Led down the garden path…

This is the third article in my rant over the bad – in fact downright dangerous – advice my fellow insolvency practitioners are regularly giving out…

The first was about the bad advice being given to company owners, selling them a liquidation they didn’t want, need nor could easily pay for…

The second was about the failure to advise individuals that income based individual voluntary arrangements are a massive gamble…

This, my third, rant is again about the bad advice given to individuals, but on a more general level.

Let me explain…

Have you seen how debt advisers of all sorts, but particularly the IVA specialists, send husbands and wives, or couples, down the same debt solution at exactly the same time?  They argue that it makes perfect sense, that doing so is cost effective… yet that, at least for me, is manure, and I’m going to show you why…

First of all, a few key principles for you to take on board…

You, me, your kids, your parents, Uncle Tom Cobleigh and all are separate individuals in the eyes of the law.  We’re each our own entirely distinct legal entity.  It matters not that we are married, part of a family, related in any way – we are all our own separate legal being, with our own little package of assets and liabilities, and thus our own individual options for dealing with our financial problems. 

And, importantly, those options are often not mutually exclusive.   An option taken now doesn’t always stop another being taken later on.

Sure, there are a few complications when their are joint assets or joint debts, but the principle remains – we each have our own separate options, which we can take as and when we choose.

Let’s take a typical situation…. Husband (Basil) and wife (Sybil); Basil is a landscape gardener who chooses to run his little business through a limited company, in which he owns all the shares.  His normal work is maintaining your and my garden, doing a little building work from time to time, pathways, rockeries, decking, BBQs, that sort of thing.  A nice little business, but not enough to keep house and home, the family has to rely on his wife’s income too, especially as he had an accident a year or so ago – he twisted his back beating up his Morris 1100 and couldn’t work for 6 months.  Couple this with a foray into the buy to let market where a void period and some unexpected repairs as a result of the actions of a dodgy tenant and supporting one of his kids through university saw his debts built up.  He now has £50,000 in personal credit card and loan bills, each at their max, he’s now not even paying the minimum payments – the business isn’t doing as well as he’d hope as people aren’t spending like they used to on their gardens, and his bad back plays up from time to time, middle age is taking its toll.  There’s nothing but a few items of small plant and an inexpensive van in the company: it”ll generate £1,500 per month on a good month, more often than not a lot less, particularly in the winter months.  The buy to let is in negative equity – they’d taken out the maximum mortgage they could when they bought it, and have remortgaged a few times, using the money raised to buy Basil’s van and tools.  The buy to let is making a profit of £120 per month, after paying the mortgage, assuming everything goes hunky dory….

Feisty Sybil is a part time shop assistant and home maker.  When the debts started piling up she took on a few debts too – but at a far lower level, after all, she earns a lot less than Basil.  She’s got £20,000 of credit card debt, of which £15,000 is in her own name, £5,000 is a joint debt with Basil.

The family, Basil, Sybil and their three kids – Martha, 20, going through Wolverhampton Uni; Steve 16 and at Bilston Academy; and Sarah, 13 at Coseley School – all live in a cramped three bed semi on the Coseley/Bilston border.  A few years back, with the walls moving in, Basil, a dab hand at building, started on an extension above the garage.  But then he hurt his back, he couldn’t work and now he hasn’t got the money to finish it and doesn’t know when he will ever have.  The house is virtually unsaleable in its present condition, at best a buyer would pay a knock down price, leaving nothing in the kitty to set up home elsewhere after settling the mortgage.  Basil is hoping Sybil’s mother, Ethel, will leave them something in her will, but they’d be lucky to get £45,000 when she turns her toes up.  And that’s assuming it doesn’t all go in care home fees.  He/they have been holding on for that legacy – it might just provide the lifeline they so desperately need – but cantakerous old Ethel, whos’ yoyo’ed in and out of hospital over the last 18 months, seems to have 9 lives.

So you’ve got the picture – The Fawltys are a hard working, average, working class family who are trying to work their way through life, but have been hurt by a few things that all came together to put them into quite a difficult position.

So they go to see an insolvency practitioner.

This ‘expert’ recommends an IVA – a ‘joint IVA’ – the great thing is they’ll be able to substitute the need to pay the minimum payments on their debts with ‘one affordable payment’ of just £400 per month into the IVA – it will mean paying less and bring some certainty to the situation, they’ll be able to slep at night.  They’ll even keep their home; Basil will still be able to act as a director of his little limited company; they could keep the buy to let; and in 5 years time, they’ll be debt free – what they’ve not paid to their £65k of unsecured debt will simply be written off.  What’s more, them both going into an IVA right now would not only keep the IVA experts’ costs down, it would make things far simpler for them as they’d both come out of it at the same time, ten years before retirement.

Sounds reasonable?  Sure it does… but as I said, it’s appalling advice.

Let me tell you what taking that advice would lead to…Ethel’s legacy going into the IVA to pay the insolvency practitioner’s fees and Basil and Sybil’s creditors – that’s to say, the Fawlty family would see nothing of it; Basil and Sybil still having to pay £400 per month into the IVA for 5 years – these monies also going to the creditors to pay off the ‘capital sum’ and interest (with interest being charged at 20% to 30% pa); the IP getting about £20k in fees in total; etc… there are other implications too.  All in all a poor deal for the family.

So let’s pull the advice to bits…

The following is a key principle – please remember it…  ‘Just because one solution might be the best option right now for one person, doesn’t mean to say the other has to follow the same course at this exact point in time, even if ultimately it might be the best option for them too.’

Here’s another – both Basil and Sybil have their own full tool box of options each – these include (i) Best manage their cash, keeping themselves out of any formal insolvency; (ii) Keeping creditors at bay using the ‘token/no payment’ option; (iii) Debt Management Plan; (iv) IVA; and (v) Bankruptcy.

It’s vital they should assess their own individual options first, asking themselves ‘What’s the best for me at this particular point in time?’.  Then when they know what that option is, assess what that means for the other member of the couple.

So the steps are:

1)  What’s the best option for me?  Write down the pros and the cons for me.

2) If I take that option, what impact does that have on my partner?  Write down the pros and the cons for them.

3)  Are we prepared to live with the cons?  Could those cons be reduced, if not eliminated, by something either I or my partner could do?  If I’m not happy with the cons, and neither I nor my partner could reduce them, what’s my second best option and what are its pros and cons – the cons on both me and my partner?

4) Repeat steps 1) to 3) for your partner, assessing the pros and cons on both them and you.

5)  Put together a plan that you’re both ‘happy’ with.  Ask yourself, whether overall, this plan works and fits with what you both want to achieve.

6) Run with it…

Here’s what I would have advised in Basil and Sybil’s case…as you’ll see it’s a country mile away from what the other IP advised…

Basil should go into bankruptcy soon, and first – cost of doing so £700, debts written off £50,000 – it would be like picking a 70 to 1 certain  winner at Epsom, a great return on his money; he’d come out of bankruptcy in 12 months time. Sybil should keep her creditors at bay for that 12 months, using the token payment option; before Basil goes bankrupt, Sybil should become the shareholder and director of the company, taking responsibility for running it, with Basil becoming a mere paid employee – for just 12 months.  Then when he’s out of bankruptcty the roles would reverse – she’d go bankrupt, but before she did so, he’d take buy back her shares in the company and get appointed as its director.  Cost to her, £700, debts written off £20,000. Get Ethel to change her will, so the beneficiaries are Martha, Steve and Sarah, missing out the Basil/Sybil generation (she could always change it back in 24 months time if she’s still around!) – that way the legacy would not fall into the bankruptcy as ‘after acquired property’, it could be used to pay down the mortgage on their home or the BTL giving them a far better chance of a prosperous retirement.

An alternative to think about in 12 months time would be, if Ethel dies in the meantime and leaves her £45k to the kids, for some of that to be used, say 40%, £8k, to offer to her creditors in full and final settlement, if she really wanted to avoid bankruptcy.  The point is, she doesn’t necessarily have to follow Basil’s route – having ringfenced the legacy, she could take another solution then.  Watch, wait and see!

Result if plan A, of them both going bankrupt, him first, her later: No disruption to the business; total process 24 months when one or the other was in bankruptcy compared to 5+ years in an IVA; no assets lost – not even the home or BTL (unless they actually wanted to lose the BTL – they have the choice);  legacy kept within the family, doing it, rather than the creditors some good; no IP fees, whole process cost £1,400 (plus the cost of my advice), a little inconvenience and form filling, and the cost of writing one/two wills, compared to an IVA which would see over £69,000 spent, I’d argue wasted.

The Fawltys’ name may be made up but the facts are real,but in recent weeks I’ve seen 2 families, both where they’d been led down the garden path by so called experts with plausible yet downright dangerous advice, costing them money they couldn’t really afford.  You see, they suffered the outcome I ‘anticipated’ above, they will probably now never manage to rebuild their lives.

And that is inexcusable.  The IPs took them to the cleaners, their entire family, not just the ones in debt, but them all.

You see nothing will ever be a substitute for experience, professionalism and a single minded focus on getting the best outcome for the client … and with almost 30 years in the insolvency game, you can be sure anyone who comes to me for support will be getting these in abundance.  They will not be sailing into unchartered territory, they’ll get advice and support that will stand the test of time.

If you’re accustomed to using another insolvency practitioner and the story I’ve painted above is ringing true for you, I’ve a question for you…why?

New eBook on bankruptcy!

I’ve written a new eBook on Bankruptcy.  You’ll find it very helpful indeed.

It’s called ‘The little book of Bankruptcy’.

I’ve called it that because it’s very short and very focussed, it’s just 5 pages!

It tells you why bankruptcy is the best solution for 99 people out of a 100 by setting out 9 clear advantages of bankruptcy over other potential debt solutions.

It compares bankruptcy with IVAs and Debt Management Plans.

It explains why you should only go into an IVA or DMPs if in doing so you are protecting assets or income.  It shows how bankruptcy does the same in three quarters of cases – yes, in 3 out of every 4 bankruptcies, the bankrupt loses nothing except his/her unsecured debts.

It explodes some commonly held myths about bankruptcy – myths that often hold people back from doing the right thing, the thing that best protects their family.

And I do this in just 5 pages… in an easy to read format.

And what’s more, the book is free, I make no charge for it.

To get a copy just e-mail me – copy my email address into your email programme, with the title ‘please send me your little book of bankruptcy, free of charge’ – paul@midlandsbusinessrecovery.co.uk

Thanks for reading.

Paul Brindley

Licensed to act as an Insolvency Practitioner in the UK by the Institute of Chartered Accountants in England & Wales

 

What else do you need to know to solve your debt problems?

 

Some people have several options to solve their financial problems.

The problem is no one solution is ever ideal, each will mean you giving up something.  You’ll have to compromise.

Get used to this.

Focus on the bigger prize of losing your unsecured debt.

Take time to assess the relative merits of each solution.

Have in mind throughout that there’s a trade off between the control you have over the process and the amount of debt written off.  How prepared are you to surrender to a formal insolvency process?

If writing off debt is what you really want or need, as this is normally achieved through a formal insolvency process, be prepared to ‘lose control’ of any assets you have.  This isn’t as bad as it first sounds – if you know how the process works, you can still be reasonably certain of the outcome, what assets you may or may not lose.

If retaining control is important, then look at taking one of the more informal solutions.  But recognise that you will probably not be able to write off so much debt.

If you’d like to talk things over with us, call Paul on 01902 672323.

Clarification on my 'scathing attack on payday loan firms

You may have seen in the Leamington Observer my ‘scathing attack on payday lenders’ – click here to read it.  The Observer asked for a press release in advance of my anticipated appointment as liquidator of a local credit union.

Credit unions are a fantastic opportunity to bring bank accounts, financial education, responsible saving and borrowing to the masses.  They are run by well meaning volunteers, who are paid nothing for their services, whose drive is to put something back into society.

Right now some unions are struggling because:

  1. They simply cannot lend enough money to enough people who are willing and able to repay – there is savers’ money in the bank available to lend but under their rules they simply have to lend responsibly and the financial position of many of the people who are approaching them for loans is such that to lend them any more money would be irresponsible;
  2. When debtors get into trouble it’s sensible for them to use what little cash they have to repay those loans with higher interest rates first – the interest rates unions can charge are capped by law at around 28 per cent pa, meanwhile our government is unwilling to cap payday and other predatory lenders’ rates – rates of 1,500 to 4,000% are common – this means that debtors with limited cash will leave the credit unions until last for payment;
  3. The courts are now taking a lenient stance with debtors, ordering them to pay £1 to £5 per week against their debts.

The toxic combination of these final two points deprives credit unions, the most well meaning socially responsible lenders in the UK, of much needed cash, effecting what they can pay to savers.

There are around 600 or so credit unions in the UK, they lend about £600m.  Big number? – no.  The public owe something like 500 times that in unsecured debt – the credit unions make up less than one per cent of unsecured lending.  It’s a minnow in a immense pond of debt.  But how does that compare with the payday sector?  Let’s compare the size of the entire credit union sector with, say, Wonga one of the biggest payday lenders.  Wonga’s 2011 accounts showed its income to be around £185m – that’s to say just one payday lender’s income in one year represents about a third of all the money credit unions have out on loan to their members.  Again, a minnow.

The Office of Fair Trading recently prepared a scathing report on the payday lending sector – click here – the OFT essentially said that no one in the sector came out with a glowing report – irresponsible lending and aggressive debt collection practices were just two of the issues the OFT had with the payday lenders.  It’s easy to criticise the payday lending sector, and that’s why the local newspaper framed my press release as they did… by a far bigger point is  what the hell is our government doing about it?…

… why is it allowing a low cap to be imposed on the interest rates the credit unions can charge yet choosing not to cap predatory lenders such as the payday loan firms?  Do the banks and predatory lenders have that much influence over MPs?

… why has it bailed out the irresponsible banks for trillions of pounds, yet committed just £35 million to help far the more socially responsible credit union sector grow?  Just how much of that is to help educate Joe Public rather than roll out new products?

… why isn’t the government doing anything about improving the financial education given to our kids in schools and colleges, helping people to help themselves?  Why is teaching our kids how to manage their money wisely, what the difference between good and bad debt is not in the national curriculum?  Surely this is more important than some of the rubbish our kids are taught?

What I’m saying is just give the credit unions more support, if only a level playing field, then watch them grow, and do an immense amount of good for our sick debt ridden society.

I’me just about to write to the MP for the area in which the particular credit union I’m dealing with is based, I’ll let you know what he says.  In the meantime why don’t you talk to your own MP?

Clarification on my ‘scathing attack on payday loan firms

You may have seen in the Leamington Observer my ‘scathing attack on payday lenders’ – click here to read it.  The Observer asked for a press release in advance of my anticipated appointment as liquidator of a local credit union.

Credit unions are a fantastic opportunity to bring bank accounts, financial education, responsible saving and borrowing to the masses.  They are run by well meaning volunteers, who are paid nothing for their services, whose drive is to put something back into society.

Right now some unions are struggling because:

  1. They simply cannot lend enough money to enough people who are willing and able to repay – there is savers’ money in the bank available to lend but under their rules they simply have to lend responsibly and the financial position of many of the people who are approaching them for loans is such that to lend them any more money would be irresponsible;
  2. When debtors get into trouble it’s sensible for them to use what little cash they have to repay those loans with higher interest rates first – the interest rates unions can charge are capped by law at around 28 per cent pa, meanwhile our government is unwilling to cap payday and other predatory lenders’ rates – rates of 1,500 to 4,000% are common – this means that debtors with limited cash will leave the credit unions until last for payment;
  3. The courts are now taking a lenient stance with debtors, ordering them to pay £1 to £5 per week against their debts.

The toxic combination of these final two points deprives credit unions, the most well meaning socially responsible lenders in the UK, of much needed cash, effecting what they can pay to savers.

There are around 600 or so credit unions in the UK, they lend about £600m.  Big number? – no.  The public owe something like 500 times that in unsecured debt – the credit unions make up less than one per cent of unsecured lending.  It’s a minnow in a immense pond of debt.  But how does that compare with the payday sector?  Let’s compare the size of the entire credit union sector with, say, Wonga one of the biggest payday lenders.  Wonga’s 2011 accounts showed its income to be around £185m – that’s to say just one payday lender’s income in one year represents about a third of all the money credit unions have out on loan to their members.  Again, a minnow.

The Office of Fair Trading recently prepared a scathing report on the payday lending sector – click here – the OFT essentially said that no one in the sector came out with a glowing report – irresponsible lending and aggressive debt collection practices were just two of the issues the OFT had with the payday lenders.  It’s easy to criticise the payday lending sector, and that’s why the local newspaper framed my press release as they did… by a far bigger point is  what the hell is our government doing about it?…

… why is it allowing a low cap to be imposed on the interest rates the credit unions can charge yet choosing not to cap predatory lenders such as the payday loan firms?  Do the banks and predatory lenders have that much influence over MPs?

… why has it bailed out the irresponsible banks for trillions of pounds, yet committed just £35 million to help far the more socially responsible credit union sector grow?  Just how much of that is to help educate Joe Public rather than roll out new products?

… why isn’t the government doing anything about improving the financial education given to our kids in schools and colleges, helping people to help themselves?  Why is teaching our kids how to manage their money wisely, what the difference between good and bad debt is not in the national curriculum?  Surely this is more important than some of the rubbish our kids are taught?

What I’m saying is just give the credit unions more support, if only a level playing field, then watch them grow, and do an immense amount of good for our sick debt ridden society.

I’me just about to write to the MP for the area in which the particular credit union I’m dealing with is based, I’ll let you know what he says.  In the meantime why don’t you talk to your own MP?