What to do when borrowing bubble bursts

Tens of thousands of credit card holders - many with numerous cards, all up to their limit - could be on the verge of defaulting on their repayments. Barclaycard said recently it was having greater difficulty collecting arrears, and was seeing more people failing to repay even the monthly minimum. And the number of people suffering debt problems will grow over the next six to 12 months, according to debt advisers, as more people are juggling larger numbers of credit card debts.

Nick Lord, of Citizens Advice, believes that many people whose debts would, in the past, already have forced them into a crisis are now able to borrow more. But even these people reach a limit some time, and he expects to see more of these problems becoming visible from now on. Many of these people will consider bankruptcy, but this is a dramatic step and there are alternatives. Here, Cash outlines the basic steps that people should take when dealing with debts in general; and on page 4 we look at the growing number of repossessions and how homeowners can avoid becoming a statistic.

Own up


Speak early to your bank, credit card company and other creditors if you are unable to make a payment. It may be tempting to keep quiet, hope your lenders do not notice and avoid them getting heavy-handed with you. But all the experts, from the Financial Ombudsman Service (FOS) to the Consumer Credit Counselling Service, say you should own up as soon as possible. 'Banks generally are more prepared to negotiate if they are involved at a very early stage, rather than being presented with a fait accompli,' says David Cresswell of the FOS.

Negotiate


Remember in your negotiations that regulated financial institutions are required to deal with you on a 'fair and reasonable' basis (as outlined in codes such as the Banking and Mortgage Codes and as interpreted by the FOS, which handles complaints against them). So you can suggest, for instance, that they extend your repayment period or give you a break from repayments in return for your producing a schedule of repayments which you promise to stick to.

Get help with a budget


Sit down and work out how you can manage within your budget in future. You either have to cut back, increase your income or both. A crucial point is to identify your 'priority debts': rent and council tax, for example, where you can get into serious difficulties if you do not pay them. You may need to sit down with someone else to do this - a friend, parent or adviser - as you probably have not faced up to the full onslaught of reality until now. You will need a clear cash budget, by week or by month. You can play tricks on yourself to ensure you meet it - cutting up credit cards, perhaps, or taking out only a budgeted amount of cash to last you to the end of the week.

When it goes to court


Take advice if you are issued with a default notice, which is a formal notification that you are in breach of your repayments and must meet them. If you have genuine problems (including going through a divorce or losing your job), then you may be able to persuade a court to be lenient. You can do this by asking for a 'time order' - 'a very powerful and underused tool from the Consumer Credit Act', according to Nick Lord - which is a way of asking a court to give you more time to meet a loan agreement by either changing the amount you pay each month or, in some cases, reducing the interest rate.

Bankruptcy and IVAs


Consider bankruptcy and its cousin, IVAs (individual voluntary arrangements), if you think that you cannot dig yourself out of trouble in the next couple of years by extending your repayment arrangements with creditors. Bankruptcy now only lasts one year (following changes made in the Enterprise Act 2002) and carries less stigma than in the past. But a bankrupt person is very restricted: you have to hand over your assets to the Official Receiver to be sold, for instance, and cannot get more than £500 in credit without disclosing the existence of the bankruptcy order.

With an IVA, you have a lot more work to do: making an arrangement typically lasting three or four years to pay off much of your debts gradually. You are likely to have to pay fees of about £4,000 to an insolvency practitioner (although these fees can usually be rolled into your debts), who will oversee your IVA. The process will be painful, but leaves you with greater control and a better credit reputation. 'An IVA would be recommended if someone has a fixed income for the next three or four years,' says Frances Walker, of the Consumer Credit Counselling Service. The last thing you want is to undergo the pain of an IVA for three years, then default and end up in bankruptcy anyway.

Make use of free advice


Start by reading up and getting free advice. Citizens Advice (contactable via its website), the Consumer Credit Counselling Service (0800 138 1111), welfare teams at universities and the government's Insolvency Service (enquiry line on 020 7291 6895) are among the numerous sources of free advice.

Useful websites include:

www.adviceguide.org.uk

www.insolvency.gov.uk

www.nationaldebtline.co.uk

www.cccs.co.uk

Coping at last, after a one-hour phone call to sort out repayments

Karen's money problems started at Christmas, when she and her partner split up. The 33-year-old shop manager earns £1,100 a month but her partner had paid the majority of the rent until they separated.

For a few weeks, Karen moved in with friends before taking the cheapest flat she could find, for £520 a month. Having to pay another month's rent as deposit, she was already floundering and borrowing from friends. Fairly quickly both her credit cards were up to their limit. She had £3,500 of debt in total, £1,000 of which was on her credit cards, and she could not afford the repayments.

'I'm not the sort of person that gets down, but I was despondent at work and having mood swings,' she says. 'I decided I was not going to let something like this ruin me.'

When her credit card companies contacted her to discuss her repayments, they pointed her towards the Consumer Credit Counselling Service. After an hour's interview on the phone - 'The lady I spoke to was lovely' - she sorted out a list of her income versus outgoings. They then agreed a repayment plan. She now pays £30 a month (leaving her nothing beyond the bare essentials) to CCCS, which is writing to her creditors and will pay them a portion each month.

Karen is relieved to be making the £30 repayments and is optimistic. 'I needed a verbal kick up the backside from friends to sort myself out,' she says. 'But I've got friends. And I'm lucky. And I've got quite a strong character.'