Helping a friend...severe debt issues!

ChrisH

Hi all,

Hope you can help.

I've got a friend that is in quite severe financial difficulties, the extent of which they didn't realise until we went through and completed a full SOA showing that their outgoings are far higher than any income.

Unfortunately I haven't got the SOA with me that we drew up, but can give you a rough idea of outgoings and current debts.

Monthly Income
___________

• Wages - £1,200.00
• Benefits (child/council tax) - approximately £150.00

TOTAL - £1,350.00

Monthly Outgoings
___________

• Credit Card - £25.00
• Loan - £100.00
• Rent - £500.00
• Mobile Contracts (3 of) - £100.00
• Food - £200.00
• Petrol - £200.00
• Water/Sewerage - £30.00
• Gas - £25.00
• Electric - £30.00
• Council Tax - £105.00
• Car Insurance - £50.00
• TV License - £11.75
• BT Line Rental - £10.75
• AOL Broadband - £14.99
• HSBC Account Fee - £15.00

TOTAL - £1,437.49

Current Debts
___________

• HSBC Overdraft - £500.00 (approx 22% APR)
• HSBC Credit Card - £1,500.00 (same APR as above)
• HSBC Loan - £5,000.00 (APR 18.9%)
• Electric arrears - £315.00

TOTAL DEBT - £7,315.00

I've made several suggestions to them, such as cutting down on their food bills by planning meals etc and researching alternative energy suppliers; however they are locked in with the electric due to the arrears present. A pre-payment meter has been fitted which debits a certain amount each time it is reloaded to slowly clear the arrears.

Unfortunately, they are locked in to all three mobile contracts for nearly a year and are unable to change the tariff for two of them so that's not an option.

With regards to the petrol costs, the couple live a fair distance from work etc and so would be difficult for them to cut down on costs in this respect.

They've started to struggle meeting repayments on bills now and I've been trying to work out what the options are. An appointment has been arranged with the CAB but this isn't for another month unfortunately! From what I can see, an IVA could be arranged but I'm not sure that this would work as they would be incredibly stretched even meeting lowered repayments so bankruptcy could be the only option.

They've also got a one year old child and they are expecting another in approximately six months' time and therefore living expenses will increase even further as there's no budget in the SOA for general day-to-day living costs.

I'm struggling to work out the options, however - as if they did take the extreme route of declaring bankruptcy they'd still only have approximately £38.00 free cash to spend each month. Would there be any options in terms of obtaining social housing for example? Though I'm guessing that it'd take them years to actually get high enough up in the list to get a place.

There's just one more thing - all the debts are in D's name via her bank - she's not worked for approximately 2 years now and J is the sole earner. This is a bit of a long shot, but should HSBC really be offering out loans/credit cards/overdrafts of this extreme to somebody that is effectively unemployed? I've checked and there is no guarantor on the paperwork, just seems a little odd to me.

Sorry if this post was a little disjointed. If you need any more information, let me know and I'll find out!

Thanks. :beer:

Chris

tealady

A few thoughts. Food - how many people is that feeding. If they have mobiles and cant get out of the contracts have they considered up their phone line and broadband. Elecricity - make sure nothing is left on standby, put on extra clothes rather than turn up heating.
If you want to know more re BR then there is a great section on this site.

Scarlett.1974

Hi Chris,

Firstly, you're a good friend to be trying to help them like this

Right....... now, this debt is not massive and there are ways around this. I'm almost 100% sure though that an IVA is not for them, because 1. I'm sure whoever does it (and I'm assuming it would be D only, as the debts are in her name?) has to be in employment and 2. I'm also pretty sure that there is a minimum level of debt, I think it's £15k.

Now, is the £1200 per month the only income, from J I assume? Get them to check on www.entitledto.com that they're getting all the benefits they are due, tax credits etc.....

I would also suggest that they contact one of the FREE debt charities, such as Payplan or CCCS to see what they can do for them. A DMP might be an idea for them, this would mean they would pay their creditors smaller, more manageable payments each month until the debt is cleared.

The things that stand out to me on the SOA are:
Mobile - 3 of? Really??! I'm pretty sure that if they did do a DMP then this debt could be included in it, therefore freeing up that £100 a month.
Food - £200 a month is FAR too much for 3 of them I feed a family of 4/5 (we have 2 children and H's son at the weekends) and a cat on not much more than that.
Petrol - wow, that is loads! I know you say J works a way from work and there's no way around this, but there must be something they can do..... share lifts, get rid of the car and use public transport, move closer to his work? I know these seem like rather drastic ideas, but £200 a month on petrol when the wage is only £1200 is just madness, something needs to be done there

Could D not get a little part time job or something? Even something like Avon would help bring in a few more pounds a month. Have you suggested they ebay stuff they don't need/want?

I hope this helps a little

Scarlett xx

seven-day-weekend

As you say they have some Council Tax Benefit, are they not entitled to Housing Benefit too, for the rent?

(Although I niotice they are still paying £105 Council Tax - can you clarify what the benefit is?).

angelavdavis

What a great friend you are for helping everyone out. You have had some good suggestions so far in terms of reviewign benefit entitlement, etc.

OK, Here are my comments:

• Credit Card - £25.00 - see if they can switch the credit card and o/d debts onto a 0% card so that they can pay these off using the combined £40 payments (see Martins page above on credit cards)- only possible if your friend has been good at paying her bills every month or if her O/H has a good credit rating and can get a card. They must try to lower the initial balance as suggested below before applying. They will have to tart the card a few times and pay an additional 3% admin fee each time they switch accounts so ensure that they set up a warning about six weeks before their 0% expires so they can find another deal. For this to work, they must stick to a budget and not run up the o/d or cc again. Ensure they cut up the cards (but keep the bits in an envelope so they can refer to the card details when switching if necessary but can't use it to run up more debt)
• Overdraft - as suggested above. They are paying about 30% on this debt - £180 per year - even if they reduce it, presumably this £15 is fixed so is the worst type of debt because the % will increase as the balance decreases! Ensure they either close the bank account or stop using it and take out a simple account that doesn't allow overdrafts.
• Loan - £100.00 - find out if its possible in the terms and conds to overpay or settle loan earlier once their o/d and ccs are settled. What is the term left on this debt? If its possible to settle early, see if they can switch the debt to a lower life of balance credit card as 18% isn't much better than an overdraft rate. Because of limited income, I suspect your friend won't be able to combine this with the cc and overdraft debts as she won't get the credit limit.
• Rent - £500.00
• Mobile Contracts (3 of) - £100.00 - sounds like they are pretty stuffed with this one tbh. Presumably, this is the amount now they are lowered the rates for 2 of the 3 phones? I suggest they keep the sims and sell the handsets on mobipay or ebay - using the cash they get to pay a chunk off the od/cc. They can then get a cheap model handset from ebay, freecycle, etc. At least this will help lower the debts, even if they are continuing the contract. At the end of the contract period, they must cancel the contracts and look to switching the least used phone to a pay as you go limiting themselves to £10 per month max for emergencies.
• Food - £200.00 - This can definitely be cut down as you have suggested, I think by about £50 per month. One big saving can be made in taking in their own lunches to work.
• Petrol - £200.00 - they have GOT to look at cutting this down - either by trading in the cars for smaller models that are more efficient, or looking at car sharing with a colleague, or ruling that they don't use the car at weekends. £200 is a 6th of their salary so is a high percentage of their income and so a good place to cut back. I think they should aim to reduce this by £40 per month.
• Car Insurance - £50.00 - I think they could shop around to see if they can reduce their insurance to lower than £600 per month. My concern also is that there are no costs attached for mot, tax, servicing, etc for the cars.
• BT Line Rental - £10.75 - I would suggest they investigate a joint BB/Line rental deal as they are bound to be able to save about £10 per month - even more short term (check out BT's deals alone - eg Option 1 is an 18 month contract - £8.95 for the first 6 months, £17.99 thereafter)
• AOL Broadband - £14.99 - see above
• HSBC Account Fee - £15.00 - presumably this is for the overdraft? Hopefully my suggestion above might help.

Other costs that might not have been taken into account are: contents insurance, car costs (see above).

My estimate is that it is possible to save £100 on your friends outgoings with some work, which, although slowing down the debt growth, won't give them packets to throw at the debts. In addition, I think they could possibly pay £100 off the cc or o/d balance by selling off these relatively new model phones.

What have they been using the loans and credit cards for? Do they have anything they can ebay to pay off chunks off their overdraft, credit card then loan (this seems like the most sensible order based on the charges for each)? They need to look at raising their income somehow as clearly, there is little room for savings amongst the outgoings. Pay per click sites such as pigsback are useful to use for treats such as toiletries and they should try to get supermarket loyalty points on food and check out the vouchers forum on here for other money-off suggestions. Freecycle.org is useful to get hold of larger items they might need to replace such as washing machines, etc for transport costs only.

Ensure they note down the details of the credit card (including the numbers on the signature panel) but cut it up (sealing in an envelope) to prevent them using it again.

I don't think you will get anywhere trying to suggest misselling of the loans, etc I am afraid. HSBC are a classic bank who prey on low income customers with lures of overdrafts, credit cards, etc all tied into the accounts and at poor credit rates because they are deemed high risk customers. They then get nasty when the customers can't pay the bills!

If you have a look on whatsthecost spending calculator, it will show you how quickly the o/d and credit card debts will go down by freezing the interest to 0% +3% admin fee. Looking at the rough costs of cc and o/d, if they continue as I have suggested, the date they will pay these off will be 2012, whereas continuing as they are will be a lot longer (2020 at least!).

I also suggest they keep a joint spending diary and update every evening for a couple of months as it is a real eye opener and will really show where the spare pennies may be going.

Hope these suggestions help. Good luck

tigerfeet2006

Don't you just love MSE. I can't add to that excellent advice but see my signature for Payplan and CCCS.

Andy_Edinburgh

Does your friend have internet access (themselves, or through you/work/college/library etc.)? You must get them engaged in the MSE process - reassure them that they've come to the right place and there are loads of people eager to help them every step of the way., but they have to take the bull by the horns themselves if it's going to work. You're an excellent friend for helping them this far.

ChrisH

Hi guys,

Wow, thanks for the replies!

Just to clarify a few excellent points raised here.

• Switching card to 0% deal - unfortunately D has maxed out her available credit and nobody will offer her a credit card, so she's stuck with the high interest rate for now! J hasn't got a great credit rating from previous years and so has also been rejected for credit cards
• Overdraft - I've suggested that they open a basic bank account and start using that instead of the HSBC account and slowly reduce the overdraft balance so hopefully they'll go for this
• Mobile Contracts - D is the main mobile user, however the original phone supplied with her contract was accidentally damaged so she's now using a second hand model. I'll speak to J about selling his phones however, I've got one that he can have if he needs it.
• Petrol - agreed about the high costs; I'll see what I can do! They've recently changed to another car that's far more fuel economical but costs are still high at the moment
• BT Line Rental/Broadband - I'll speak to them about this. D has an Orange mobile contract so I would guess that they could sign up to Orange Broadband for free, saving a minimum of £14.99 per month
• HSBC Account Fee- this is for one of their useless 'Plus' accounts but D is tied into a minimum term of a year for this type of account.
• Benefits - I've done a brief check online and they may be entitled to tax credits of approx. £30.00 per week and £12.00 housing benefit...I'll find out if they already benefit from these or not.

Thanks for the advice regarding an IVA - forgot that there was a minimum debt amount to do this!

My remaining concern is that if we take all the suggestions into consideration, the outgoings can be reduced to about £1,340.00 per month with earnings increasing to £1,518.00, still leaving only just under £180.00 per month for feeding/clothing themselves, baby and expected baby! Let alone costs for things such as car maintenance etc.

If they were to take a DMP, can any of you advise as to roughly what percentage your payments were reduced by? If we could include the non-essential phone contracts with the current debts and reduce the payments by 50%, that'd give them an extra ~£90 or so a month spending money.

I'll try and get D on here later on so she can post a reply!

Thanks again,
Chris :beer:

Gemmzie

Most DMPs are worked out on the basis of what you can afford in total for debt repayments and then pro-rated to each company so it is fair.

It requires a very complete SOA, including things like car maintenance, birthdays etc. as it leaves no spare funds.