Introduction

Crunch Time: Nasty Letters. Nastier Calls

Welcome to the dark underbelly of the international banking system: a well-oiled mechanism of intimidation that kicks into gear the moment you hit hard times. Welcome to the debt collection industry. Most people who've never experienced bad debt are unaware that this 'industry' even exists. And the most disturbing fact is that behind it all are the high street banks, the very same benign institutions that bombard us with happy jingles and promises of life-long security.

You won't want to know how I got there, but it doesn't take much imagination.

Towards the end of 2002 I reached meltdown. It was what everyone in debt dreads most. I'd been fending off ruin by robbing Peter to pay Paul, taking out loans I couldn't afford just to keep me afloat, running one credit card to the hilt before applying for (and always receiving) another, and all the time hoping my circumstances would improve, while knowing deep down that, short of a miracle, nothing could prevent the inevitable.

When finally I surrendered to my fate, I owed more than £100,000 in unsecured debt and £150,000 in secured debt. In less than two years I'd run up a debt of £¼ million. It was very easy.

Readers of this report will be on different rungs of the debt ladder, but for the benefit of everyone I'm going to take you quickly through what can happen at crunch time, beginning from the point when you know you can no longer service your debt.

Your options:

Option # 1/ Do absolutely nothing

Unlikely as it may seem, and depending very much on your personal circumstances, doing nothing is a viable option when dealing with unsupportable debt. If you don't happen to own your own home, and if you have no assets of value that can be seized by a bailiff, there really is very little anybody can do to call in your debt. And as every debt has a maximum shelf life of six years*, you can simply sit it out until it drops off your credit file*, together with any adverse judgements*. Six years later, phoenix-like, you will be reborn to acquire more precious plastic.

Of course, during this period it is possible that one or more of your creditors will apply to the County Courts for a judgement, but, as they say, they can't get blood from a stone. Likewise, in theory, one or any of your creditors could bankrupt you at any time, but unless they can be certain that you have significant assets, it is highly unlikely, because it's throwing good money after bad. And even if they were to bankrupt you, they'd be doing you a favour by writing off your debts.

Oddly enough, the difference between doing absolutely nothing, and paying your creditors a nominal monthly repayment to keep them off your back, is negligible in terms of the treatment you can expect to receive when you default on a loan.

If you elect to do nothing, however, you will be hounded for a matter of years before the banks eventually write you off. Be warned. You are in the system. The system is watching you.

NB

Although I wouldn't recommend it, I've heard of people who've moved fast, sold their property under the noses of their creditors, placed their money in an offshore account, and set themselves up abroad. They return after six years and it's as if nothing happened.

To sum up

Unless you're a little weird and happen to thrive on hassle, or unless you're one of life's itinerants and have made yourself difficult to track down, (by keeping your name off the register of electors) then it is probably best to consider a more responsible course of action, such as...

Option # 2/ Take out a further loan to consolidate your debts

Ouch! Many would advise against it, although there are specific circumstances where it can work. But it requires some discipline.

It really depends on the nature and extent of your debt. If, for example, the bulk of your borrowing is on credit cards, you haven't missed any payments, and you have a regular and predictable income, you could wrap up your debt into a single loan or, better still, an extension on your mortgage (if you have one). This can leave you with a significant reduction in outgoings, and just one 'manageable' monthly repayment at a lower rate of interest. I did this myself (on more than one occasion!) but I made the teensy-weensy mistake of continuing to use my credit cards. Oops!

A word of warning

If your credit rating is already damaged, (i.e. you've missed payments and it's been registered on your credit file) it is unlikely that any high street lender, including your own bank and / or mortgage lender, will touch you with a long stick. The only way you will be able to borrow money is via the plethora of seedy loan brokers — the ones who advertise in the Yellow Pages and in the back pages of the tabloid newspapers. Not only will you pay well over the odds on interest, you will also be required to use your home or property as security. If you find yourself in this position, be very cautious; do your sums meticulously and take alternative advice before you commit yourself. Consider all your options first.

To sum up

If you're serious about debt consolidation, you must be prepared to 'feel the pain'. Live within your means. Cut up your credit cards. Give up partying and fast cars and hunker down to an extended period of austerity! Or consider...