Tackling unsecured debt can prevent repossession
Released on: March 16, 2009, 6:54 am
Author: Debt Advisers Direct
Responding to the 2008 repossession and arrears statistics
released by the Council of Mortgage Lenders (CML), debt specialists Debt Advisers Direct have stressed the relationship between unsecured debt and mortgage arrears.
"As the CML reports, there were 40,000 repossessions in 2008," said a spokesperson
for Debt Advisers Direct, "and a further 219,000 mortgages ended the year more than
three months in arrears.
"For many of those people, however, the problem lay not in the cost of their actual
mortgage payments, but in the cost of servicing their unsecured debts. Charging
significantly higher interest rates than mortgages, unsecured debts can easily
'snowball' to the point where borrowers simply can't keep up with them - where
their monthly payments barely suffice to pay off the accumulating interest.
"Unsecured debts can also be alarmingly easy to take on. Credit cards and store
cards in particular allow significant levels of debt to accumulate gradually: people
who would hesitate to take out a £2,000 loan can find they've acquired £2,000 of
debt on a number of cards without even noticing it."
This combination of high interest rates and ease of access has left many homeowners
with unsecured monthly debt repayments that take up some or all of the funds they
need to service their mortgage debt. Unless they take steps to address this, it can
end up leading to repossession.
"There are ways of reducing the burden of their unsecured debts," the spokesperson
continued. "Many people successfully negotiate with their unsecured lenders -
either on their own or through a professional debt management organisation - asking
them to accept lower payments, freeze interest and/or waive charges, to ensure that
servicing their unsecured debts doesn't take up funds they need to stay on top of
their mortgage payments.
Others find that their unsecured debts have passed the point where negotiation is a realistic option: "In 2008, some 106,000 people in England and Wales turned to insolvency (bankruptcy or an IVA (Individual Voluntary Arrangement)) as the only realistic path out of debt - and experts such as KPMG believe this figure could easily grow by 50% this year.
"For the majority of homeowners, an IVA offers distinct benefits over bankruptcy.
Like bankruptcy, an IVA lets them write off the debt they can't afford to repay,
and will have a severe impact on their credit rating. Unlike bankruptcy, however, it
will allow them to retain ownership of their property."
This is what makes it a particularly interesting option for homeowners who worry
that their unsecured debts could end up costing them their home: "An IVA requires
substantial commitment, as they will need to make regular payments towards their
unsecured debt for five years, but those payments are designed to be affordable.
They will be calculated to take up the individual's entire disposable income - the
money they will have left after taking into account their essential monthly
expenditure, such as food, petrol, utility bills and (most importantly) mortgage
"So a homeowner in an IVA will be required to contribute all their disposable
income to their IVA for a full five years, as well as releasing some equity halfway
through the final year of the IVA to maximise the amount they can pay their
"However, they'll know they're protected from any legal action by their unsecured
creditors - including attempts to make them bankrupt - and they'll know their
outstanding unsecured debts will be written off at the end of that period. Most
important of all, they'll know the budget they're following is specifically
designed to ensure their monthly mortgage payments will be met."
"The important thing is to take action in time, as soon as their unsecured debts
reach unmanageable levels. An IVA is a legal procedure that requires the approval of
creditors who collectively 'own' 75% of the debt in question - in general, the
sooner an individual speaks to an Insolvency Practitioner about an IVA, the better
their chances of gaining that approval."
Contact Details: Debt Advisers Direct
Pennington House, Carolina Way
South Langworthy Road
0845 056 6480