In debt - what are the options?

I am often asked what the options are when in financial difficulties. Many people know about bankruptcy as an option, but don’t necessarily know how to go about it, or the pros, cons and alternatives. This is a brief summary.

Bankruptcy is a way of getting rid of your debts. You can declare that you are unable to pay everything off by making a 'petition' (i.e. request) to a relevant local County Court. The cost is a court fee (£120), a deposit towards costs (£250), and sometimes a fee to swear or confirm your financial position (£7). The court then makes a 'bankruptcy order', and appoints the Official Receiver (a person who works for the court) to control your finances for at least a year. Your bankruptcy is registered, and published. From that moment you stop using your existing bank account, and stop paying your debts.

Within 21 days of the Order, you must list all assets and debts for the Official Receiver. You must report all your income, and any assets you have, or any extra funds above normal living expenses, should go to pay back your debts.

During the period of bankruptcy, you cannot borrow more than £250 without telling the lender you are bankrupt. You can open a bank account, but can't have an overdraft. At the end of the period (often a year, sometimes more), you are 'discharged' - that is, the court declares that you are free of the debts.

A bankruptcy stays on your credit record for six years. Even after that, you may be asked (e.g. by mortgage providers) to state if you have been bankrupt.

Alternatives to bankruptcy include:

1. Informal arrangements. You agree reduced payments with your creditors, but they can reverse their decision at any time.
2. Individual voluntary arrangements. A professional insolvency practitioner (IP) acts as intermediary. You pay the IP, and they pay the creditors. The IP charges you a fee.
3. Debt management plans. A debt management company helps you make a plan and agreement with your creditors. As with informal arrangements, creditors don't have to stick to the plan.
4. Administration orders (only for debts totalling < £5,000). The court acts as intermediary and takes a 10% fee.
5. Debt relief orders (only for < £15,000 where you have <£50 per month spare income and < £300 in assets). Student loans don't apply. An authorized debt adviser applies to the Official Receiver on your behalf. The application fee is £90. This is very like bankruptcy, but slightly cheaper and simpler to administer, and you are less likely to have to attend court.
6 Fast-track voluntary arrangements. Involves the Official Receiver. Relevant if you have easily saleable assets and want to cancel a recent bankruptcy quickly by cutting a deal.

For more on debt options the follwing Government link is good:
http://www.direct.gov.uk/en/MoneyTaxAndBenefits/ManagingDebt/Debtrepaymentoptions/DG_10023185

For more on debt relief orders, see the following from the Citizens Advice Bureau:
http://www.adviceguide.org.uk/index/life/debt/debt_relief_orders.htm

I hope this all helps!

The Irish debt crisis - musical chairs

Like most banks, the Irish banks have been making money by giving long-term loans to customers at higher rates, and taking shorter-term loans from capital providers at lower rates. When times are good, capital providers are generous and indiscriminate. But in a recession, capital providers suddenly get choosy, and there is less money to go around.

It's a bit like the game musical chairs - at every round of negotiation the music stops, there is a scramble for insufficient resources, and one bank loses its position. The weakest bank in the group risks collapse if it can't get the next supply of short-term funds to fund the loans they have given out.

A government can use its strength and credibility to support its native banks with guarantees. That way the capital providers are less likely to get nervous. However, some of these loans are huge - bigger than even governments can manage. If the capital providers see that a government itself is at risk of default, then guarantees won't help, and the game is really up. Noboby wants to be the last capital provider left investing, and everybody pulls out - except the home government itself. The government effectively becomes 'as one' with its banks, as it is the only funder left.

In this way, the game of musical chairs can apply to governments. With each negotiating round, as funds become more scarce, capital providers progressively remove funding resources from the weakest countries. First Greece. Then Ireland. Then perhaps Portugal. Europe tries to mitigate this effect by providing 'support packages' - effectively, sharing the remaining chairs, somewhat uncomfortably.

Meanwhile, the original problem remains - long term loans being given out by banks, funded by short term loans from capital providers. This is a mismatch which will not leave us until banks learn to borrow, and lend, over matched periods.

Until this is done, capital providers are in the driving seat. And it may be that the only credible capital providers left will be governments, outside Europe, with access to high levels of sovereign wealth - some with an interest in political influence. Ironically, in Europe's quest to maintain control over its own banking system, the ultimate sacrifice may be some of Europe's political independence.

The scale of the UK national debt

It's easy to forget just how much the UK government owes. The approximate figures are:

At the moment, the government owes around £950 billion. There are around 62 million people in the UK, so this is about £15,000 per person.

Last year (2009-10), the UK government spent £671 billion, but only received £496 billion in tax. This is a shortfall of £175 billion. This year (2010-11), government spending is set at around £700 billion, so the shortfall may be similar, increasing the debt still further. Per person, the government spends about £11,000 per person, but receives about £8,000 in tax.

The interest bill on the debt this year is expected to be about £43 billion (about £700 per person).

MPs' expenses

British Members of Parliament have been enjoying a very relaxed system of indirect remuneration. Instead of voting themselves pay rises, they have voted themselves allowances which do not show as part of their basic pay.

Two things made this system different from normal: firstly, MPs voted themselves special tax exemptions which members of the public did not have; secondly, the culture surrounding the management of such expenses encouraged MPs to 'use up' their allowances, rather than minimise costs. This was plainly a system and culture which encouraged spending as an MP's 'right', and viewed allowances as a perk of the job.

There will always be those who push things as far as the rules will allow. But they are not always exposed so ruthlessly. What is driving the additional attention and hostility?

We are in a recession, with many worried about their finances. At times of acute threat, people tend to place more blame outside themselves, to avoid immediate pressure. In extreme and focussed form, this turns into scapegoating, where one class of people becomes the repository for everyone else's anger and despair. British MPs are suffering because the British public has turned on them in this way.

As to the system itself, my suggestions are: to tax MPs allowances in exactly the same way as everyone else's; and to give design and control of the system to a non-MP with a specific remit to keep costs down.

Is BAA in trouble?

Running UK airports used to be a monopolistic licence to print money, and an attractive cash cow for outside investors. At the moment, however, BAA, which runs many UK airports, is suffering several attacks - from financial losses; from falls in passenger numbers; and from the Competition Commission's quest to break up its market power.

Passenger volumes have fallen by around 10%, but BAA's main problems relate to financing issues, include interest charges and losses on financial instruments. BAA refinanced its debt (currently around £10bn) last summer.

BAA (majority-owned by Spanish company Ferrovial) has been ordered by the Competition Commission to sell Gatwick and Stansted airports, as well as Glasgow or Edinburgh. The Gatwick sale is well under way, and BAA are considering three rival bids - from Global Infrastructure Partners; Manchester Airport Group and Borealis; and Citi Infrastructure Investors.

The question for me is whether, once the sales are completed, BAA has enough cash-generating ability to finance whatever debt remains on the books. In a buyer's market, this isn't guaranteed. The situation reminds me of BT, a one-time perennial cash-earner, which is now saddled with debt as well as periodic de-monopolising pressure.

Is it better if the giants fall?

Would it be better all round if the two troubled US car giants, Chrysler and General Motors, go into bankruptcy?

Both are teetering between restructuring and going bust. With regard to debt, although, Chrysler's main lenders have accepted $2bn cash in lieu of $7bn secured debt, GM's more diverse lenders have not proved so easy to get together in one agreement. With regard to other obligations, both companies have contracts to fulfil with a network of dealerships which is just too big for the current market.

Bankruptcy would have its advantages for the companies: not least, the protection afforded would enable them to downscale operations, reducing the number of dealerships with fewer legal repercussions.

Should bankers be forgiven?

The new chairman of the Royal Bank of Scotland wants to draw a line under the past; the former chairman apologised last November, and the argument is that we should now move on. But, as recent public protests in London show, it is proving hard for people to forgive bankers for their role in the current financial crisis. There are two aspects to forgiveness here: the banks' wish to regain goodwill, and the public's need to see the past resolved.

What did the bankers do to lose goodwill, and how can they therefore regain it? They prioritised reward over risk management. In the quest to generate short-term wealth, they overestimated the longer-term sustainability of the growth mechanisms they were using. Many bankers knew the growth was unsustainable, but continued because the short term gain was so attractive, and because their competitors would get the business if they did not. They can only credibly regain goodwill if they show they are putting in place a new corporate culture of lower reward and lower risk.

And for the people, what still feels wrong, and how could it be resolved? An abiding feeling is that the main parties responsible have not shared equitably in the suffering they helped to create. This finds its expression in a wish to challenge the generous pension deal given to retired RBS chief executive Sir Fred Goodwin. The people might have forgiven more easily if Sir Fred had voluntarily given up a significant part of his benefit. But the legal deal in this country is that, unless reckless or dishonest, a director can take what is contractually agreed for his efforts, whether a company is successful or not. Those who were so generous to Sir Fred are themselves being challenged, but again, unless they were reckless or fraudulent, not a lot can be forced upon anyone. The best that can be hoped for, is that the government, on behalf of the people, wins fair repayment for its support for the banks.

Earlier I mentioned the two aspects of forgiveness: the banks' need to retain goodwill, and the public's need to see the past resolved. The best hope of both of these happening is for banks to introduce a new low-reward, low-risk culture, and for the government to exact proper repayment on behalf of the public.