There’s been news today about some mortgage brokers encouraging potential homebuyers to exaggerate their salaries in order to secure mortgages beyond their means:

Unscrupulous brokers are encouraging homebuyers to lie about their finances to qualify for huge mortgages up to eight times their salary. Experts warn that the scam could drag Britain into a US-style subprime mortgage crisis.

Many brokers have been pushing ’self-certification’ mortgages on first-time buyers, low-income families and those with a patchy credit history as a way to get on the housing ladder. These let people state their income without any proper employer checks to qualify for some mortgages.

But evidence is mounting that rogue brokers have encouraged people to inflate their salary to get a bigger loan.

You can read the full article here: http://www.dailymail.co.uk/pages/live/articles/news/news.html?in_article_id=483883&in_page_id=1770

Of course, this drums up some business for mortgage brokers working on commission, but it isn’t so good for consumers, who can rapidly find themselves stuck with unmanageable repayments, and anyone who has been on the forums knows how that can turn out. More credit, more loans, and a serious debt problem at the end of it all.

Firstly, this is clearly bad practice and liable to get vulnerable consumers into financial trouble. People should know better than to lie on mortgage application forms, but with the housing market growing increasingly inaccessible to first time buyers and with the encouragement of “expert” mortgage brokers, it is unsurprising that some people will be tempted into obtaining unreasonable mortgage deals through deception. It is another example of creditors thinking more about their financial gain than about the welfare of their customers.  

It also bad for the economy. As the article says, the US crisis was caused by mass defaulting on missold mortgages, and the last thing we need is for a similar occurrence here. Perhaps one of the upsides of the current problems in the mortgage market is that it has shone the light on the way housing deals are handled in this country – and it has turned up some unsavoury practices. The sooner these self-certification mortgages are subjected to a rigorous review the better, for all concerned.   

After the US subprime crisis shook the global economy, in Britain we have seen Northern Rock become the first high profile UK casualty of the financial instability. In layman’s terms, Northern Rock’s business was dependent on a high degree of borrowing and lending to other banks – with every financial institution suddenly more wary about giving large scale credit and wanting to retain as much liquidity for themselves as possible, Northern Rock faced an enormous shortfall in funding and have suffered accordingly.   

Reports indicate that the tighter lending conditions aren’t just being affecting big business and private equity – consumer debt is coming under increasing scrutiny, with banks unwilling to be stung on defaulted loans, bankruptcy and late repayments while the markets remain jittery.

Barclays, for example, are now for the first time refusing more applicants for credit cards than they are accepting (approval for credit card applications is now down to 46% - 49%), and are conducting a review of all their customers, especially those who have multiple credit cards and regularly borrow to pay back debts. Credit limits for over 500,000 customers have been reduced.  

This is a mixed blessing. It’s high time that banks exercised more caution in consumer lending, and were more responsible about offering credit to those who are clearly developing a debt problem. This benefits everyone – creditors do not have to suffer the financial stings of loans being paid back late or not at all, debtors are forced to realise that they have problems before their debts reach truly unmanageable levels. Both sides being less reckless with credit can only help to reduce the mounting problem of consumer debt in the UK.

Of course, there is a downside. While greater credit control is good, make things too tight and it can actually hurt those who are worst off. For low earners or people whose income and expenditure are uncomfortably close, a small amount of sensibly managed credit can give them the flexibility they need to manage unexpected costs and avoid late payment fees. If these people are cut off from reliable sources of credit, it could actually encourage a slide into debt. At the moment, for good or bad, it would appear that credit is still relatively easy to obtain, with only the real “problem debtors” likely to be hit by the squeeze.   

With the banks in uncertain condition, it remains to be seen whether or not this will make them more or less friendly to their customers who are involved in or are considering an IVA. Perhaps Northern Rock also stands as an example to consumers that living by credit can be a dangerous game. You can live on a lot of credit for a time, but as soon as conditions change unexpectedly, whether you are a large bank or an ordinary debtor juggling credit cards and loans, the debts pile up and you find yourself in serious financial trouble.

There have been a number of news articles released recently that urges caution to those considering entry into an IVA if they are looking for an easy way out of debt, with the main source a recent report released by Which? (http://www.which.co.uk).  

Indeed, a few weeks ago I wrote a blog on this very subject. An IVA is not something to be entered lightly, and it is by no means the best option for every debt situation. Small scale debts can be managed through consolidation or a debt management plan, while very large debts typically demand the more drastic methods of an IVA or bankruptcy. It is certainly important to consider all the available options that a debtor has.

However, the wording of the report is in danger of misrepresenting IVA companies as being uniformly exploitative, luring in debtors with unrealistic promises, signing them up to schemes that they will never be able to repay and creaming their fees off the top.

Anyone thinking of entering an IVA needs to be sure they are making the right decision. It certainly isn’t easy, living on a tight budget for 5 years, and getting any kind of credit, even opening a bank account, can be difficult or impossible.  

Not only does a debtor have to make certain that an IVA is the right solution for them, they also have to choose their IVA company and IP carefully. People who are heavily in debt are vulnerable, sometimes desperate people, trying to get out of a rapidly worsening situation. There are plenty of unscrupulous people willing to exploit this vulnerability to try and turn a profit. Unfortunately, there may well be IVA companies who are guilty of this, and they should deservedly be punished. They are the exception, not the rule – far more frequently, creditors can be blamed for continuing to push credit on those desperate for money, then hitting them with late payment fees and high interest rates beyond their ability to pay.

To label IVA companies as routinely unscrupulous or the IVA itself as an ineffective option is short-sighted, as the IVA can be an effective way of clearing debt under the right circumstances. But an IVA is a serious 5 year legal commitment, and debtors should arm themselves with as much impartial advice as they can before making their decision. Careful research of all the options and the companies that offer them is the key to successfully resolving a debt problem. �

There’s been recent news of creditors becoming increasingly reluctant to agree to IVA proposals. With the arguments still raging over the TIX Compliant IVA and the recent Northern Rock court case against two debtors after refusing their IVA proposals, stories abound of some creditors issuing flat refusals of  IVAs or demanding impossible degrees of repayment. But in many situations the IVA can actually be in the creditors’ best interest.

Obviously, given the choice between recouping all of the money they are owed or a smaller proportion of it, sometimes down to 25p in the pound and with several thousand pounds of the funds recovered going to the IP’s service fees, creditors would prefer to receive the full amount through a Debt Management Plan or a similar arrangement. Large numbers of debtors entering IVAs means frozen interest charges and proportions of debt written off, neither or which is likely to please creditors.  

But by making IVAs unattainable, creditors are shooting themselves in the foot. The IVA is used by people who have personal debts running into tens of thousands of pounds. Paying these debts off through conventional means can take over a decade – ten years or more of living on a tight budget, with no legal guarantees of frozen interest or fixed repayment. For extreme degrees of debt, IVA and bankruptcy are usually the best choices for the debtor.  

When IVAs are refused or are failed, bankruptcy often results. Indeed, many IPs have said they will advise bankruptcy to their clients if creditors unfairly refuse a proposed IVA. When proposing an IVA, IPs have to produce a document showing what creditors are likely to recover in the event of bankruptcy and in the case of an IVA.  The funds recouped by creditors in the case of a bankruptcy are almost always significantly lower than those from an IVA.

If a debtor is in a financial position where bankruptcy or an IVA are the only reasonable options, it makes no sense for creditors to force bankruptcy. They recoup less, the debtor isn’t given the chance to manage their debt effectively, and there are no winners.   

Of course, creditors will always be uncomfortable writing off proportions of debt in IVAs and bankruptcies. They will say that consumers need to be taught to manage their finances better and that avoiding the full repayment of debts is not acceptable.

But they have to accept responsibility for repeatedly giving unrealistic amounts of credit in the first place. If they do not want IVAs and bankruptcies writing off large amounts of debt, then they should exercise better judgement in their money lending, rather than pushing credit onto cash strapped consumers and hoping to reap the full benefit when they inevitably fall behind on repayment.

For many people who are heavily in debt, the idea of finally becoming debt free may be unimaginable. An IVA lasting for five years becomes a way of life, a ritual of tight budgeting, sending off pay slips, and nervously awaiting responses from creditors after any change in circumstance. After so much tension, many people will find it hard to believe that they are finally liberated from their debts.

You previous debts will be gone, but there are after effects to a successful IVA – nothing that is unmanageable, but it is important to keep certain consequences in mind.

As was mentioned in a previous blog, if you have had to remortgage your house to release final year equity you may find yourself in a subprime mortgage with larger repayments and a higher rate of interest than your previous mortgage. While this is unlikely to consume all of your disposable income in the same way that your IVA payments have, it can still be disheartening to have to make this payment at a higher rate. However, as previously discussed, mortgages can be renegotiated after a period of successful repayment, normally two years or so.

Your credit rating will be affected, but only temporarily. It is important to consider before entering into an IVA that it will remain on your credit record for 6 years from the date that it begins – even if you settled a full and final IVA after 2 years, it would still remain on your record for another 4 years. During this time, getting any kind of unsecured credit will be almost impossible. Even opening a bank account will be very difficult.

After 6 years have passed, the credit record is cleared – this is better than having an IVA on there, but can still cause problems, as creditors may be reluctant to trust someone with no credit record at all.  

Many people who have recently finished an IVA may have acquired a healthy aversion to credit and be grateful that loans, overdrafts and credit cards will be out of their reach for awhile. But large scale purchases such as cars often require loans that will be hard to secure – this can cause frustration. Mortgages, however, remain relatively easy to acquire, even with an IVA or blank credit record. They will likely be subprime and thus more expensive for the first few years, but are not difficult to establish.

A completed IVA will successfully and completely clear a person’s debts, giving them the opportunity to start afresh. Credit restrictions and subprime mortgages will be restrictive for the first few years following an IVA – this gives time to adjust to a new spending pattern, rather than falling immediately back into borrowing and spending more than can be repaid.�

Its funny how things come around and go around. 4-5 years ago, Debt Management Plans were a dirty word and it was difficult to get creditors to agree to them. Now, it seems that if you find yourself in financial difficulty, your creditors are positively falling over themselves to get you to enter into this type of plan. But what are the benefits to the individual debtor? 

Its true, compared to an IVA, a Debt Management Plan is relatively easy to put in place. Basically you work out what you can afford to pay each month to all of your creditors and then divide this equally between them on a pro rata basis. These reduced amounts are then offered to the creditors. Once accepted as reasonable, this situation gives immediate relief from your creditors as suddenly you are making regular monthly payments to them based on what you can afford – no more robbing Peter to pay Paul. 

If you are a home owner, a Debt Management Plan will normally not force you to consider releasing any equity from your house. In addition, the agreement is informal. As such, it is not a legal requirement to include all of your creditors. It is not recommended however quite feasible, that you can undertake a Debt Management Plan with most of your creditors but leave perhaps a credit card out and continue using that as normal.

This situation does sound good. But are there any downsides to the Debt Management Plan? There are clearly some things worth thinking about: Firstly, with a Debt Management Plan, you may be repaying what you owe at an easier and reduced rate. However, you still have to pay everything back. Normally this will take a considerable time – 8-10 years on average. It’s a long time to be living within a tight budget will little light at the end of the tunnel. Secondly, because the agreement is not legally binding, any party can change it at any time. If one of your creditors suddenly decides that £16.50 per month is no longer acceptable and they want you to pay more, they are at liberty to go back on their origional agreement. This means that Debt Management Plans are uncertain and you never know quite where you stand.  Thirdly, Creditors who agree to a Debt Management Plan are under no legal obligation to freeze their interest and charges. They may agree to do so for a certain time or may use the threat of continuing to add interest if you do not agree to paying them more each month than you can reasonable afford. 

In summary, a Debt Management Plan can be an excellent tool for resolving a debt problem. However, there are some significant pitfalls and disadvantages which you should also be fully aware of.

There have been several recent threads on the forums concerned about a spouse’s liability for his/her partner’s debt.  One man wants to go through an IVA but wants his wife to have no liability to pay anything, whilst another woman has discovered that her husband has run up a colossal debt and concealed it from her.

A hidden debt can feel like a terrible betrayal, particularly when it has involved borrowing from friends and family or is in a joint investment like a mortgage. Combined with the emotional hurt of being lied to by someone close to you, there is the very practical concern of not wanting to be dragged into someone else’s bad debt, combined with feelings of guilt that impel people to help out partners who are in trouble by borrowing money for them, thus putting themselves in a dangerous amount of debt.

As a third party, you are NOT legally responsible for another person’s debt, unless you have signed as a guarantor for them or the debt in question is jointly in your name. In the case of joint investments, like a mortgage, your half of the investment is safe, i.e. if you had each contributed £25,000 to a mortgage, your partner’s £25,000 could be claimed by creditors but they cannot claim your share. This is the bottom line – you are not legally bound to help repay a partner’s debt. 

However, with IVAs, as an agreement which requires the majority approval of creditors, the situation becomes more complicated. Creditors naturally want to recoup as much of the debt as possible, and may refuse to believe that the partner in a marriage has in no way benefitted from the debt in question. As such, they will frequently refuse to agree to an IVA unless a partner’s income is in some way factored in. 

When calculating the disposable income that will be used to pay back the creditors, they will insist on viewing the household income rather than the income of an individual.  If you are still living with someone who is heavily in debt, although not legally obliged to pay into the IVA, you may find that your contributions are required in order to maintain it.

If you are no longer living with someone who is going to enter an IVA, your income will not be factored in to creditor’s calculations. However, if you move back in at a later date (or if you move out once the IVA has begun) the terms of the IVA will have to be renegotiated to take the change in income into account. But it is vital to remember that it is the household income that is significant – you have control over how involved you become in a partner’s debt, and have no legal obligation to help them repay it. 

Many people may still feel a moral imperative to help the partner in debt as much as they can. But it is important to resist this – it is vital that someone who has run up an uncontrollable debt learns to take control and manage their money. People caught in a spending/borrowing cycle will keep spending until they are forced to stop. Through an IVA, a person will pay back only as much as they can afford – excessive charity from partners, family and friends, however well meaning, can hurt rather than help.