Different Variants of Conducting with Debt - Case Study Example

Debt Student Name: Tutor’s Name: Course: College Name: DEBT The term debt may be described as an obligation or duty todelivery goods or render services, pay money under an implied or an express agreement. An individual who owes the debt is referred to as a debtor. On the other hand, the one to whom debt is owed to is called a debtee, lender or a creditor. The use of debt in an organization is fundamental as it creates financial leverage that is used to multiply the yield on investment. This happens only if the provided return yielded by debt exceeds the cost of debt. The interest that the organization pays on a debt is written off as an expense and hence debt is considered as the cheapest long term financing strategy. Debt is not only used by organizations but also by personal individuals. The consumer or personal debts are debts owned by individuals as a result of purchasing goods for consumption and hence they do not appreciate. Such types of debts enable people to make purchases they wouldn’t have afforded on a normal basis through their monthly payments. Types of debts include unsecured loans such as personal loans, credit cards, student loans, secured loans such as auto loans and mortgages and also debts from taxes, medical expenses and legal fees. Possessing high levels of consumer debt increases the strain on one source of income hence it is not beneficial. Consumer debt that is not managed well usually leads to the bankruptcy of an individual. However, possessing some consumer debt may be beneficial to an individual under certain circumstances. For example, the debt accrued to buy an asset that will boost the earning power of an individual. In this case, financing a car is a wise idea if the owner requires it to travel to work that is a job which is paying high. Although debt can be obliging in many circumstances, it can also be a hazard and a burden to a person’s financial and personal well being. Individuals who fall behind on their debts may find it difficult to catch up. This is because they have to dig deeper into their pockets every month as interest rates and possible late fees add up. Additionally, by falling behind on payments for secured debts, the debtor may lose their property through repossession by the creditor (Jose & Esquerra, 1991, pp.76-77). Increasing balances and late payments also slow up on an individual’s credit report and in turn lower their credit score. Due to the fact that scores of individuals are in debt which they cannot manage, the demand for credit counseling has also increased. Credit counseling is a service where one receives advice on their current financial situation and the ways to improve their financial future. Kiesiläinen, Ramsay & Whitford (2009, p.91) argue that credit counseling not only advises individuals to go bankrupt but also inform individuals on other various options such as debt consolidation. In short, this service is put in place to help people who are overwhelmed in debt. This essay will look at the various options of dealing with debt given two different situations that have the same feeling of desperation. As the adviser in both situations, I will explore the various options available for the clients, discuss all the advantages and disadvantages of the options, discuss all the processes related to each option, and help the client come to a decision which is believed to be the most appropriate. Situation 1 Mr. and Mrs. Robert have been struggling to manage their accrued arrears and contact many of their creditors but in vain. They bought their home 15 years ago through a 25 year mortgage. Recently, they made an agreement with their mortgagers to make additional payments despite them having some equity in their property. Making extra payments to a mortgage reduces the total amount paid and shortens the term of the mortgage. This may be beneficial to the Roberts as it will allow their equity to increase faster but it is a strategy they should not embark in now given their situation. The outstanding thing for them to do is to discontinue their additional payment and channel the money to other pressing issuing. Before one decides to pay down their mortgage, they should take a look at the present economic surroundings and their overall financial situation. This would enable them to determine where their money will serve them best. In this case, Mr. Roberts does not have sufficient funds for the extra payments. Since they have other high interest debts from other sources, they should pay off the debt before paying down the mortgage. Another option for the Roberts to consider is that of applying for an administration order. An administration order is an order to the county court by an individual to have all their non-priority debts combined together into one affordable monthly payment (Kempson & Collard, 2004, p.205). This option is usually suitable for individuals who have county court judgments against them. In this case, Mr. Robert is qualified to apply for one as he has two county court judgments. The court usually decides the amount to be paid by an individual depending on their income. Sometimes, the court may agree that an individual should pay only part of the total debt through a consumption order. If and when an order is agreed by the court, the debtor makes one regular payment to the court to prevent creditors from taking any further action. The advantages of undertaking County Court Administration orders are that the court distributes payments deals with the creditors on behalf of the debtor, there is no upfront fee, one can pertain to make payments for a limited time period through composition order and if circumstances get worse, one can apply to the court for reduced payments. Its disadvantages are that creditors may object to the court order, if one does not maintain payments, the order may be revoked and an individual’s employer will become aware of one’s financial difficulties. Since Mr. Roberts needs the vehicle for work, voluntary termination of the hire purchase agreement is not an option. Therefore, it is important for Mr. Roberts to treat this debt as a priority compared to other ordinary debts. When dealing with a hire purchase loan, it is important for an individual to read all the terms and conditions of the contract. Since the hire purchase firm applied through the court to repossess the car, it is advisable for Mr. Robert to request for a time order. A time order is an order applied by a debtor to a court for it to make changes on the terms of an initial credit repayment agreement with a lender. It is used to reduce the interest and repayment rates on a credit agreement. Time orders are granted to debtors as a temporary measure for their financial difficulties. After a specified time, the debtor may resume to their original payments. A time order is a suitable option for Mr. Robert as he can use his new salary to pay for the installments he missed before he gets back onto his feet. Kempson and Collard (2004, p.34) state that the advantage of using a time order is that the debtor can stop potential ruling against them if the creditor had started the court action process. The other advice I would give to the Roberts is for them to apply a debt relief order. This is an order applied by individuals who cannot afford to pay off their debts. The relief is normally granted by the insolvency Service to low income earners with debts equal or less than £15,000. A debt relief order lasts for a maximum of one year and is a cheaper preference than going insolvent. During a debt relief order, none of an individual’s creditors will be able to take action against the debtor in a bid to get their money back (Jose & Esquerra, 1991, p.82). The advantage with this option is that the Roberts debt would be written off at the end of the order, it allows them to make a fresh start after the one year, the fee for ordering a debt relief is affordable and can be paid in installments and in addition the couple will keep their assets including the vehicle. Situation 2 In the case of Lisa Shelley, I would advise her not to file for bankruptcy and instead opt for other options or paying off debts. Since Lisa has a £37,000 credit debt as well as three county court judgments, ordering a debt relief would be inappropriate for her as she does not qualify. However, Lisa can take up the option of an Individual Voluntary Agreement. An IVA is a formal agreement between a debtor and his or her creditors. It is a popular alternative to bankruptcy since it is a less restrictive and less severe solution to debt problems. It helps a debtor to repay their debts by freezing charges and interests whilst reducing the overall amount to be repaid. IVA allows individuals to repay part or all of their debts over a fixed period usually 5 years. Such options are usually arranged by insolvency practitioners who help individuals put together a plan known as a proposal. Through the proposal, an individual will be able to sort out all their non priority debts and pay what they can afford. Individuals who can get an IVA are those who owe more than 15000, their debts are unsecured, they owe money to two or more creditors and have been struggling to reduce their debts (Jose & Esquerra, 1991, p.132). The benefits of IVA to an individual are: less stigmatization compared to bankruptcy, increased privacy as it is not announced publicly, the debtor can still keep the assets, it is tailored according to the aptitude of the debtor to disburse and it prevents further legal action from creditors. However, IVA has its drawbacks such as negative credit rating, need for a lump sum to get started, one may still go bankrupt if they don’t keep up the agreed repayments and the IVA may end if the creditors do not agree with the insolvency practitioner. The other option which Lisa can take up to manage her debt is that of applying for an administration order. Just as stated above, it is an order made by a debtor to the county court to have all their non-priority debts combined together into one affordable monthly payment. An administrative order is best suited for individuals who have county court judgments against them. Hence, it is a suitable option for Lisa as she has three court judgments against her. The benefits of an administration order remain the same to all individuals who undertake it (Kempson and Collard, 2004, p.64). Hence Lisa would benefit from the advantages of the options that have been stated above in the case of the Roberts. As the saying goes that “prevention is better than cure”, I would advice Lisa to cut down on her spending habit and embark on saving as a measure of preventing more debt. For Lisa to manage her spending habits, she needs to develop a personal monthly budget. Through a budget, Lisa can allocate her future personal income towards essential expenses, debt repayments and also savings. An ideal budget enables one to spend their money correctly and prevents a further accrual of debt. In both situations, I did not advocate for bankruptcy as an option. This is because although personal bankruptcy reliefs’ individuals of their financial burdens, it has more disadvantages compared to its advantages (Kiesiläinen, Ramsay& Whitford, 2009, pp.212-213). Some of the disadvantages include loss of property, high court costs and attorney’s fees, loss of credit and publicity of a person’s financial information. Hence it is advisable to consider other options which tend to be more suitable than bankruptcy. Bibliography List Jose, J., & Esquerra, J. (1991). Debt management options. Diliman, Quezon City: Freedom from Debt Coalition. Kempson, E., & Collard, S. (2004). Managing multiple debts: experiences of county court administration orders among debtors, creditors and advisors. London: Department for Constitutional Affairs. Kiesiläinen, J., Ramsay, I., & Whitford, W. C. (2009). Consumer credit, debt and bankruptcy: comparative and international perspectives. Oxford: Hart Pub. Read More