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Case Study – Debt Management

Lucy C moved back to the north-west of England to be close to her family in Manchester after graduating from university in London. After spending a couple of years renting a room in a friend’s flat she put down a deposit on a small house and took out a mortgage. Lucy had saved enough to pay her deposit herself but didn’t earn enough at that stage to qualify for the mortgage she needed so her parents stood as guarantors to help her get on the housing ladder.

Since moving back to the north Lucy had started working as a trainee fashion buyer with an independent chain of stores. Apart from her mortgage she had no significant debts to start with and the car she drove was given to her by her older brother when he was given a company car.

The Finances

  • Although Lucy has always had an active social life and enjoys going out once or twice a week with her friends she was brought up to be careful with her money. For example, she worked her way through university and worked in a local office during every vacation so was primarily able to fund her student life with some help from her parents without the need for student loans. During her first year of working, however, she did buy furniture and fittings for her home which left her with credit card/store card debts of around £2,000.

    Although Lucy technically did not qualify for the mortgage she was given she, and her parents, had no worries about her ability to meet her mortgage commitments which she could comfortably do from her salary. As a trainee buyer she didn’t earn that much at this stage although she was in line for reasonable pay rises every year.

    Unlike many people fresh out of university Lucy made real efforts to make sure that she saved some money every month that she could to give her an emergency savings fund. She also restricted her own credit card spending from this point and tried to pay over the minimum payment every month to reduce her debt balance more quickly. She did not have a lot of cash spare at the end of the month but she had some and she was happy with that.

The Problem

  • The fashion chain that Lucy worked for started to suffer from financial problems last year and, although they are still operating, they had to let a lot of staff go and Lucy was made redundant. She did receive a redundancy payment but, as she hadn’t been working for the company for that long, this wasn’t really a significant sum.

    Lucy did find another job but it took her four months to do so. During this period she was able to use her savings and her redundancy money to pay her mortgage for two months and she took a payment holiday to cover the other two months’ payments because her mortgage deal allowed her to do so.

    During her period of unemployment Lucy had very little cash to live on and started to rely on using her credit cards to buy essentials and to pay her bills. She also carried on going out with her friends and, again, had to use her cards to service her cash needs on nights out – she got into the habit of taking out cash advances on two credit cards to give her money to spend. During this period she also needed to pay for some essential repairs to her property which was, again, funded on a credit card.

    Lucy did not want to ask her parents for more help during her period of unemployment. She felt that they had done enough to help her out already and they were at this point also helping her two younger sisters who were both at university. She was aware that money was now tight at home and didn’t want to put extra pressure on her parents’ finances. So, she let them believe that she was living on her savings even though they were actually quickly used up.

    Lucy sat down shortly after getting her new job and took a look at where she stood financially. She had found another job as a buyer but was actually being paid a little less than in her previous job. She worked out that she could afford to pay her mortgage and run her car (which she needed to get to work) and that she had enough left over every month to live on. It would take her a year or more to get back to the salary level she was on previously.

    However, Lucy was shocked when she realised just how much she had spent on her credit cards during these four months. After all, she had had an outstanding balance on a couple of cards before she lost her job that she hadn’t got round to paying off and had then run up further debts on her credit and store cards to keep her going. At this stage Lucy owed around £7,500 across a variety of cards.

    According to Lucy’s budget she could just about manage to afford the minimum payments on her cards each month however this would be based on her not paying for anything but the bare essentials. Then, she had a month with high electricity and gas bills and found she couldn’t even manage that.

    She now had arrears on one of her credit cards and, as she then noticed, the interest she was being charged in some cases was much higher than the norm because she had used certain cards for cash advances. At this stage she realised that even if she managed to pay off the minimum every month the interest that she was being charged alone would soon outstrip her ability to pay and her arrears situation could get much worse.

The Solution

  • Lucy talked to her Dad and he recommended that she take some independent advice to get her finances under control. She went online and decided to contact a debt management plan company. She had every intention of paying back what she owed but felt that she needed some leeway with payments to do so effectively.

    The debt management plan specialist she contacted helped her work out just how much money she had spare every month to service her credit card debts and to allow her to live comfortably within her means. They then explained to her exactly how the debt management plan would work. She would pay the debt management plan manager this spare cash at the beginning of every month and he would share it out between the credit cards that she owed money to.

    Lucy was worried here that the credit card companies would not be happy with this. After all, it would mean that she would be paying a lot less than their minimum payments every month. She was also concerned that paying back smaller sums would mean that she’d never make any headway. If interest kept on being added to the debts she already owed then she’d never be able to pay them off in full.

    Her debt management plan manager was able to put her mind at rest. He explained that his company had an excellent relationship with the major credit card companies, most of whom were willing to help in this kind of scenario. After all, getting some money back is better than nothing and Lucy’s willingness to take responsibility here would stand her in good stead.

    Then he delivered the really good news. Having talked to Lucy’s credit card companies he was able to report that all but one of them had agreed to freeze her interest charges while she was committed to the plan. The remaining card company wouldn’t freeze charges but had agreed to reduce them. So, the payments that she could afford to make would actually help her pay off her debts quicker than if she had struggled to make the minimum payments.

Lucy Today

  • A few months forward and Lucy is feeling much happier about her finances. The debt management plan is working well and she can see her debts being reduced slowly but surely. She is also planning on increasing her payments in a couple of months when she should be given a pay rise. Her debt manager reckons that she should be fully paid off in around four-five years or less if she carries on doing so well.

    Her credit card spending was a real eye-opener for Lucy and she has cut down on her socialising and is spending a lot less money. She has started saving small amounts every month when she can to help her pay for emergency expenses and, on the advice of her debt management plan manager, has switched all essential payments such as insurance and utility bills to monthly direct debits. This avoids her having to find extra cash every three months or so to pay large bills and makes it easier for her to budget on a monthly basis.

    As Lucy says: ‘I really had no idea what I was supposed to do here to sort myself out. I was extremely worried that I’d just get further and further in arrears and would end up losing my home. I really didn’t want to let my parents down when they went to all the trouble of guaranteeing my mortgage in the first place and I really did not want them to be liable for money that I owed. My debt management plan really took the pressure off. I know that my debts are being repaid but I don’t have to worry about extra interest being added and how to manage every month. I’m much more careful about the money I spend now – all I want to do is repay what I owe and make a clean start.’
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| Debt Management Case Study | Walking Away From Debt | Are debts ever out of date | Facing a lifetime of debt | Paying for Debt Management Advice | Non-profit Debt Advice |