The Cycle of Debt and Solutions

Whilst this is a fairly lengthy section which covers the primary reasons that our clients have come to us for assistance along with an explanation of how the help we provide actually works, it is lengthy for a reason. This section will demonstrate the many ways people have found themselves in debt, the attitude that their creditors take towards their circumstances and the precise methods we use in order to help.

Debt – Common reasons and common misconceptions

“Money makes the world go round”. Well maybe it did but a more accurate assessment would be “Lending money makes the world go round”. We live in an age where credit is simply a fact of life for everyone no matter what their status. It surrounds us and will continue to do so because it makes money for the lenders and companies tend to continue to do things that make them money. The days of stigma being attached to those with debts are long gone. Your new mobile phone is “advanced” to you on credit, you can pay for your car, bed, TV, PC, tools or pretty much anything else you care to name on “convenient monthly installments”. Even your supermarket offers a credit card.

It is therefore inevitable that despite credit checks, credit limits and rigorous lending policies, not everyone will be able to meet their repayments. This is because we live in the real world where things happen to people. The unexpected, unanticipated and unwanted happen and all too often they happen to people who do not deserve it. They may have happened to you and they may be the reason that you are now reading this.

Here are the most common reasons for people seeking our help.

Relationship breakdown / Divorce

It stands to reason that a household with two incomes will have more disposable income than a household with only one. A huge amount of people are affected by this every year. What was affordable for couples sometimes becomes impossible for the person left with the debt after a break up.

Creditors understand this.

Accident / Illness / Injury

Whether you are employed or self-employed, accidents and illnesses can have a hugely detrimental impact on your income. The same is true if it is your partner who has been affected.

Creditors understand this.

Job loss / Redundancy

We are living in tough times at the moment. The reality is that many employers are making cuts and the loss of a job is often compounded by difficulties in finding alternative employment or employment at a similar salary.

Creditors understand this.

Loss of overtime / Reduction in bonuses

When a business makes cuts, the first thing to go is usually overtime. If your income was only just supporting you, losing any amount of it can cause financial difficulties. For those working in sales environments, consumer spending is down generally and therefore so are bonus payments. Again, if this part of your income is lost, it can cause problems.

Creditors understand this.

Business failure / Reduction in business income

Small businesses are being hit hard as people tighten their belts. Many fold each day and the result is not just a loss of income but often additional debts that were guaranteed by the company Directors, compounding an already awful situation.

Creditors understand this.

Common effects of the debt burden

Whilst it is fair to say that a few of our clients have retained their joi de vivre despite their financial difficulties, the vast majority have been carrying the weight of the world on their shoulders. Our conversations revealed patterns that were repeated time and again and in many respects are the hidden personal cost of living with the burden of debt.

Almost without exception, stress was playing a part in people’s lives. Insomnia is often the least of someone’s troubles if they are living with stress. Stress affects your relationships, your work and your health. Even though the source of the stress could be pinpointed, another characteristic typical of those living with debt is denial – the hope that avoiding the problem might in some way make it disappear. Of course, avoiding the problem actually has the opposite effect and makes the situation worse but pride and not wanting to accept that control has been lost are strong feelings that only serve to compound the very source of the stress in the first place. It is often a truly vicious circle.

The only way to lift the burden is to take action. Do something about it, regain control and remove the stress from your life.

Creditor behaviour

So what happens if you start missing payments? You may already know the answer and have been on the wrong end of some fairly robust chasing from creditors but our aim here is to lay out all of the information in order to gain a full understanding of all the processes, so again, I will begin at the beginning.

Each creditor may have a slightly different approach so the following is a guide to typical behaviour and we are using a credit card debt as the example.

Step 1 – Late charges and reminders

If you miss a payment, the chances are that you will hear nothing until you receive your next statement. The statement will remind you that you have missed a payment, will add a charge for late/non-payment and will preclude you from using the card again until the account is back up to date. Whilst policy varies from creditor to creditor, at this stage you will still be dealing with customer services who are unlikely to be able to accept a reduced payment.

Missing a payment is detrimental to your credit rating.

Step 2 – Inhouse collections team

If your account is not brought back up to date, the card issuer will automatically pass your account on to their inhouse collections team. They are employees of the card issuer and their role is to contact you in order to bring the account up to date. They keep different hours to standard bank opening times and are likely to call you any time between 8am – 9pm. They will continue to call, and write until they either make contact or have made an agreed amount of attempts to contact you. This may be as few as 10 or as many as 50.

Missing further payments is even more detrimental to your credit rating.

Step 3 – Default Notice

If a satisfactory outcome is not obtained by the inhouse collections team, a creditor is bound by the Consumer Credit Act 2006 to issue a default notice. This will state how you have breached the terms of the agreement and detail steps that you can take to remedy the situation. The Default Notice must be served in order for the creditor to take more serious intervention.

A Default Notice is once again, even more detrimental to your credit rating.

We hope that this has been helpful, informative or both. If you have a specific question, or would like to find out more in the strictest confidence, you can contact us on 0141 348 7900 or if you prefer to not to speak to us directly at : This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Step 4 – Debt Collection Agency

Shortly after the Default Notice is served, your account will be passed on to a Debt Collection Agency. There is an important distinction to be made between an inhouse collections team and a Debt Collection Agency. The former assumes that it is dealing with clients who have made an oversight or have suffered a temporary setback, the latter assumes that they are dealing with people avoiding their obligations. The approach is therefore considerably more tenacious.

Debt Collection Agencies use two primary methods of making contact. The first is a dialler. This is a piece of technology which automatically dials telephone numbers, putting calls through to their agents once the call is answered. Once your number is in a dialler, you will continue to be called at all hours until the agency speak to you. The diallers can use several different numbers to call you from or can withhold it.

Agent’s services are either retained on contracts by creditors or paid a percentage of what they collect. Therefore, Agency staff are to all intents and purposes sales people. They are targeted on the amount of money they collect each day and as such are likely to be very aggressive in pursuing payments of any size.

The second approach is to send letters which contain statements such as “Legal Action Pending” or “Notice Prior To Court Action” and so on. Whilst your creditors are ultimately within their rights to take legal action if you continue not to pay or ignore attempts to communicate with you, these letters are designed to elicit a response from you by scaring you.

By now your credit rating will show persistent missed payments, a default and now failure to agree a plan to repay what you owe at any level.

Step 5 – Decision time

After a predetermined amount of time in the hands of the Debt Collection Agency which can vary from 3-9 months, creditors then need to make a decision on what to do next. They are now within their rights to take the matter to court but this does cost money and the old adage “Don’t throw good money after bad” often comes into play here. If they do take the case to court, they will be applying for a County Court Judgement (CCJ). The court will make a ruling on how much you have to pay each month. If you fail to attend this hearing or subsequently fail to make the court appointed payments, the CCJ effectively grants the creditor permission to pursue the debt even more aggressively. This can be done through an Attachment of Earnings (AOE) where money is deducted directly from your salary via your employer, appointing a bailiff to come and knock on your door and seize possessions, or by petitioning for your bankruptcy which could see you lose your home and other assets in order to cover the amount owed. Clearly a CCJ should be avoided at all costs.

A more likely course of action however is for the creditor to cut their losses and sell the debt on. There are many companies operating who make a living from purchasing debts at a small percentage of the overall debt, confident that they will be more successful in collecting the debt than the creditor was. If they were to buy a debt of £1000 at a rate of 10% then they only need to collect £101 before they are showing a profit. But you will still owe them £1000.

Once the debt has been sold, the new owner of the debt can do any of the things we have covered so far – and they will.

By now, your credit rating will show persistent missed payments, a default, possibly a CCJ and is will now be in the hands of someone even more determined to collect from you.

So what to do?

This demonstration of a typical debt chase cycle should leave you in no doubt that ignoring the problem is simply pointless. Not only will you suffer the whole way through the process but the problems will simply escalate and make matters worse. You need to take action and in the first instance that action should be to speak to someone who can help.

You should be aware that there are two ways of going about this. There are free or charitable services such as the Citizens Advice Bureau (CAB) or Consumer Credit Counselling Service (CCCS) or there are fee charging companies, such as our very own company whose site you are currently reading! There are differences in service of course. The CAB will simply provide letter templates for you to write to your creditors yourself and the CCCS are massively oversubscribed which is why there are so many Debt Management companies in existence as they (as a rule) will act immediately, something which is extremely important to most people. Regardless of who you choose to help you, the method of providing assistance is identical. All solutions for those burdened with debt are surprisingly straightforward.

Here is how it works.

Step 1 – A true and fair assessment

First of all, your monthly household income is evidenced by payslips, contracts, benefit awards or company accounts. We then know precisely how much money comes into a household each month.
We then calculate your expenditure. Certain items of your expenditure are easily evidenced. Your monthly mortgage or rent payment can be proved with a statement or contract. The same is true for things like your car insurance and mobile phone bills. For other items, creditors use pre-agreed guidelines for the things that you have to spend money on each month like transport and food. Using a combination of evidenced items and guideline amounts, your monthly expenditure can be easily and fairly calculated.

We should also point out here that guidelines are precisely that and are not hard and fast rules. There are many people who have unique circumstances which can be taken into consideration. It is simply a case of understanding and communicating them correctly to your creditors.

Once we have these two figures, we deduct your expenditure from your income and what remains is referred to as disposable income and is what your creditors will expect you to pay them each month. If it sounds too good to be true, ask yourself this; If you were owed money, would you rather get some of it back or none of it?

Step 2 – Make the right choice

Once your monthly disposable income is clear, it must be put into context with your overall level of unsecured debt, likely timelines for a change in your financial circumstances, future goals and current assets. As everyone is unique, you need to speak to someone to make sure that your financial welfare is as protected as it can be.

Step 3 – Stick with it

Once an agreement has been reached with your creditors, it is crucial that you stick to it. Not only is the agreement taking steps towards repairing your credit rating but failure to meet reduced payments significantly hardens the approach that your creditors will then take.

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