I am sure I am not alone but I actually drastically reduced the amount of money I owed last year. By liquidating a few ISAs and realising a property investment, I reduced my credit card debt to zero and reduced my mortgage debt by over a third.
OK, so my wife is an IFA (Independent Financial Adviser) and thanks to her wise counsel we sold the ISAs when the FTSE was at 5400 but our property dream was soured by a small loss. However, overall, it means that between us, and thanks to her choice of a 0.49% above base tracker mortgage, our outgoings on debt servicing has collapsed to a small fraction of our income. Again, thanks to the clever mortgage my wife chose, we have a savings pot which we have bolstered from our debt-reduction to access in case of emergencies. Further, our plans this year are to forego expensive holidays and spend wisely on home needs. We had our most frugal Christmas for at least 5 years by my estimate although we had at least the same amount of fun and entertained friends far more.
My point here is that we have made conscious and, dare I say it, strategic efforts to weather a storm.
A Business View
I work with firms to help them grow and so I have a precarious existence at the best of times. In good times, I compete with companies investing in expanding their employee base and in tough times I compete against contracting costs. It means my Value Proposition as a Business has to stand both tests of scrutiny. In the last few months, I have been able to win new business and consolidate existing clients, and helped one whose business model is favoured in tougher times. So far, I have been able to not just maintain revenues but actually increase them.
That has come about from a very conscious and strategic change in my plans coupled with a sharp increase in work rate. It also focuses the mind. Some contracts and potential clients who I had hoped would do business with me, I have simply not worked on - there is always a whiff of reality over wishful thinking to be had in tougher times, something I have preached loudly to anyone who might listen.
Combining a Personal & Business Strategy
What my wife and I had done over the last few months, almost without discussing it in the same context, was to modify our personal and business outlooks to coincide. There was no point in me believing my business was recession-proof even if I can position the services as recession-busting or easing, the fact remains that businesses will have to cut cost and that often means rational thought about service value goes by the wayside. Reality says that I should not expect my business to continue to perform the same way in a recession and I would certainly have to modify my personal thinking about money and how I spend to match this. It came about without a sit down pow-wow, we just both thought the same way.
We may not feel more confident about the future at the moment but we are actually more prepared.
2009 - Poor Outlooks
There is no doubt we planned with the worst in mind and much of it made sense anyway - we have not missed out on anything as a result. However, the recent KPMG Report on 2009 outlooks with reference to personal debt has brought our decisions into sharp focus. The accounting firm predict there will be a big increase in Insolvencies this year with some 150,000 people going bankrupt or entering into arrangements - up from 104,000 in 2008.
For most of us, debt has become a way of life. If you are a student, you now start your working life with a long term debt and banks are instructed to treat this differently so that such students can still have access to more credit like loans, credit cards and even mortgages. As a nation we have an enormous amount of debt which is not secured on any asset at all beyond our mortgages, with over £1 trillion of it racked up on credit cards alone. We have been, for some time, a nation with a ticking bomb of debt.
Up until August of 2007, everything was fine. Most of that unsecured debt was more than covered by the equity in our homes. That has changed dramatically and we now know our homes are worth the same as they were in August 2004 and are still dropping in value. For a large proportion of all mortgage holders, the equity in their homes has collapsed to nothing and in many cases gone negative. The threat of personal insolvency is very much a reality as we move into 2009.
What the KPMG report illustrates is that most people are 'ill-equipped' to deal with the situation and for those heavily in debt, the costs of their day to day outgoings and debt servicing have not been sufficiently modified or possibly cannot easily be in order to meet their obligations going forward.
Debts Write-offs
In 2008 it was estimated that creditors had to write off some £1.1bn 2009 in debts to customers. For those entering what is known as Individual Voluntary Arrangements (IVAs), they had an average of £47,800 of debt which was agreed to be paid back at around 38% of its value. Over 2,500 people entered IVAs with over £100,000 of debt - and the predominant creditor is always credit card companies.
KPMG say that by the time people deal with the situation, the roll up of debt, interest payments, penalties and additional borrowing to meet minimum payments are so high as to make the only way out some kind of IVA or similar as they had no realistic hope of meeting payments. What KPMG say is that those with seriously high levels of debt are ill-equipped to deal with the hardships of recession and downturn - with the further risk and threat of job losses now a reality, many of these people will have little choice but to go bankrupt - meaning the loss of all assets including their house.
A Joint Plan
I don't assert that my wife and I were really clever but we have always had a sharp focus on our responsibility and accountability when it comes to money. It came as second nature to us to do something about our situation while we could so that if anything bad should happen, we could weather the storm without seeking Government handouts or help. Most people think the same way, I would imagine.
There are those though who had not understood what the boom of the last 10 years meant. When the Government keep standing up there telling us our Economy is stable and that Recession cannot affect us because of how clever the Ministers were, many believed it for what it appeared. I can really understand that even if I saw through the guff Gordon Brown and Tony Blair tried to make us believe. There is no doubt in my mind, they have led ordinary families into some kind of Utopian view of the world and how well off they were and it was simply not true. The cost could be very heavy for all thoe individuals.
My only advice - and most of it comes from my IFA-qualified wife - is that anyone who is either experiencing hardship from debt or who has heavy debts to start talking with creditors early - and to keep talking. The worst thing to do is to avoid the obligations as the Law favours the creditors especially if debtors make no effort to either pay or talk.
I also advise to get professional help as early as possible. Many IFAs, Lawyers and Accountants are fee-earners only and so advice can be expensive. There are many bodies such as the Citizens Advice Bureau that can offer some advice for free. However, if you do have a financial adviser, now is the time they should earn their fees.
I can offer my wife's firm, Haymarket Associates (www.haymarketifa.co.uk) as a source of help.
Formal Protection
One area the Government has helped on after helping create this 'Utopian Britain' is that there will be new legislation coming into being which will avoid the need for bankruptcy for relatively small debts - and that's a good thing as bankruptcy carries an awful and practical stigma.
There are several official levels of protection from debt as last resort:
- Debt Relief Orders (DRO) - Planned for April 2009 this will be a mechanism for those with debts of less than £15,000 to be protected from creditors if they have minimal assets or surplus income to service the debt. It can mean the debt will be written off.
- IVA - This is a deal between you and your creditors overseen by an Insolvency Practitioner. It has less associated stigma and can possibly mean you keep your home but does mean you pay some or all of your debts in one go or over an agreed period and plan.
- Bankruptcy - It's the traditional way of escaping overwhelming debt and in the US is actually not so bad. In the UK it has a terrible stigma and can blight your credit rating and more for a long, long time. It will also mean that you will certainly lose your house and other assets to pay as much as you can to creditors whether you like it or not.
Plan Now
My only practical advice is to sit down and plan now. Debt has a way of spiralling very quickly and getting out of control and don't be fooled by low interest rates. When debt gets hard to pay, creditors start charging penalties and they can be wholly out of kilter with base interest rates.
I would advise that you be sensible about prospects going forward. While all may seem pretty good now, job prospects OK, things can rapidly change. I have blogged about this incessantly and argued with people on the subject as people honestly say to me that the recession is not real. I am not proud or happy to say some of those people have been badly affected since.
Debt on a personal level and business-wise needs to be balanced. For many individuals and businesses, it has become a large source if not the only source of funding for day to day expenditure. If that is the case, do your planning now.
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