Debt Management

By selling your house and releasing equity, you can use some or all of the proceeds to clear your debts.

However this is not a decision to be made lightly. The most important consideration before selling to release cash to pay your debts is: Are your debts secured on the property, or unsecured?

Secured Loans

If you default on a secured loan, the Lender can demand their security (the property). If you have loan(s) secured on the property (i.e. a mortgage or a secured second charge loan) and you don’t make the payments, then sooner or later the Lender(s) will take action to repossess the property.

It is quite common for your first charge Lender (usually a Bank or Building Society) to show some sympathy if you are struggling to make your repayments, while at the same time a second charge lender (many of these are smaller, specialist loan companies) will try and repossess the property.

However if you have little or no equity the second charge Lender may be unlikely to recoup their loan in full if they repossess. If you point this out to them they will sometimes accept that it is not in their interests to seek possession of the property.

Should you have access to a lump sum of money, quite often second charge lenders will negotiate a settlement and write off part of the debt (first charge Lenders very rarely do this).

The amount of the debt written off will vary from Lender to Lender and will depend on your level of equity and financial circumstances, but between 25% and 50% is possible.

If you have no realistic way of making payments to your Lender(s) and are unable to agree a payment plan that works for you and them, then selling your property is usually your only way forward.

To do this you will need to have sufficient equity to pay off your mortgage(s) and secured loan(s). At least you can release the stress of living with debt and start again.

Unsecured Loans

If you default on an unsecured loan, your house is not immediately at risk, although unfortunately it is becoming more common for unsecured lenders to get what’s called a ‘charging order’ on your home.

They request this through the courts if you don’t repay the loan. This effectively means they have a call on the money from the sale of your house.

It doesn’t usually mean repossession though. The courts are much more reticent to grant repossession on charging orders.

It is more likely that you will be allowed to stay in the property, but will have to repay what was originally an unsecured loan when you come to sell.

Some loan agreements are not as clear as they might be, so you should check the small print carefully to see whether the loan is secured or unsecured.

Additional Debts

If, in addition to your mortgage and any other secured loans, you have other debts – personal loans, credit cards, store cards, unpaid tax bills, or any other types of debt – it is usually a good idea to take advice from a specialist Debt Management Company or Insolvency Practitioner.

These specialists invariably offer free advice on the various alternatives open to you. Depending on your circumstances the likely options are:

a) Debt Management Plan

With A Debt Management Plan, an agreement is made between you and your creditors to pay all of your debts. You make regular payments to a licensed debt management company. The company then shares this money out between your creditors.

In most cases, Creditors will agree to waive any further interest charges; otherwise the payments you make are unlikely to actually reduce what you owe. Nevertheless, if you are making reduced payments it could take you a long time to actually clear all your debts.

One advantage of a Debt Management Plan is that if you should have a lump sum of money at some time in the future, for example from redundancy or an inheritance, the debt management company can often use this to negotiate a significant reduction on what you owe in what is known as a full and final settlement.

b) Individual Voluntary Arrangement

An Individual Voluntary Arrangement is an agreement with your creditors to pay part of your debts, the amount of which is agreed by the Creditors at the outset, over a fixed period, often 5 years. It must be arranged through an Insolvency Practitioner, to who you will make regular payments. The payments will be divided between your creditors.

It is very important that you make the monthly payments in full and on time otherwise the IVA can become void. You should only take this route if you are confident that you can pay what you agree at the outset, every month, for the agreed period of the arrangement.

c) Bankruptcy

Any assets you have can be used to pay your debts. You must follow certain rules called the ‘bankruptcy restrictions’.

Your name and details will be published on a bankruptcy register called the Individual Insolvency Register. You are usually discharged from your bankruptcy after 12 months. Advice on the above is available from the Citizens Advice website.

By Richard Watters

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