More and more people in the UK are facing problems with debt. Official figures show that over 130,000 people were declared insolvent in 2009. Unofficial estimates put the number at least double that.
However simply being in debt does not automatically mean that your house is at risk. The problem for many people when they are short of money is that they prioritise payments to unsecured debts such as credit cards and personal loans. This means that mortgage payments are missed.
Missing mortgage payments is a serious mistake. The first rule if you are a home owner is to maintain these payments over any other unsecured debt payments. However if you do this you are then in a position where you cannot afford your other debts so what can you do?
Tackle your debt problem head on
If you miss payments to your unsecured debts this poses no immediate risk to your house. However you must not just ignore the problem. If this situation continues then there is a risk that the unsecured creditor could try to use a Charging Order to secure their debt against your property.
In order to prevent this type of action you need to tackle your debt problem head on. Assuming that you are unable to re-mortgage and consolidate your debt, there are three main options to consider:
Debt Management Plan (DMP)
A DMP allows you to reduce the payments you make to your unsecured creditors to a manageable affordable amount. This means you free up money to ensure that you have enough to pay your mortgage.
The advantage of a DMP is that it is flexible. You are not forced to release any equity from your home to help repay your creditors. However, because your monthly payments are smaller, it will take you much longer to repay your debt – in some cases many years.
Individual Voluntary Arrangement (IVA)
An IVA is a more formal, legally binding solution which allows you to pay your debts for five years. After this any unpaid debt is written off.
With an IVA, you remain in control of your house. It is protected because money is freed up to ensure you can afford to make the mortgage payments. However there are some serious implications to consider such as the fact that you may have to release equity from your property for the benefit of your creditors.
Bankruptcy
Generally speaking if you have equity in your property Bankruptcy should be avoided. If you were to declare bankruptcy in this situation there is a very high probability that your house will be sold to release any equity in it for the benefit of your creditors. However if there is little or no equity in your home this solution is also worth considering as it is less likely that the property will be at risk.
If you have a debt problem, this does not automatically mean that you will end up losing your house. However, if maintaining your unsecured debt payments means that you are getting in arrears with your mortgage, this could have very serious consequences.
Implementing a debt management solution will protect your home by reducing payments to your unsecured debts thus freeing up cash for your mortgage.
However, you must make sure that you get the right advice and fully understand the implications for your home before deciding which debt solution is best for you.
