ANALYSING YOUR FINANCIAL SITUATION

A few years ago, when severely in debt, I avoided opening letters from banks and credit card companies. So I couldn’t begin the process of getting out of debt, because I didn’t have a clear picture of my situation.

However, I found that when I bit the bullet and analysed my situation in detail, I felt better! Knowing the facts, no matter how bad, is better than living with a “sword of Damocles” hanging overhead.

If you too have been ignoring those letters, please start opening them now.

Sorting that paperwork

1.       Bank statements. Overdraft? How much?

2.       Credit card / store card statements

3.       Invoices from other creditors

4.       Tax correspondence (if self-employed)

5.       “Informal” liabilities, e.g. loans from friends / family

When you’ve totalled the debts in categories 1-5, now list the positive side of your “personal balance sheet”, i.e.

6.       Estimates of the value of your assets: property; car; cash at bank (if your account’s in the black); shares; insurance policies; money owed to you, including refunds; occupational pension funds [if you’re old enough to consider cashing them in]; anything that could be turned into cash if necessary.

Now prioritise your debts, as follows:

  • Priority: “roof-over-your-head” and essential utilities, for example:
    • mortgage or rent arrears (you could lose your home)
    • other debts secured on your home (same result)
    • Council Tax (they can send in the bailiffs)
    • gas & electricity (they can cut you off)
    • water (though they cannot).
  • Non-priority: all other services you need, e.g. car loan; home or mobile phone; credit cards; all other creditors.

Income and expenditure

Now you’ve assessed your liabilities and your assets, you need to evaluate your income and expenditure. It’s a “profit and loss statement” for your life, based on your current spending pattern. Then do another, based on your “survival budget”.

You’ll need a table or spreadsheet: money advisers at your local CAB (Citizens Advice) can provide a form.

Putting it in perspective: “key ratios”

Now analyse your total debt relative to your income; also to your assets. What multiple of your net monthly income is your total debt? What percentage of your net worth? These are what I call your personal “key ratios”.

Now you are in a better position to develop your options and choose the solution that works for you.

Discretionary income

A final question: what’s your discretionary income? What’s left after tax and essential expenditure? (Not after your usual expenditure: the answer to that question might be zero, as it was for me)

Whether you think you can repay debts in full or make a partial offer, you’ll need to maximise this “discretionary income”. That’ll involve tough decisions about “needs versus wants”: between what’s essential to your life and what you see as essential to your lifestyle.

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The above is an extract from Chapter 5 of my book “Back to the Black: how to become debt-free and stay that way”

Want to know more?

“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook, to sample (first 20% free) or buy, at Smashwords: http://www.smashwords.com/books/view/22886

It is also in the Kindle store but only the first 10% is free (sorry: Amazon’s rules, not mine). http://www.amazon.com/dp/B004PLMAQM

NEGOTIATING CREDIT DEBTS

NEGOTIATING CREDIT DEBTS

In my book “Back to the Black”, I highlight the need to classify your debts in two main groups. Priority debts have to be paid first, of course, because non-payment could cause you to lose your home, or essential services, or even your liberty. I specify which debts come into this category.

The rest are non-priority debts. In my experience, most of these are negotiable if you cannot find a way to pay them in full.

Here’s an extract from Chapter 10 of the book.

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Classifying debts

While you were doing your “reality check” you will, I hope, have classified your debts into priority and non-priority. Priority debts will mostly, if not totally, consist of any arrears you may have built up in the essential areas of keeping a roof over your head (mortgage or rent), the associated taxes (Council Tax in Great Britain or domestic rates in Northern Ireland) and essential utilities, i.e. gas, electricity and water. (Phone rental has often been classed as a utility but it doesn’t qualify as a priority debt for this purpose, whether it is landline or mobile or broadband). There are also some other categories of arrears that could in the worst case land you in prison for non-payment, so we class them as priority debts too; they include court fines and child maintenance.

Negotiating non-priority debts

On non-priority debts – and most credit debts come into this category – one option is what I call Plan C, i.e. “Negotiate a Deal”.

Plan C involves negotiating not only for time while you put the deal together, but also for a discounted settlement on the non-priority debts. Your creditors, however, may be prepared to freeze further interest payments and late-payment charges, while you are putting your plan together and also while you are in the process of paying off any deal that might be agreed.

It may be that you have some funds available and could make an offer for “full and final settlement”. The word “full” in this context means that the debt is acknowledged by the creditor as being “paid in full” or “satisfied in full”; you are paying a lump sum, though you are paying less than the full amount. The funds you have available might come from friends and family, or maybe from the lump-sum element of cashing in an occupational pension, depending on your age (I was lucky enough – and old enough – to be able to do the latter). More usually, though, you’ll make an offer for payment in instalments.

Co-ordinating the responses

However, if you do decide to go for “full and final settlement,” then bear in mind that you will be negotiating on several fronts and not everyone will agree at the same time; a tricky situation. What you want to avoid at all costs is to have agreed with some creditors, paid them the lump sums agreed, and then to be forced into bankruptcy anyway if other substantial creditors would not agree to a negotiated settlement. That’s why you’ll find that one of my standard letters in “Resources” caters for the situation where you have agreed a deal with one or more creditors but need to delay payment of the sum agreed pending agreement from other creditors. For this particular strategy, therefore – i.e. Plan C offering lump-sum for full and final settlement – my usual warning is louder than ever: take advice.

Some creditors will be reasonable and flexible but others will be intransigent and will play hardball. However, once you have decided that you are going to take action about your debt situation, you should inform your creditors of your situation and ask them for a moratorium on interest and charges.

[the book contains a template for a standard letter to handle this and many other situations.]

Avoid the phone

At the risk of yet more repetition, this is where I say again, “don’t negotiate on the phone; do it in writing.” It is simply not necessary to pick up the phone whenever creditors phone with demands and threats; that is a stress you can do without. In Chapter 2 (“Mind over matter”) I discussed the extra stress of dealing with phone demands; even if you might say that you can handle the stress, there is another very practical reason for doing it this way. If you negotiate on the phone, and if at a later date you find that the creditor’s recall of that conversation is not the same as yours (surprise, surprise), you will have no record of what was said or what was agreed. So let those calls go through to voicemail, but then respond promptly in writing to any messages left. Do it all in writing; it’s more work, of course, but the outcomes – not only for your debt management plan but also for your state of mind – will be better.

Keep copies

Needless to say, keep copies of everything. The fact that you are able to refer to the content and the dates of all previous correspondence is worth its weight in gold. Get that lever-arch file; if you have many creditors you’ll soon fill it. Of course you will have kept copies of your outgoing letters on your computer, but when you go for meetings with your adviser it will be very helpful for that adviser to be able to scan a paper record of all the correspondence, both incoming and outgoing.

“The left hand doesn’t know what the right is doing”

Something I learned is that, while you are negotiating with a creditor, they might simultaneously instruct intermediaries to collect on their behalf. This might be policy, it might not, so be aware of the fact that the left hand might not know what the right is doing within the creditor company. If this happens, simply refer them back to previous correspondence (even sending copies of it) in a polite way. This way you retain, if not the moral high ground, at least the efficient high ground. Don’t assume everyone is super-efficient. Poor communication within a creditor company and between them and their intermediaries can work in your favour, if you are patient.

***

Talking of left and right hands … and nothing to do with debt: I can’t help repeating what was once said about the jazz pianist Erroll Garner, who at times played right on the centre of the beat with his left hand, while playing way behind the beat with his right hand:

“His left hand knew what his right was doing but it didn’t care.”

Want to know more?

“Back to the Black: how to become debt-free and stay that way”, is now available to sample (first 20% free) or buy as a multi-format ebook, at Smashwords: http://www.smashwords.com/books/view/22886

… and is now also on the Kindle catalogue. (search under the title or under “MacMahon”; sample first 10% free)

PHONE CALLS FROM CREDITORS AND HOW TO MANAGE THEM

In my post of 2 Feb 2011 (“Is there life after bankruptcy?”) I quoted an article from “Moneywise” magazine (Jan 2011), containing a useful summary of the danger signs that debts might be running out of control. The last item on that list of danger signs is the one I want to go back to today:

  • If you are not opening bills and are screening calls from creditors, seek advice. Ignoring payments will not make them go away and the problem will only get worse.

Firstly, I agree totally about seeking advice if any of those five signs fits your situation. And yes, I agree totally that ignoring payments – ignoring the situation in general – will make the problem get worse.

Not opening bills? Ten years ago, I was “guilty as charged” on that score. I know from bitter experience that mounting interest charges, penalty charges etc can result. Luckily I didn’t get to the point of being taken to court, despite many threats.

Incoming phone calls

However, it’s the question of incoming phone calls I want to talk about here. Yes, the fact that you feel you need to screen phone calls is one sign that you’re worried about your debts.

However, there is a case for letting your answering machine take those calls, subject to one important condition: that you take note of any messages left by your creditors and you respond to them in writing.

In my book “Back to the Black” I deal with incoming calls as follows:

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In order to create space between you and your creditors, I recommend that you conduct your negotiations in writing only. There are all kinds of benefits here:

  • You have time to think before responding.

  • It will look professional; if you are not good at composing letters, there are some examples in the “resources” section, which you can adapt to fit your situation; or you can get an adviser to help.

  • You have a record of everything that has been said by both parties.

  • … and most importantly, it is less stressful.

“Let the answering machine take the strain”.

Follow this strategy, summon up your reserves of patience and persistence, and the huge benefit is that you avoid verbal discussions. They are just too stressful right now and, thanks to that wonderful invention the telephone answering machine, you need never speak to a creditor in person.

When I say this, I am not advocating that you ignore telephone calls. No, you should respond if a creditor leaves a message but you do it in writing, referring to any previous correspondence and repeating your previous offer, if you have made one, or perhaps making an offer, if you have not done so. Alternatively you could simply state your position and ask for their understanding and for more time.

One slight disadvantage of the telephone “bubble” concept (Seve Ballesteros again) could be that your friends might notice that you are never in, even when they expected you to be so. Is that a major problem? Probably not. If you have an actual answering machine, rather than the service from your telephone provider, then you can use it to filter your calls, by listening to the machine before deciding whether to pick up. If you have “caller display” on your home phone, or you are being called on a mobile, problem solved: you can be 100% selective about which calls you accept and which you allow to go through to voicemail.

Now I do recognise that there are some people who simply cannot resist answering a ringing phone. If you are one of those people and you can’t break the habit, then all I can say is that I hope you are someone who is not stressed out by this kind of situation, in which case you are in the lucky minority. In such a case, carry on following your instincts and answer the phone, but I would still urge you not to conduct a negotiation on the phone. Simply take in what is said and offer to think it over and reply – but in writing.

Always respond both to written correspondence and to phone messages and do so Promptly, Politely, Professionally – and Persistently (i.e. sticking to your guns). In the resources section at the end of the book there are some examples of letter formats you could customise

END OF EXTRACT

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I hope that the above is of help. If you need more info (for example if you want to know why I refer to Seve Ballesteros!), get in touch or read my book.

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Want to know more?

Want to view, free of charge, the first 20% of my multi-format eBook (“Back to the Black: how to become debt-free and stay that way”)?

Go to:  http://www.smashwords.com/books/view/22886

REPAIRING YOUR CREDIT SCORE

A few years ago, while I was busy solving my debt problems, I was a subscriber to the credit rating service provided by Equifax, who are one of the leading companies in that field. This week, I’ve found in my old files that I’d printed out from their website a very useful page. I think it’s so good that I make no apologies for reproducing it virtually intact, with acknowledgements to Equifax.

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REBUILDING DAMAGED CREDIT

Bad credit can happen to good people. Don’t despair. There are ways you can get your credit back in shape. But you have to start working on it today — and keep working hard to show potential creditors that you’re serious about getting your credit back in order. As you do so, your ability to obtain credit will improve over time, resulting in better credit offers and a substantial savings in money.

Get Started Now

Open new accounts and pay them off. Being able to repay a variety of new accounts is a key step in rebuilding your credit. That means that devising a strategy to open and pay off as many different kinds of accounts as you can is better than adding more debt to an existing credit card.

Start small. Rebuilding your credit can be similar to starting over from scratch, and starting small may be the easiest option. Credit cards from department stores can be useful.

Consider asking for help. If you can’t qualify on your own, ask a friend or family member to co-sign for a small loan or credit card. If you can stay current on a major credit card account or small car loan, this will speed up the process of re-establishing good credit in your own name.

Consider a secured credit card. They are guaranteed by a deposit that you make with the credit grantor. The cards offer the purchasing power of a major credit card. Just make sure the grantor reports payment histories to one of the credit reference agencies so you ‘re building your positive payment history.

Use your new accounts in moderation. And make payments that are more than the minimum. You can keep a small balance so that your positive payment history will continue to show up on your credit report.

Keep your balances low. Avoid carrying a balance that is more than 30% of your credit limit (creditors may view it as excessive debt that you may not be able to stay current with).

Be Patient – it’s Worth it

It takes some time for your new credit history to gain momentum. You’re demonstrating that you are not depending on certain credit cards and loans for your financial survival.

That’s why opening and paying down accounts may make it a little easier to get more credit. With patience and timely repayments, you will likely be able to build a new credit history that creditors will look upon favorably when making decisions about your ability to handle even more credit.

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Want to know more?

1.      Want a link to the article and the Equifax website? Go to: https://www.econsumer.equifax.co.uk/consumer/uk/sitepage.ehtml?forward=gb_elearning_credit33

2.      Want to view, free of charge, the first 20% of my multi-format eBook “Back to the Black: how to become debt-free and stay that way?” Go to:  http://www.smashwords.com/books/view/22886

IS THERE LIFE AFTER BANKRUPTCY?

The good people at “Moneywise” magazine have recently published (Jan 2011 edition) a story about bankruptcy, which contains a useful summary of the danger signs that debts might be running out of control.

  1. You use your credit card to buy groceries or to pay bills, not knowing when you’ll be able to clear the balance.
  2. Applying for a new credit card, loan or extension on your overdraft is the only way that you can get ready cash for daily expenditure or to service existing debts.
  3. Your debt is mushrooming because you either only make minimum payments each month or are unable to pay off any money owed.
  4. If you have started to miss monthly repayments on your credit card or, worse still, you are in arrears on your mortgage, you need to seek immediate help. Contact creditors to see if you can make reduced payments or have a mortgage break while you sort out your finances.
  5. If you are not opening bills and are screening calls from creditors, seek advice. Ignoring payments will not make them go away and the problem will only get worse.

The article contains some interesting case studies, of three people who had to file for bankruptcy: 32-year old Emma Smith from Milton Keynes; 54-year-old Terry Donaldson from Huddersfield and 27-year-old Michelle Cheston from Newcastle.

I noticed one unusual silver lining to these three clouds. There are costs associated with going bankrupt (typically about £600) but, as the article mentions, Michelle had served in the RAF. Not for long, because she could only have been 24 when she left the service. However, her adviser at Citizens Advice told her she could apply for help to the Royal British Legion. She did; and they paid all her fees. As I mention in my book “Back to the Black”, the Legion’s support is a benefit that is open to anyone who’s served in the UK armed forces, even for a relatively short time.

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Want to know more?

  1. Want a copy of the full Moneywise article? Go to http://www.moneywise.co.uk/node/7896
  2. Want to view, free of charge, the first 20% of my multi-format eBook “Back to the Black: how to become debt-free and stay that way?” Go to:  http://www.smashwords.com/books/view/22886

IS IT SAFE TO PAY YOUR RENT OR MORTGAGE WITH A CREDIT CARD?

 

A recent news item (Channel 4 News, I think) flagged up a potentially alarming problem that’s been caused by the recession. (Yes, that’ll be the recession that the experts say is now officially over. Try telling that to someone who has lost their job.)

 

What’s the problem? According to a report by the charity Shelter, there’s been a large increase – possibly 50% in a year – in the number of people using credit cards to pay their mortgage or rent.

 

Does this affect owner-occupiers? Or tenants? Or both?

 

According to the BBC website, the Council of Mortgage Lenders (CML) suggests that the problem has been sensationalised by the media. That may be true. It would not be the first time. I should point out the obvious, however: the CML’s concern is only for mortgages. What Shelter describes may well be more of a problem for tenants than for homeowners. Mortgage rates are exceptionally low at present, so it’s less likely that an owner-occupier will have difficulty meeting housing costs, other things being equal. Also mortgage payments are normally taken on a direct debit, the CML says.

 

The reduction in housing costs caused by low mortgage rates has not yet been mirrored in reduced rents (why not?? Logic tells me it should be). Therefore, other things again being equal (which they never are) a tenant is more likely to be tempted to solve a short-term cash-flow problem by paying the rent with a credit card.

 

Is the story true?

 

“In the current climate”, I would not be surprised if there has been an increase in the number using cards. But has the increase really been 50% in a year? That’s massive. What they say, if you read the various reports, is that it’s gone from 4% to 6% and that is indeed an increase of 50%.

 

Firstly, you’d have to ask how big was the sample; obviously they didn’t interview everyone in the country (well, they didn’t ask me, anyway). And secondly, here’s a bit of a giveaway. Last year’s survey calculated the number of households, rather than individuals, that fell into this category. However, “the figure for households has not been calculated this year”, according to the report. So are we comparing apples with oranges, to make a point?

 

So is it safe to pay with a credit card?

 

Back to the question at the top of this post; is it safe to use a credit card to pay your rent or (less likely) your mortgage? The answer is a cautious yes, but only under certain circumstances. Credit cards do not have the astronomically high interest rates of payday loans, but the principle is the same. IF there is no alternative, and IF you are 100% sure you can pay off the card in full before the interest kicks in (you have 4-6 weeks to do that) then fine. If not, then as I have said many times before … get help from one of the debt advice agencies (for example Citizens Advice, or Consumer Credit Counselling Services, or National Debtline) and put together a plan. If you don’t, you could find yourself on a slippery slope.

 

I’ll be following up this story. “Watch this space”, as the saying goes.

 

 

 

WANT TO KNOW MORE?

 

Here’s a piece on the website of Shelter, who produced the original report:

 

http://england.shelter.org.uk/news/january_2011/2m_pay_for_home_on_cards

 

And here’s an item about the story on the BBC website:

 

http://www.bbc.co.uk/news/business-12120937

 

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My book “Back to the Black: how to become debt-free and stay that way” is now available to sample or buy, as a multi-format e-book, at: http://www.smashwords.com/books/view/22886

 

POSITIVE ATTITUDE AND DEBT: LESSONS FROM NAPOLEON HILL

I recently had a couple of e-mails from someone with debt problems who had come across my book “Back to the Black: how to become debt-free and stay that way” and I was impressed with the positive attitude shown. That reminded me of the importance of mental attitude when one is trying to find a way out of debt. It also reminded me of a story that was told many years ago by Napoleon Hill.

 

Hill was an early writer on the habits and characteristics of successful people. In one of his books he wrote: “In my youth, when I worked as a bank clerk, (this was in the 1920s) I could tell, before a man was 10 feet inside the bank door, whether he expected to get his cheque cashed.”

 

Debt and stress

 

Being in serious debt is stressful: that’s obvious to pretty well anyone who has been in that situation. How we react to that stress greatly influences our success or otherwise in getting out of debt and the best way to manage stress is to use our knowledge of how our minds and brains work.

 

My reading of Hill’s anecdote was this: less-confident customers possibly had their accounts scrutinised more closely before being given any cash. If I’m right about that, then it follows that being confident – or at least acting confidently no matter what one feels inside – might have helped some of his customers to get cash; in some cases that will have meant they got credit if their accounts were not “in the black”.

My belief is that the same principle applies to getting out of debt as was applied to getting credit in Napoleon Hill’s day (nowadays, of course, the branch manager simply says: “sorry, the computer won’t let me do it.”). Let’s call it the power of positive expectations.

 

Negotiate with positive expectations

 

In this connection, the power of positive expectations says that while you are negotiating with your creditors, if you demonstrate that you expect to be debt-free in a given time, and that you’ll do whatever it takes to get there, and if you are persistent in acting that way, eventually you’ll find people who will help you. They may be employees or managers in the very companies to whom you owe money; they are just people doing a job, after all. If you have a positive attitude, it can attract people who can help you; maybe by giving you more time, or by going to the limit of their authority in some other way.

 

To quote another famous figure from that far-off era, Henry Ford: “If you think you can, or you think you can’t, then you’re right.” Based on my own experience, that applies to getting out of debt too.

 

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Want to know more? “Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook at Smashwords. You can sample it free (view or download the first 20%), or buy the whole book at only $3.99.

Go to: http://www.smashwords.com/books/view/22886

 

Book website: www.back-to-the-black.com

 

 

FREE EBOOK FOR YOUR “BUDGET XMAS” IDEAS

Would you like to win a free copy of my e-book “Back to the Black: how to become debt-free and stay that way”? I’m giving away five copies for the best “budget Xmas” ideas I receive between now and 20 December.

The reason is simple: getting out of debt is one thing but of course you probably won’t stay out if you carry on spending money at the same rate as before. Cutting costs is not easy, but generating more income is harder, especially in today’s climate. So we all need to share ideas on saving money.

Santa reports peer pressure still strong despite recession

Managing costs is, of course, especially difficult at Christmas, with all the pressure from advertisers, and even harder if you have small children.

Right now, wearing my actor’s hat, I am spending ten days as Santa in a budget store in Wales.  When I ask the children (who are, without exception, delightful): “what’s the best thing about Christmas for you?” the answer in 95% of cases is, predictably enough, “lots of presents”.

Peppa Pig

By the way, if you are interested in toy branding, Peppa Pig is the name I hear most often while wearing the Santa hat. The name comes up unprompted, although I try to avoid getting into discussion of specific gifts. I don’t want to provide yet more cost pressures for the mums and dads who are generally standing nearby.

The popularity of Peppa Pig is good news for the BBC, as they no doubt make lots of money from the merchandising of this TV show. I’ve heard that Toys R Us has 84 Peppa Pig products; that’s a juggernaut for any parent on a limited budget to resist.

Ideas win books

My book has a final chapter called “Keep up the good work”, which is all about ideas for staying out of debt, once those debts have been cleared. Most of the ideas in that chapter are about saving money but I’m always on the lookout for new ideas. So the five best “Budget Xmas” ideas, suggesting how you plan to have a great Christmas without spending a fortune, will receive a free copy of the book in .pdf format. The ideas will also be featured in the book’s second edition.

Please e-mail ideas to me (michael.43@blueyonder.co.uk), or you can post them on this blog as comments, whichever you prefer. Entries requested by 20 December, please.

Want to know more?

My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886

OCCUPATIONAL PENSIONS IN BANKRUPTCY

In my book “Back to the Black: how to become debt-free and stay that way”, I tell the story of my own brush with bankruptcy in 1999. At that time, my then accountant recommended that I should file for voluntary bankruptcy.

Why I didn’t go bankrupt

In the event, I did not take the bankruptcy route, for a variety of reasons. One of those reasons was that I had some occupational pensions (of the “money purchase” type, not final salary) accumulated over the years. If I had become bankrupt those pensions might well have been vulnerable.

How the law has changed to the benefit of debtors

However, the law has changed: pensions are now to a great extent protected in a bankruptcy.

According to HM Government’s Insolvency Service, any private pension fund you have built up cannot generally be claimed as an “asset” if the bankruptcy petition was presented on or after 29 May 2000, as long as the scheme was approved by HM Revenue & Customs.

What to do

If you are considering bankruptcy, first read Chapters 8, 9 and 10 of my book, in order to review the pros and cons of the alternative routes “back to the black”. Chapter 9 deals with bankruptcy and IVAs (Individual Voluntary Arrangements) . Then, if you still plan to consider bankruptcy, take professional advice: either from one of the non-profit advice services (for example Citizens Advice, Consumer Credit Counselling Service or National Debtline) or from an insolvency practitioner. There is a checklist in Chapter 9 of my book about how to go about selecting the right insolvency practitioner for your particular situation.

Want to know more?

My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886

HM Government’s Insolvency Service’s publications can be found at http://www.insolvency.gov.uk/guidanceleaflets/guides.htm

PAYDAY LOANS: RECENT MEDIA COVERAGE

Lots of stuff about payday loans in the media just recently. I’ve mentioned on my Twitter feed that the subject was featured in “Broadcasting House”, one of my very favourite programmes on BBC Radio 4, yesterday morning.

I thought that in several ways the programme presented a balanced view. Rather than simply saying “these loans are terrible and should be banned because of their outrageously high interest rates”, at least one interviewee said that the amount paid (and it’s generally small, as it’s generally on smallish loans) could well be less than what the bank would charge you for going into (unauthorized) overdraft.

A fair point and another reason why people would be tempted. I’d previously said in my last post (at the back end of last week) that these kinds of loans could be considered in emergency, provided you also put a plan in place which ensures that you repaid the loan at the next payday .

High interest charge … or a bank charge? Maybe both

However, there is a comprehensive article on this by Matthew Wall in ‘Moneywise’ magazine (November 2010). The article points out something else, which adds a further danger to what’s already known about these kinds of loans.

He says: “Lenders usually take your debit card details as part of the application process so they can take out the full repayment come payday. They’ll do this whether you have the money in your account or not, potentially pushing you into overdraft and triggering bank charges if you don’t.

In this situation it’s a double whammy; you’ve paid the payday loan company’s interest rate (which is well known to be very high) but then you are stung with the bank charge anyway.

Matthew Wall goes on:

If you can’t repay the full amount you can ask to defer the loan, but they’ll usually insist you at least pay the borrowing charges.

There may also be a deferral fee or a charge incurred for arranging the new loan. So it’s not hard to see how cash-strapped borrowers can quickly become submerged in debt.”

Want to know more?

1. To see the whole of Matthew Wall’s article, go to: http://www.moneywise.co.uk/cards-loans/personal-loans/article/2010/11/03/beware-offers-easy-credit

2. My book “Back to the Black: how to become debt-free and stay that way” is available on the Smashwords site. To sample (first 20% free) or to buy at only $3.99, go to http://www.smashwords.com/books/view/22886