So You Want to Get Out of Debt?

By: Amber Dextrose
Submitted: 2007-01-17 16:15:21
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Bills piling up? Scared to open the mail? Time to face up to your mounting debts.

If you get a sinking feeling each time an envelope hits your door mat it could be time to face those debts head on. So, what's the answer?

Re-mortgaging

If you have mortgage, you could consolidate your debts into that, but beware of saddling yourself with a long-term debt for short-term gain. You may be cutting your monthly payments now, but you'll be paying that money back for a long, long time. There's a good reason why those monthly payments are so cheap: they're spread over something like 25 years. Calculate first how much interest you'll be paying over that period. For example by adding ?5,000 to a 25 year mortgage at a rate of 5% you'll be paying ?2584.30 in interest in total. Mortgage rates can rise, however, so unless you have a fixed rate, don't assume that tomorrow's rate will be as good as today's.

Even if you don't add your other debts to your mortgage, you could still shop around for a lower rate. Check the terms of your mortgage and then check a site like www.thisismoney.co.uk to find a better rate. You may have committed yourself to sticking with your mortgage for a fixed term or be liable to penalties if you change, so do your sums before swapping around.

Consolidation

Maybe you have run up a credit card bill which, due to your other financial commitments, you are unable to clear quickly. If you also have an overdraft, your money situation may feel out of control. Credit experts reckon that you should always try to clear your outstanding balance at the end of each month and not let your balance spiral out of control. Don't treat a credit card like a loan - if you need a loan it's better to take one out: the rates are generally far better.

The case for consolidation applies particularly if you have one or more maxed out credit cards or store cards. Especially where you only make the minimum monthly repayment, or are struggling to chip away at the debt. Credit cards and store cards can have super-high interest rates.

Presuming a balance of ?5,000, if you were only to pay off ?150 monthly you'd still clear it in under four years paying only ?1507 in interest over time. However, if you were clearing it off by paying the minimum each time, it would take you 14.5 years to pay off every penny. By the end you would have paid ?3365 in interest.

One loan with a lower rate of interest will enable you to pay off more money faster. That ?5,000 could be paid off in just over three years with interest charged at a typical 7%, costing you ?575.67. So it might be a higher rate than a mortgage, but the shorter period means you won't be spending so much of your hard-earned cash on interest.

Don't worry that by consolidating you're adding to your debt. It's far more practical to have one sum to pay off, rather than several accounts all attracting interest. A loan provider will expect you to make a fixed payment each month, so you won't be able to make mini payments that never clear more than the interest.

IVA - Individual Voluntary Arrangements

If you really are in trouble with huge debts that are overwhelming you (or those over ?15,000), you may need to talk to an insolvency practitioner about an IVA. This scheme was set up to allow debtors to freeze interest rates and pay back debts over a longer period of time. However, beware of those enticing adverts claiming you can write-off all your debts . There are fees to be paid up front and the IVA will stay on your credit record for six years. Typically the process takes five years and you will be committed to making regular payments calculated to be within your capacity.

The Debt Advice Bureau stresses that although assets such as your home are at less risk of seizure than with a bankruptcy, they are still at risk. Any savings or other financial assets are likely to be taken.

You will be unable to get credit whilst you are in the IVA process and any credit you get after will be subject to high interest and other penalties. So you could be spending eleven years under harsh financial conditions.

Bankruptcy

The final resort in cases of bad debt is bankruptcy, but don't be thinking this is your "Get out of Jail Free card". A bankruptcy judgment will have serious implications on your future creditworthiness and all your assets can be seized.

There is a huge stigma attached to bankruptcy and how you are viewed in future will be affected in terms of not only creditworthiness, but also in employment, running a company and buying property. Going bankrupt is a very public matter, with adverts published locally and nationally asking your creditors to come forward.

Just like an IVA, there are large expenses involved in being declared bankrupt plus a 15% levy by the official receiver on all sums received.

Amber Dextrose is a finance guru at http://www.allaboutloans.com and is kind to old ladies and kittens

Article source: Expert Articles