Debt Solution Case Studies

Case Study One: Oliver & Kate

Oliver and Kate are married with two children aged 16 and 10. They live in a house valued at £200,000 with a £135,000 mortgage, which has 25 years to run. They also owe around £35,000 on credit cards and loans. The loan and credit card repayments (including their mortgage which is paid at their mortgage lender's Standard Variable Rate of interest) total £1,869 per month, which is proving impossible to meet from their family monthly income of £2,400. They calculate that they currently have around £250 per month more going out than coming in.

Debt Consolidation Option

Oliver and Kate should certainly investigate a better mortgage deal. Paying at the Standard Variable Rate is generally not a rational approach unless there is a specific need for the flexibility and this cannot be found within more competitive rates. At the same time, they should consider the option of consolidating their unsecured debt into their mortgage. As an example, £170,000 payable over 12 years at a mortgage rate of 4.7% will mean payments of around £1,572 per month, which should bring income and expenditure back into line. But they must be aware of the fact that they are securing their unsecured debt. And they must also see debt consolidation as a once and for all option.

Verdict – Well worth considering so long as Oliver & Kate have sufficient self-control to monitor and manage their future spending.

Debt Management Option

It would certainly be possible to negotiate reduced payments on the credit cards and loans by providing evidence of income and expenditure. However, there is the substantial downside of an impaired credit rating, and the probability that interest charges would still continue at the relatively, and sometimes excessively, high rates of credit card and loan interest.

Verdict - Second best to debt consolidation unless Oliver and Kate feel that it otherwise better helps them manage their financial situation.

Individual Voluntary Arrangement Option

Probably like using a sledgehammer to crack a nut. The costs of the IVA and the detrimental impact on Oliver and Kate’s credit rating is adding to the problem rather than solving it. There is also the problem of the equity in the home and the possibility that the credit card and loan companies would want to claim against this.

Verdict - It is almost certainly better for Oliver & Kate to attempt to pay their debts in full.

Bankruptcy Option

This would mean the loss of the home. Oliver and Kate would be better off voluntarily selling the property and trading down or renting.

Verdict – Forget it.

Case Study Two: Gemma

Gemma is 25 years old. She shares a rented house with two others and has recently started her first job after graduating from University. She earns £15,000 a year. She owes £17,000 on credit cards and has an additional student loan debt of £7,400. Repayment of debt means that Sarah will be unable to pay her next month's rent.

Debt Consolidation Option

Gemma will very probably find it difficult to borrow more money because of her limited income and tenant status. Any companies prepared to lend her money will likely charge a high rate of interest, which will lead to an even more severe debt problem.

Verdict – This is likely to cause more problems rather than provide a solution.

Debt Management Option

Will bring income and expenditure into balance and ensure that Gemma can meet all essential costs. The longer-term impact on her credit rating will impact on any credit applications over the next few years.

Verdict – Will provide the financial stability that Gemma needs and is worth considering, particularly if Gemma is optimistic she will progress quickly in her career with associated pay increases.

Individual Voluntary Arrangement Option

As with debt management, will bring income and expenditure into balance and ensure that Gemma can meet all essential costs. The longer-term impact on her credit rating will impact on any credit applications over the next few years. Gemma will need to carefully examine the impact of the costs of the IVA.

Verdict – The less optimistic that Gemma is about future pay increases, the more attractive an IVA will become over the debt management option.

Bankruptcy Option

May be initially attractive as a quick and easy solution. However, Gemma should carefully consider the impact that bankruptcy will have on her career and on practical issues such as her bank account and mobile phone agreement. The student loan debt is not affected by bankruptcy and remains payable in full.

Verdict – Not as attractive an option as it may first seem.

Case Study Three: Mark

Mark is 43. He is recently divorced and lives in local authority rented accommodation. He owes £64,000 in loan and credit card debt. He receives incapacity benefit and Income Support and expects to be unable to work for the next few years.

Debt Consolidation Option

Mark is extremely unlikely to be able to access additional borrowing. Any lending is likely to be at extremely high rates of interest, possibly from individuals who will not care too much about legal restrictions in recovering their debts.

Verdict – A non-starter.

Debt Management Option

Reliance on Income Support does not normally provide sufficient 'spare' income to make debt management a viable option. And with no expectation of an early increase in his income, any payments that Mark could make would be a drop in the ocean.

Verdict – This is of very little help.

Individual Voluntary Arrangement Option

The lack of income and assets means that there is no money to pay the costs of an Insolvency Practitioner let alone go towards the debts. The only possibility is if a friend, relative, or some other third party is prepared to offer some money on Marks's behalf.

Verdict – Only worth considering if there are third party funds.

Bankruptcy Option

Bankruptcy law aims to provide relief to those in otherwise unmanageable financial situations and this clearly describes Marks's predicament. The biggest problem is likely to be coming up with the £600 fee.

Verdict – A sensible and positive option