may be sent over to collect the money.
There are ways to stop bailiffs from visiting your home and seizing your possessions. If you have been issued with a CCJ and your creditor has a warrant of execution against you, then you can ask your local County Court for an N245 form. This is a realistic offer to repay the debt. If accepted, this will suspend the warrant so long as you keep up-to-date with the agreed payments.
It is illegal for a bailiff to use force to break into your home on their first visit. So, while they may gain access through an open window or unlocked door, they cannot push past you and into the property if you open the door to them or kick-down your door.
However, if the bailiff has been appointed to collect money owed to HMRC, unpaid magistrates’ court fines or non-payment of rent, then forced entry is permitted. Remember, they must show you written authorisation from the council for them to call, and they must leave with you a list of their powers and what they can and can’t do as well as their charging information.
The purpose of creditors appointing bailiffs is to recover money owed to them; to this end, a bailiff can seize your property as payment. However, essentials such as clothing, bedding, cookers, fridges, furniture and ‘tools of your trade’ (such as a computer) are out of bounds.
Remember, if you do hand over any money or possessions to a bailiff then you are entitled to a receipt. You also have the right to ask them what fees or expenses they are charging, as these are likely to be added to your debt.
In March, the government decided against extending bailiffs’ powers, and instead unveiled plans to create an online certificated bailiff register later in 2009, allowing debtors to check bailiffs' certification status. The government also intends to introduce independent regulation of bailiffs by 2012.
Bailiffs must abide by the Office of Fair Trading’s Debt Collection Guidance – this states that they must not communicate in a way that is “unclear, inaccurate or misleading”, must not act in a threatening manner and must not use aggression or undue pressure.
So, bailiffs should give you notice of the time and date they will call, and they should explain the reason for their visit. In fact, most bailiffs should call at a 'reasonable' time, normally between 8am and 8pm.
If you are vulnerable or ill then they should leave, and they shouldn’t attempt to contact you at work unless the debt is business related.
Despite a lack of regulation, the rules that govern how bailiffs might behave do give consumers leeway to complain. If you think you have been treated unfairly or in a threatening manner, then you could complain to the creditor to whom you owe money, or to the professional body that bailiff belongs to. You could also complain to the court or the police.
Another way that a creditor might pursue you for outstanding debts is through a debt collection agency. A debt collector doesn’t have the same powers as bailiffs, so they can't enter your home to seize your possessions.
A creditor, such as a bank, credit card provider or even government agencies such as HMRC, will pass outstanding debt to a debt collection agency only when all other means of collection by the original creditor have failed. The agency will then work with the consumer to try and resolve the issue.
This is usually done by letter, confirming the amount of debt and containing details on how you can settle this. If such letters are ignored – or simply do not result in the debt being repaid – then you may be treatened with legal action. You may also be contacted by telephone or even email or text, and there is a possibility that you could be paid a visit by the agency in your home.
Death and debt
There is a lot of confusion about what happens to debt when someone dies; can this be ‘inherited’ by their loved ones or does it die with them?
Debt is not automatically wiped out when a person dies, unless provisions have been made (through insurance for example) for this to happen.
In fact, when someone dies, their creditors are allowed to pursue outstanding debt from their estate. This includes any property, cash, investments and possessions they have left.
The executor of the will, which could be a solicitor or a relative or friend, is responsible for handling the deceased person’s estate. Depending on the size of the estate and the amount owed, the entire estate could be swallowed up by creditors as they take priority over the benefactors of the deceased's will.
If there is not enough money in the estate to meet all the debt, then the executor will have to pay them in a particular order. Funeral expenses take priority, followed by mortgage debt, any monies owed to the Treasury, any overpayments of benefits and unpaid pension contributions or wages.
You may also have to advertise in The London Gazette to find out whether any creditors have a right to the deceased’s estate. In many cases it is advisable to seek legal advice when dealing with an estate, especially when debt is involved.
Generally speaking, you cannot be held responsible for someone else’s debt when they die; however, if you jointly owned a property with the deceased and there is not enough money from elsewhere in their estate, then there is a chance you may have to sell the home to repay the creditors.
The likelihood of you having to sell your home depends on how you owned it. If this was as 'tenants in common' – i.e. you both owning a stated share of the property – then the share of the deceased passes to their estate and could be claimed by a benefactor in the will or, if relevant, their creditors. Unless you are able to negotiate with whoever is owed this money, then you may have to sell the property.
However, if you were 'joint tenants' – i.e. you owned the whole property together – then the deceased person’s share passes to you (as part of your estate) upon their death. Creditors can still try and claim money through the property by applying for an Insolvency Administration Order within five years of the death. If they are successful, then you might be forced to sell up.
If you held debt jointly with the deceased, through a joint credit card, mortgage or loan for instance, then responsibility for meeting this debt passes to you upon their death.
However, in the case of mortgages, a life insurance policy might be in place that will protect you from inheriting the debt. Credit cards and loans can also include payment protection plan, and if the deceased was under pension age, their employer might have offered a 'death in service' payout from their pension that can be used to meet any debts.
There are a few examples of debts that can automatically be passed over to you when a person dies. Anyone still living in the deceased person’s house could be responsible for any arrears and charges for water, fuel and council tax, even if their name isn't on the bill.
Fraud such as identity theft is on the rise, as scammers take advantage of the economic downturn. This means that an increasing number of people could be pursued for debts that they did not realise they had.
Fraudsters often steal a person’s identity and use it to apply for credit and loans.
Unless you have been negligent, any financial loss suffered as a result of identity fraud is already covered in the Banking Code. You can also get free advice from the government’s fraud prevention service, CIFAS. For a small charge they will make sure that anyone applying for credit in your name is automatically double-checked.
However, if it can be shown that you acted fraudulently, or did not take reasonable care of your personal details (for example, keeping your PIN number written down with your card) then you may not be able to get compensation.
If you have been a victim of identity theft then your first port of call is your bank. Make sure you keep a record of conversations as well as any written correspondence regarding the issue.
You must also report the theft to the police, and get a crime reference number.
You can find out whether any applications for credit have been fraudulently made in your name by contacting the main credit reference agencies:
Experian (0870 241 6212)
Equifax (08705 143700)
Call Credit (0870 060 1414)
They will explain how you can get this information removed from your file.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
A stockmarket security (a form of derivative) issued by companies on their own ordinary shares to raise capital. A warrant has a quoted price of its own that can be converted into a specific share at a predetermined price (called the conversion price) and future date. The value of the warrant is determined by the premium of the share price over the conversion price of the warrant. Warrants give the same economic exposure to an underlying security without actually owning it, and cost a fraction of the price of the underlying security.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
A homeowner’s worst nightmare; repossession is an action of last resort by mortgage lenders to recover money from borrowers that have failed to keep up with repayments on their mortgage or other loan secured on their home (see secured loan). Repossession is a legal procedure that has to go through several processes before the homeowner is evicted and the property reposed. These are: if a borrower keeps defaulting; the lender applies for a solicitor’s notice; the lender instigates possession proceedings through the court; at the court hearing a possession order is granted and sometimes a possession warrant; a bailiff is appointed and an eviction notice issued at which point the homeowner has two to three weeks to vacate the property.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
A County Court Judgement is a legally issued strike by a lender against a person who has failed to keep to the terms of a credit agreement, usually by habitually failing to make the payments on a loan, credit card or mortgage. A CCJ will appear on a person’s credit record for six years and will certainly affect future applications for credit.
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.
“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.