Laura is a 22 year-old student from Manchester. She owes around £5,000 on credit cards, loans and her overdraft, as well as her £12,000 student loan.
Like many people, she sees debt as a way of life, but recently has started to worry that the debt is growing out of control.
I posed her questions to the debt experts.
I'm starting to find it hard to keep up with my debts. Do I have a problem?
Helen Saxon of the Consumer Credit Counselling Service advises: The broad rule of thumb that we use is if you are paying more than 20% of your disposable income on credit commitments, then perhaps you're becoming over extended and you should withdraw it a bit. But it is different for every single person. Make a list of your income and outgoings and if the outgoings exceed the income and you are using credit to bridge that gap, then that is a point where we would advise looking to make some cuts in your spending.
I'm worried about telling people. I know I've been overspending and I'm a bit embarrassed. Do I really have to speak to someone?
Tina Morris of Christians Against Poverty says: The effect that debt has on people, it does lower their self esteem and self confidence, but we don't ever condemn anybody who has got themselves into debt. We recognise that there are so many reasons why people get into debt so we don't attach any stigma to people.
I think my debts are out of control and I want to do something about them. What are my options?
Martin Broad of the Citizens Advice Bureau says:
It depends on where you are. We need to sit down and look at where the debts are. Some, under law, are priority debts like council tax or utilities. Consumer debts, like credit cards, still need to be paid, but they're not priority. Once we've assessed income and expenditure we can make a repayment schedule which we then offer to the creditors. Most agree with that because they can see someone is showing willing. We'll proceed with that and continue to negotiate.
I've been hearing about IVAs but I don't really know what they are. Are they like bankruptcy?
Individual Voluntary Arrangements are less drastic than bankruptcy. You agree with your creditors a period of time over which you will continue to pay off some of your debt at a reduced rate.
Bankruptcy is a court order that works by sharing out your assets between your creditors. Anyone can go bankrupt and it costs a £150 court fee and a £325 deposit. Your creditors can also make you bankrupt if you owe more than £750.
It will be dealt with either by the Official Receiver or by an Insolvency Practitioner which means that you don't have to deal with your creditors personally any more.
All your bank and building society accounts will be frozen and the money placed under the Official Receiver’s control. They will then have an interview with you, after which they will contact your creditors with a report on your financial situation. Your assets will then be sold to pay all or some of the debt. This frees you from debts and makes sure that your assets are shared our fairly among creditors.
However, remember that your student loan is exempt from proceedings and you will still be liable for it afterwards.
Usually a bankruptcy ends after one year. This may be less if you cooperate. After this most debts that haven’t been paid will be written off.
You may also be given an income payments order which means you have to make contributions to your debts from your income.
For many this is the right option but John Tribe of the Centre for Insolvency Law and Practice says:
"Don't forget you have at least nine years of credit history problem after a bankruptcy, so getting a mortgage, getting any form of loan would be extremely difficult.
"One of the onerous elements is income payments orders. So, you're discharged after a year but you still have to pay IPOs to your trustee in bankruptcy for up to three years. Whereas an IVA lasts for five years of continued payments."
