Unit 3 Topic 5 Flashcards
(131 cards)
1
Q
When do people tend to borrow?
A
Everyone has different ways of thinking about and managing their money – and, more specifically, very different attitudes towards borrowing and debt. In general, people borrow when they have a cash deficit, or when they want to finance the purchase of goods and services that they cannot afford at present.
2
Q
What does borrowing mean?
How do you describe someone that borrows?
A
Borrowing means drawing from future income flows to finance an item of expenditure now. Someone who has borrowed money is in debt to the lender; this is a legal relationship and arrangements must be made to pay back the debt plus interest.
3
Q
What does someone’s total debt include?
A
A person’s total debt includes all of the money that they owe under different borrowing products and also borrowing from informal sources, such as from family and friends. Each separate borrowing decision adds to total debt.
4
Q
How can borrowing help people?
A
Borrowing can help people to smooth out differences in timing between their income and expenditure. Someone who is always short of funds at the end of the month can use their credit card or overdraft to finance their purchases until the next salary payment arrives in their bank account.
5
Q
How does borrowing have both benefits and costs (advantages and disadvantages)?
A
Borrowing money is a tool that some people use to their advantage, while others find themselves getting into financial difficulties when they cannot afford to maintain the repayments. Borrowing therefore has both benefits and costs.
6
Q
What is a negative bank account balance called?
A
A negative balance at the end of the month – the result of spending more than your monthly income – is a deficit.
7
Q
When is borrowing to cover a deficit good?
When is borrowing to cover a deficit bad?
A
Borrowing money to cover a deficit is sensible if you know that you will have extra money next month to repay it. But if you have to carry the deficit over to the following month and add to it to cover that month’s deficit, you will be in danger of accumulating a rising debt – money that you have borrowed, but which you cannot afford to pay back.
8
Q
Why do most people borrow money?
A
Most people borrow money as a means of affording a substantial purchase, such as a house, a car or furniture, which they need to buy now, but which is too expensive to be funded only by current income. It might take someone too long to save up for an item that they need immediately or very soon; if they buy the item now with borrowed money, they can use it while they repay the loan.
9
Q
What is the most common example of borrowing?
A
The most common example of borrowing is the mortgage loan: very few people are able to buy a house without taking out a mortgage loan, which they pay back while they are living in the house.
10
Q
Why are interest rates lower for a mortgage loan than for other loans?
A
Interest rates are lower for a mortgage than for other loans because it is secured on the property. This means that there is less risk for the lender, as it can sell the property to recover its losses in the event that the borrower defaults on the loan (ie cannot afford to maintain their repayments).
11
Q
What is defaulting on a loan?
A
Defaulting on a loan = cannot afford to maintain their repayments.
12
Q
What does the long term factor of mortgage loans do to the monthly repayment size?
A
The long term of such a loan (mortgage loan) also means that monthly repayments are similar to – or sometimes less than – the rent that the borrower would otherwise have to pay for an equivalent property.
13
Q
What happens when the mortgage of a house has been fully paid off?
A
Eventually, the house will belong to the borrower (when they have paid back all of the mortgage) and, if house prices have risen, they will make a capital gain (although they also risk losing money if house prices fall).
14
Q
What is equity?
What can positive equity be used for?
A
The difference between the amount owed on the mortgage and the market value of the house is called ‘equity’;
If this is positive, it can be used as security for loans to finance other purchases, such as home improve -ments, or to finance a life event or emergency. More -over, people who own their homes may have a psycho -logical benefit, because they feel a sense of security and perhaps even pride, as long as they can still afford the repayments.
15
Q
When someone borrows money, what are they agreeing to?
A
When someone borrows money, they agree to repay the debt from their future income. This means that they will have less left over from their future earnings until they have repaid their loans and so there is an opportunity cost, ie the value of the best alternative purchase that they could have made with this money.
16
Q
What is the cost of borrowing?
A
Borrowing is a product that must be paid for; the cost is called ‘interest’. A borrower repays not only what was borrowed, but also a percentage interest charge on top of this to recompense the lender for the use of its money over the time of the loan and for the risk that it takes (that the borrower will default).
17
Q
What type of debt is the most expensive?
What type of debt is the least expensive?
A
Some types of debt (such as payday loans) are very expensive, while others (such as personal loans) are much cheaper – and mortgages offer the lowest rates because they are secured on the property.
18
Q
What is the representative APR for Payday loans?
A
Payday loan APR
Lending Stream 1,333% MoneyBoat 939.5%
19
Q
What is the representative APR for Store cards?
A
Store cards APR
Argos 29.9% New Look 28.9%
20
Q
What is the representative APR for credit cards that require good credit rating?
A
Credit cards (require good credit rating) Sainsbury’s Nectar Credit Card 20.9% Tesco Bank Low APR Card 9.9% Royal Bank of Scotland Credit Card 9.9%
21
Q
What is the representative APR for credit cards that require poor credit rating?
A
Credit cards (poor credit rating) APR Metro Bank Personal Credit Card 14.9% Capital One Classic 34.9% Vanquis Visa Classic 39.9%
22
Q
What is the representative APR for personal loans?
A
Personal loans (£7,500 unsecured – repaid over 36 to 60 months) Barclays Bank Personal Loan 5.5% Nationwide BS Personal Loan 2.9% M&S Bank Cardholder Loan 2.9%
23
Q
What is the representative APR for mortgages?
A
Mortgages APR
Coventry 4.0% HSBC 3.5% First Direct 3.2%
24
Q
Why does debt become a big problem for some people?
How does this debt accumulate?
A
Since people repay debts from future incomes, there is a chance that something might happen that affects their ability to repay, eg they may lose their job or be faced with a large unexpected expenditure. Debt can become a big problem for some people simply because they allow it to get out of control. Some people borrow more than they can afford to repay so that they can finance the purchase of goods and services that seem very attractive (and which are heavily marketed). They may find themselves taking out new loans to help them to repay old ones. Such a situation leads to what is known as ‘hardcore debt’.
25
What is hardcore debt?
| What are its effects?
Hardcore debt – an amount of money that the borrower will never be able to pay off.
This type of debt can be very stressful, and the worry that it causes can have serious psychological effects not only on the borrower, but also on relatives and friends
26
What is the impact of defaulting on a loan that is secured?
Defaulting on a loan is a serious matter.
If the loan is secured on an asset, such as a mortgage secured on a home, the borrower will lose that asset – their home – if they stop meeting the repayments. If the borrowing is in the form of a hire purchase agreement, the borrower will lose the goods – and will not be able to recoup the payments already made.
27
What is the impact of defaulting on an unsecured loan?
Defaulting on a loan is a serious matter.
If the loan is unsecured, the defaulter will obtain a bad financial reputation or ‘financial footprint’, which means that they may be unable to get credit again. In the worst case, the person could be declared bankrupt.
28
What is the majority view on borrowing?
| What does this mean for providers?
Many people see borrowing as a normal thing to do and financial institutions compete for the opportunity to lend to people. Customers can shop around and get the best deal to suit their needs.
29
What group of the life cycle are more likely to have to borrow?
Young people are more likely to have to borrow when they are starting out in adult life than older people who have been working for some years. Younger people will need loans to finance their studies, day-to-day cash flow and the larger items of expenditure.
30
What has lead to increasing debt in recent years?
What did this lead to?
What event made debt even worse?
In recent years, there have been a lot of reports in the media about people who have not used their borrowing facilities wisely and now have too much debt. Providers have also been guilty of irresponsible lending – of providing credit too easily and lending money to people who could not afford to pay it back. This was one of the factors that led to the 2007–08 financial crisis, and to several banks and other institutions in a number of countries ceasing to trade or needing government help to survive. This financial crisis was followed by a recession, during which many people lost their jobs – and the impact of becoming unemployed and losing your income is even worse if you already owe money.
31
What has happened to mortgage repossessions and arrears after 2007?
Give some statistics to back this up.
The numbers of house repossessions and of mortgage arrears increased considerably after 2007, according to the Council of Mortgage Lenders (CML).
- Some 46,000 homes were repossessed in 2009 – the highest number since 1995. During the third quarter of 2017, however, only 1,300 mortgaged properties were repossessed, which was the lowest repossession rate on record
- The number of mortgages in arrears also hit a ten-year high of 196,000 in 2009, before falling to 169,600 in 2010. The level remained consistently high after the crisis – at 161,400 in 2011, 157,900 in 2012, 149,400 in 2013 and 125,100 in 2014. But by the third quarter of 2017, the number of arrears of 2.5 per cent or more fell to 88,300
- In 2020, arrears levels were at near-historic lows as banks, the government and the FCA supported borrowers through the emerging economic effects of Covid-19.
32
In November 2014 what did the CML report?
| In terms of mortgage arrears and repossessions
In November 2014, the CML reported that:
Low interest rates, supported by intelligent communication and forbearance (ie tolerance), mean that mortgage arrears and repossessions continue to decline.
33
Why have mortgage repossessions fallen?
Mortgage repossessions have fallen partly because interest rates have remained relatively low and people are still managing to meet their monthly repayments, and partly because banks are showing more tolerance (known as ‘loan forbearance’) towards people who are experiencing temporary difficulties such as allowing them a period of grace or a repayment holiday (ie a period during which they make no, or lower, repayments). However, if interest rates rise, the situation will worsen and repossessions will increase.
34
What is a repayment holiday when talking about borrowing?
A repayment holiday = a period during which people make no, or lower, repayments.
35
What is a repayment holiday when talking about borrowing?
A repayment holiday = a period during which people make no, or lower, repayments.
36
What is a repayment holiday when talking about borrowing?
A repayment holiday = a period during which people make no, or lower, repayments.
37
What is a repayment holiday when talking about borrowing?
A repayment holiday = a period during which people make no, or lower, repayments.
38
What are the attitudes towards debt now?
| What were the attitudes towards debt in the early to mid twentieth century?
Debt is commonplace in most modern Western societies for both businesses and individuals. In the early to mid twentieth century, any level of personal debt was generally considered to be bad; businesses, of course, still had to borrow to buy stock, to obtain premises and to allow them to trade. Nowadays, reasonable levels of personal debt are accepted as the norm. What the long-term impact of widespread criticisms of financial services in the wake of the financial crisis will be on people’s attitudes towards debt remains to be seen: in the immediate aftermath, they have become more wary of borrowing – but this effect may be relatively short-lived
39
How are lenders being more cautious when agreeing loans?
It is, however, certainly the case that lenders are being more cautious when agreeing mortgages and other loans: they are accepting only customers who have a better credit history and who are more likely to be able to repay. They have also increased the interest rates that they charge on some lending products. The average rates charged on credit cards, for example, rose steadily between 2006 and 2011, and in November 2020 the average rate was still 20.91 per cent. This was 20.9 per cent above the Bank rate, the reason being that credit card providers have been forced to write off large amounts of debt in the aftermath of the crisis. This ongoing high risk of default results in increased interest rates on unpaid balances.
40
What should be considered when applying to borrow money?
Someone who is considering financing expenditure with a loan should take both the benefits and costs of borrowing into account:
- The advantages and disadvantages of each individual loan should be considered not only independently, but also in light of any other loans that the prospective borrower might already have taken out. Prospective borrowers should look at their overall debt situation and not only at each loan separately.
- The price that the customer pays for a loan must be reasonable when compared with the purpose of the loan: are the items purchased worth the amount of interest being paid and could the money have been borrowed more cheaply elsewhere?
- The length of the loan should also correspond to the life of the article purchased. For example, the borrower will sensibly apply for a 25-year loan to fund the purchase of a new home – but not to finance the purchase of a computer.
41
What factors determine whether someone decides to borrow or not?
Whether or not an individual decides to borrow also naturally depends on their attitude to debt and to risk – and remember that the cultural group(s) to which they belong and their ethical values are likely to have shaped these attitudes. People borrow only to the extent with which they feel comfortable.
42
How can borrowing decisions be dealt with to ensure sustainable personal finances?
To maintain sustainable personal finances, an individual’s borrowing decisions should not be taken in isolation, but should be both integrated into their short-term and medium-term budgeting plans and cash-flow forecasts and fully justified as part of their long-term financial plan.
43
How can borrowing decisions be dealt with to ensure sustainable personal finances?
To maintain sustainable personal finances, an individual’s borrowing decisions should not be taken in isolation, but should be both integrated into their short-term and medium-term budgeting plans and cash-flow forecasts and fully justified as part of their long-term financial plan.
44
What does a lender look into when someone wants to buy a borrowing product?
What companies offer this service?
When a potential borrower approaches a bank or finance company for a loan, the lender researches their credit history. There are three large credit reference agencies in the UK:
- Experian, online at www.experian.co.uk;
- Equifax, online at www.equifax.co.uk;
- TransUnion, online at www.transunion.co.uk
45
How do credit reference agencies check someone's credit rating?
These companies (credit reference companies) compile files on consumers using information from banks, building societies and credit card companies, and also from county court judgments (CCJs), the electoral register, bankruptcy orders and house repossessions. The details of every loan, credit card or other credit agreement that an individual has or has had are recorded in these files, which builds up a picture of how much the individual has borrowed and how good they are at making the required monthly payments. The credit reference agencies themselves do not make decisions on whether or not customers should be granted a loan and they do not keep a ‘blacklist’; they simply supply information to lenders on request.
46
What can a lender view on a person's credit history?
Every time a person applies for a borrowing product, the lender will search the credit file, and this search leaves an electronic ‘footprint’ in the person’s personal credit history. If they apply for an unusually large number of loans, a note is put on their record. ‘Shopping around’ for the best loan or mortgage deal can also cause a problem, because lenders may view multiple credit searches by different credit providers as a sign that the individual is finding it hard to get a loan agreed. Making payments late or missing payments, building up payment arrears and defaulting on a loan credit agreement (ie failing to pay it all back) all show up as negative footprints on a person’s record. Many people who have mobile phones on monthly payment contracts do not realise that these too are credit agreements and that, if they miss payments or fail to keep up the payments for the full term of the contract, negative footprints will be added to their credit history.
47
Can an institution refuse to offer credit?
What can someone do if they are refused credit?
How can poor credit histories be improved?
A financial institution may refuse to offer credit to an applicant if it thinks that the applicant is a bad risk because they have already borrowed too much or because they have a bad history of repaying. If someone is refused credit and thinks that this is unfair, they can check their credit history online at the credit reference agency websites or by writing to the agency and asking to see their file. Poor credit histories can be improved only by consumers repaying their loans, credit cards, etc, on time and in full. You can view snapshots of a sample Experian credit report online at experian.co.uk/creditreports/sample-report.htm.
48
Which people are sought after by financial institutions?
Customers who repay on time and in full leave favourable financial footprints; these people are sought after by financial institutions. Examples are those people who always pay their loan and mortgage payments on time every month, and individuals who regularly pay more than the minimum payment on their credit card balances every month, by the due date. (People who actually avoid paying any interest on their credit cards by paying off the balance in full every month are not so attractive to credit card companies, of course, because the company will not make any money out of these customers.)
49
When does debt become a problem?
What happens if people get into so much debt that they cannot pay? This may be because they borrowed too much or because they have now lost their means of earning an income. Debt is a useful financial tool as long as borrowers limit it to what they can afford, taking into account their other expenditure; borrowers have got a problem if they cannot meet the agreed payments without borrowing more money.
50
When do people typically apply for a consolidation loan?
| What is this loan?
When people realise that they can no longer afford to pay the necessary monthly payments on their debts, many react to the situation by applying for a consolidation loan. A consolidation loan provides enough money to pay off all of the other debts. This kind of loan is often secured on the customer’s home, assuming that the applicant is a homeowner and that there is positive equity in that property.
51
When can a consolidation loan be a good thing?
| When can a consolidation loan be a bad thing?
In some cases, a consolidation loan can be a solution to a debt problem, eg if the consolidation loan has a lower interest rate than the existing debts and a longer repayment period, which will further reduce the monthly payment. Debtors should, however, take care to avoid high-interest loans. Some people take out a consolidation loan as a last resort and, if they are desperate to cover their debts, they may not pay enough attention to the interest rates, arrangement fees, other charges and the ‘small print’ – ie the legal terms and conditions attaching to the loan. If they find that they cannot afford to make the required payments on the new loan, it will simply make matters worse – and if that new loan is secured on a property, it could put their home at risk.
52
What is the first thing people should do if they cannot repay what they owe?
What companies should an individual use?
The first thing that people should do if they cannot repay what they owe is recognise that there is a problem and ask for help. There are many companies that offer debt management advice and services: some companies’ adverts even claim that they can use a ‘legal loophole’ to ‘wipe out 75% of your debts’. But such companies often charge high fees for their services. Paul Lewis, presenter of BBC Radio 4’s Money Box, advises that people with debt problems should never go to a commercial company for help. Instead, he suggests that they use a free service offered by a charity such as Citizens Advice, which provides information and advice online at www.citizensadvice.org.uk, or locally, through its network of Citizens Advice Bureaux.
53
What will citizens advice advise debtors to make first?
What does this count as?
What if there are any missed payments?
Citizens Advice will advise debtors first to make a list of income and current expenses, which should be put into order of priority.
- At the top of the payments list should be secured loans (ie those loans which if repayments are not made, could lead to the loss of the individual’s home) or payments that, if missed, could result in vital services being cut off. Priority payments would therefore include monthly mortgage payments or rent, and electricity, gas and water bills.
- Also priority bills – because, in extreme cases, non-payment could lead to criminal prosecution and a possible jail term – are council tax, child support and maintenance payments (to an ex-partner or children), income tax and TV licences.
- If the debtor needs a car because of a disability or because they would not be able to get to work or do their job without one, the payments on a car hire purchase agreement, car insurance and other reasonable running costs could also be treated as priority payments.
If any of these priority payments have been missed and there are arrears, the debtor will need to contact the relevant creditor(s) and make arrangements to pay extra each month to pay off the arrears over an agreed period. There are two main ways in which they can do this: by means of an informal payment plan, or by means of a debt management plan (DMP).
54
What does an individual need to do if priority payments have been missed?
How will they do this?
If any priority payments have been missed and there are arrears, the debtor will need to contact the relevant creditor(s) and make arrangements to pay extra each month to pay off the arrears over an agreed period. There are two main ways in which they can do this: by means of an informal payment plan, or by means of a debt management plan (DMP).
55
What is an informal payment plan?
Informal payment plans are used if the debtor’s income is enough to leave a surplus after paying priority bills and their essential spending (eg on food, drink and household goods), the debtor should then use this surplus to offer regular repayments on the remaining non-priority, unsecured debts, negotiating lower monthly payments spread over a longer repayment term.
The debtor should contact the banks and credit card companies to which they owe money (on outstanding loans, overdrafts, credit card balances, etc), and explain the situation and what payments they can afford to make. A creditor will usually agree to accept a reduced monthly payment, and to stop charging interest and missed payment fees, if it sees evidence of a regular income and no spending on non-essential ‘luxuries’.
The monthly amount that the debtor negotiates with each creditor should be in proportion to the size of the total debt, so that all the creditors are fairly treated and the debts are all repaid over the same time period.
56
What is a debt management plan (DMP)?
Debt management plans (DMPs) are for anyone who does not feel capable of making all these arrangements by themselves, they can get free help to set up and maintain a more formal DMP. The organisations that offer this service include: ◆the StepChange Debt Charity, online at www.stepchange.org;
◆the National Debtline, online at www.nationaldebtline.co.uk;
◆Payplan, online at www.payplan.com; and
◆the Debt Advice Foundation, online at www.debtadvicefoundation.org.
Each of these organisations will contact the debtor’s creditors and agree affordable monthly payments to each creditor. The debtor then sets up a single monthly payment to the DMP manager, who passes it on to the creditors in the agreed amounts.
57
What happens if someone builds up an unsustainable amount of debt without recognising a problem?
If an individual builds up an unsustainable amount of debt (ie can no longer afford to keep up all of the monthly payments), but does not recognise that there is a problem and take steps to deal with it, the creditor(s) may pass the debt to a debt collection agency, which might threaten to take the individual to court if they do not bring their payments up to date. At this stage, it should still be possible to negotiate an affordable repayment plan – but in the worst cases, if someone is unable to avoid defaulting on the renegotiated repayments, they may end up in court anyway.
58
What type of court will a debtor be taken to?
| What is the court process?
The court in which the debtor ends up is not a criminal court, because they have not broken the law, but a county court. The creditor (or debt collection agency) asks the county court to consider the case, establish whether a debt exists and, after giving the debtor a chance to explain their side of the story, decide how the debt should be repaid (ie as a lump sum or by monthly instalments). If the debtor’s unsecured debts amount to less than £5,000 and the court accepts that the debtor cannot repay the debts in full, either the debtor or the creditor can ask the court to impose an administration order under which the court will make arrangements for the debtor to repay their debts in monthly instalments. The other option available to the court is a county court judgment (CCJ).
59
What is the maximum amount a debtor can owe to be given an administration order or CCJ?
Are these debts secured or unsecured?
If the debtor’s unsecured debts amount to less than £5,000 and the court accepts that the debtor cannot repay the debts in full, either the debtor or the creditor can ask the court to impose an administration order under which the court will make arrangements for the debtor to repay their debts in monthly instalments. The other option available to the court is a county court judgment (CCJ).
60
What is an administration order?
What is a CCJ?
Do these incur a cost?
The structure of an administration order is similar to that of a DMP, but in this case the debtor pays the single monthly payment to the court rather than to a DMP manager.
Likewise, the CCJ represents a legally binding requirement to pay what the court has decided is owing, either in full or by instalments, by a certain deadline. That payment may be made to the court or directly to the creditor.
Administration orders and CCJs both incur court fees, payable by the debtor, but these can be added to the total debt and included in the debtor’s monthly repayment.
61
Give some criteria for someone who will not be able to receive an administration order or CCJ.
What will be available for these people instead?
Sometimes, however:
◆the debtor’s creditors might not agree to a DMP; ◆the debtor might fail to keep up the agreed monthly repayment required under a DMP or administration order;
◆the debtor may have a number of CCJs against them; and / or
◆the debtor’s outstanding total owed may amount to more than £5,000.
The options available in these instances are an individual voluntary arrangement (IVA), a debt relief order (DRO) or bankruptcy. These options provide a solution that will cancel some or all of the outstanding debt.
62
What is an individual voluntary arrangement (IVA)?
This is a formal agreement between debtor and creditors; creditors representing at least 75 per cent of the total debt value have to agree to the arrangement for it to become legally binding. It is set up and supervised by a licensed insolvency practitioner (IP), ie a firm of accountants or solicitors who will examine the debtor’s finances – income, expenditure and assets (what they own) – and decide how much they must pay into the IVA each month (typically at least £200) for a fixed period (usually five years). The creditors will often agree to an IVA only if the payments that they receive amount to at least 30 per cent of the money owed (and some insist on repayment of 40 per cent or 50 per cent.
63
An IVA can only become legally binding if the creditor agrees, what per cent of total debt does this apply to?
Creditors representing at least 75 per cent of the total debt value have to agree to the arrangement for it to become legally binding.
64
Who is an IVA set up and supervised by?
It is set up and supervised by a licensed insolvency practitioner (IP), ie a firm of accountants or solicitors who will examine the debtor’s finances – income, expenditure and assets (what they own) – and decide how much they must pay into the IVA each month.
65
Creditors will often agree to an IVA if they are given back what per cent of money owed?
The creditors will often agree to an IVA only if the payments that they receive amount to at least 30 per cent of the money owed (and some insist on repayment of 40 per cent or 50 per cent).
66
How much must an individual pay into an IVA?
Typically creditors must pay at least £200 for a fixed period (usually five years).
67
What happens if someone makes their monthly payments for the full term of their IVA?
If the debtor makes the monthly repayments for the full term of the IVA, their debts are then classed as ‘discharged’ and they are officially ‘debt-free’ as far as unsecured debts are concerned.
68
What is the cost of an IVA?
Establishing an IVA will itself incur more costs: in addition to court and legal fees, the IP will usually charge a nominee fee for preparing and setting up the IVA (typically £2,500) and an annual supervisory fee for administering the IVA (typically £1,000 per year). Payment of these fees can usually be included within the debtor’s monthly IVA payment.
Note, however, that the organisations that offer free DMP services do also provide IP services and do not charge a nominee fee.
69
What is the criteria for a debt relief order?
If the debtor has quite a low level of unsecured debt (ie less than £30,000*), low surplus income (no more than £100* per month after paying normal household expenses) and few or no assets (no more than £2,000*), a DRO is an alternative to an IVA or bankruptcy. * Figures proposed in January 2021.
70
Is a DRO an easier or harder method for debt help?
| How can a person apply?
Debt relief orders offer a route towards being free of debt that is quicker and easier than IVAs or bankruptcy, because the debtor can simply apply online using one of the four authorised free debt advice agencies (StepChange Debt Charity; National Debtline; Payplan; Debt Advice Foundation). The agency will then forward the application to the court’s Official Receiver, who will decide whether or not to make an order.
71
What is the cost of a DRO?
There is an administration fee for DROs that can be paid in instalments.
72
What happens when a DRO is put into place?
| How long does this last?
Once the DRO is in place, the debts included in the order are frozen, so that the debtor no longer makes any repayments and the creditors cannot take court action to recover the debt. After 12 months, the debts are discharged.
73
When can an individual become bankrupted?
Any creditor who is owed at least £5,000 on an unsecured loan can also ask the court to declare a debtor bankrupt, or an individual struggling to pay back unsecured debts can apply to the court themselves for voluntary bankruptcy.
74
What happens when someone is declared bankrupt?
If someone is declared bankrupt, the court will appoint the Official Receiver (an officer of the court) or a licensed IP to take over their finances. All debts, bank accounts and assets are frozen, and arrangements are made to sell most of the debtor’s assets (including their home, if they are a homeowner) and to use the proceeds to pay off as much of the debt as possible.
75
What is the cost in court fees when someone becomes bankrupted?
The debtor will have to pay up to £700 in court fees plus legal fees if they use a solicitor.
76
When can bankruptcy be a good thing?
For some people, eg a non-homeowner with a low income and very few assets, bankruptcy is actually a process that allows them to get out from under their debts and make a fresh start. In many cases, the period of bankruptcy may only be 12 months before the bankrupt is discharged, and the big benefit of bankruptcy is that creditors can no longer chase the debt; it is up to the IP or Official Receiver to decide how much of the debt the debtor will be able to repay.
77
How long is the period of bankruptcy?
In many cases, the period of bankruptcy may only be 12 months before the bankrupt is discharged.
78
What are the disadvantages of bankruptcy?
There are some serious disadvantages to bankruptcy, however, including:
◆a damaging financial footprint on the debtor’s credit history for six years;
◆the debtor being allowed to have only a basic bank account for the duration of the bankruptcy; ◆the debtor losing their home and other assets; ◆the debtor being barred from joining the police or armed forces, or from working as an accountant, a financial adviser, a solicitor or a company director; and
◆potential embarrassment, because bankruptcy proceedings may be advertised in the local newspapers.
79
Are the debts frozen (no more interest or other charges) in an informal payment plan?
Only if the creditor agrees.
80
Are the debts frozen (no more interest or other charges) in a debt management plan?
Only if the creditor agrees.
81
Are the debts frozen (no more interest or other charges) in a DRO?
Yes
82
Are the debts frozen (no more interest or other charges) in an IVA?
Yes
83
Are the debts frozen (no more interest or other charges) in bankruptcy?
Yes
84
Are debtors protected from the action of creditors to recover debts in an informal payment plan?
No
85
Are debtors protected from the action of creditors to recover debts in a debt management plan?
No
86
Are debtors protected from the action of creditors to recover debts in a DRO?
Yes
87
Are debtors protected from the action of creditors to recover debts in an IVA?
Yes
88
Are debtors protected from the action of creditors to recover debts in bankruptcy?
Yes
89
What is the amount of outstanding debt repaid in an informal payment plan?
100%
90
What is the amount of outstanding debt repaid in a debt management plan?
100%
91
What is the amount of outstanding debt repaid in a DRO?
None
92
What is the amount of outstanding debt repaid in an IVA?
Between 30% and 50%
93
What is the amount of outstanding debt repaid in bankruptcy?
Whatever can be raised by selling debtor's assets.
94
What is the cost (legal and administrative fees)of an informal payment plan?
None
95
What is the cost (legal and administrative fees)of a debt management plan?
None, if using a free online debt adviser.
96
What is the cost (legal and administrative fees)of a DRO?
£90
97
What is the cost (legal and administrative fees)of an IVA?
Typically £7,500
98
What is the cost (legal and administrative fees)of bankruptcy?
Up to £700 court fee plus solicitor’s fees (if used).
99
What is the minimum and maximum amount of total debt of an informal payment plan?
No minimum
| Maximum limited to an amount that can be paid back over a reasonable time.
100
What is the minimum and maximum amount of total debt of a debt management plan?
Minimum usually £5,000
| Maximum limited to an amount that can be paid back over a reasonable time.
101
What is the minimum and maximum amount of total debt of a DRO?
No minimum
| Maximum £30,000
102
What is the minimum and maximum amount of total debt of an IVA?
Minimum £10,000
| No maximum
103
What is the minimum and maximum amount of total debt of bankruptcy?
No minimum or maximum.
104
Are debts discharged on an informal payment plan?
Only after full repayment.
105
Are debts discharged on a debt management plan?
Only after full repayment.
106
Are debts discharged on a DRO?
After 12 months
107
Are debts discharged on an IVA?
After 5 years.
108
Are debts discharged on bankruptcy?
After 12 months.
109
Are assets affected in an informal payment plan?
No
110
Are assets affected in a debt management plan?
No
111
Are assets affected in a DRO?
No
112
Are assets affected in an IVA?
Will have to pay any savings into the IVA at the outset and may have to use any available equity in a property.
113
Are assets affected in bankruptcy?
All non-essential assets will be sold to help to pay off the debt. Homeowners have to sell their homes.
114
Are there any restrictions placed on debtor in an informal payment plan?
None
115
Are there any restrictions placed on debtor in a debt management plan?
None
116
Are there any restrictions placed on debtor in a DRO?
If applying for new loan, must tell lender about the DRO. Allowed to keep bank account, but no overdraft.
117
Are there any restrictions placed on debtor in an IVA?
May not be allowed to be an accountant or solicitor. Cannot take out new unsecured credit.
118
Are there any restrictions placed on debtor in bankruptcy?
May not be allowed to be an accountant or solicitor. Cannot take out new unsecured credit.
Only allowed a basic bank account, and barred from certain professions.
119
What is the impact on credit history with an informal payment plan, a debt management plan, a DRO, an IVA, and bankruptcy?
Each solution will leave a negative financial footprint on a credit record for six years.
120
Define culture.
‘Culture’ refers not only to people’s ethnic and religious backgrounds, but also more generally to the social groups to which they belong.
A person’s cultural background reflects where and how they were brought up, what ideas were instilled into them as a child, their value systems, the overriding ideas of their peer groups and what is important to them in their lives generally.
121
How does culture impact finances?
Cultural factors affect a person’s approach to financial services, helping to determine which products they will buy and from which suppliers.
122
How do different people see debt differently?
Different families from different backgrounds may see debt differently.
◆At the one extreme, there are groups of people who are not at all concerned about getting into debt and even going bankrupt.
◆At the other extreme are those who see debt as something to be avoided at all costs. These people believe that you should not borrow from financial institutions and that, if you do need to spend money, you should borrow only from members of your family group.
123
What does Islamic law prohibit?
Islamic law (Sharia) prohibits the paying and receiving of interest (Riba), and this can exclude a Muslim from borrowing.
124
How many Muslims are in the UK?
| What is this as a percentage?
Muslims represented the second largest religious group in England and Wales according to the 2011 Census, which reported that there were 2.7m Muslims in total, making up 4.8 per cent of the population (ONS, 2011).
125
Some religions prohibit gambling, what financial product can this affect?
Islam and some other religions prohibit gambling in all of its forms; for these religious groups, this can include investing in the stock market.
126
How can people at the extreme ends of the attitude to debt spectrum learn from each other?
Perhaps those at the extreme ends of the ‘attitude to debt’ spectrum might learn from each other: those who will borrow up to the last penny might learn some restraint; those who prefer not to borrow at all (other than people with religious reasons) might see that debt that is limited to what you really can afford can have its uses. Some people have such strong beliefs and opinions, however, that they will not be swayed by arguments to the contrary.
127
How does/ might an individual's culture change over the course of their life?
How can this affect financial products?
A person goes through many changes over the course of their lifetime and may witness change in the prevailing culture – whether in terms of society or in terms of their own personal experiences. Some people go abroad to live for a while, for example, and learn new values and priorities; others marry into different cultures and adopt them as their own; yet others who remain within their original culture all of their lives may see the prevailing views among their peers change. To the extent that people experience some culture change, they can consequently change their attitudes to financial products. Many of today’s keen borrowers are the children of parents who believed passionately in the art of saving and saw borrowing as something to be avoided at all costs. As people change and as society changes around them, people review their decisions and the way in which they manage their money.
128
What was the view on borrowing up until the 1970s?
Up until the 1970s borrowing was widely seen as something to be avoided if at all possible. It was seen as a risky way of buying things that you could not really afford, which frequently led people into unmanageable debt. Many looked down upon those who used hire purchase, because only low-income families needed this financial product. Hire purchase used to be known as the ‘never-never’ because people ‘never, never’ paid the loans off: while they may have paid for each item in full, people tended to take out consecutive – and even simultaneous – hire purchase agreements, the effect of which was that they were always paying off something. The only type of loan that was socially acceptable was a mortgage, because people could not own their homes without one. In fact, because less than half of households were owner-occupier households in the years before 1971 (see Figure 5.2) and also because only those on a certain income would be granted a mortgage, having one was seen as more socially acceptable.
129
What was the view on saving up until the 1970s?
(Up until the 1970s) saving and thrift were seen as virtues. If people wanted something, it was better if they saved up until they could afford it – and the ‘delayed gratification’ involved (ie the ability to resist the temptation of now in favour of the later pleasure) was also considered to be a sign of a strong moral character. People took pride in being able to save up to buy the things that they wanted; by doing so, they felt they had earned the right to buy them.
130
How did attitudes toward borrowing change during the 1970s and 1980s?
What product helped to do this?
During the 1970 and 1980s, however, perceptions and attitudes to borrowing changed. The easy availability of credit cards, store cards, bank loans and other forms of credit helped to make borrowing socially acceptable, and some credit cards even became status symbols. Many people borrowed very happily and were not afraid to admit to doing so. They did not see why they should save up for something when they could have it immediately – and there was social prestige in being the first to own an innovative item among some social groups.
131
How did attitudes towards borrowing change once again during the wake of the financial crisis?
In the wake of the 2007–08 financial crisis, attitudes to borrowing seem to be changing once again, the credit crunch (ie the tightening of lending criteria and the reduced availability of credit) and the recession having caused many people to rethink their position on debt. The government and the Bank of England hoped that keeping interest rates very low would boost spending to combat the recession. Instead, many of those in debt took advantage of the lower interest charges (particularly in the case of variable interest rate mortgages) to try to repay as much of the loan as possible, reducing credit card balances and outstanding mortgage amounts. At the same time, lenders advertising their ‘lowest-ever interest rates’ have found fewer people responding than would have done so before the financial crisis.
