Debt is no longer an issue for those on low income.
Here we tell the stories of five different couples, all of whom got into serious debt in the Celtic Tiger years.
They have all come through this after negotiating with their creditors.
You can do the same. You may not get a full and final settlement but you will be able to take the distress out of the situation and find a plan that suits your individual circumstances.
This should be read in combination with the Five Golden Rules for debt management which can be seen in the box on the right hand side of this page.
CASE STUDY 1
"We had no disposable income"
This couple were at their wits end after finding themselves in debt to the tune of €70,000. They had personal loans with banks and a credit union which had been used over the years to improve their home and to purchase two cars.
They were in debt to five lenders and were getting at least five calls, letters or even house calls a week. So the pressure was constant.
They got into debt when Joseph lost his job and his partner, Clare, took a wage reduction. Before they knew it they were under water.
They had also started to use their credit cards as a source of income.
The pressure to pay was constant. “They not only had to fight their own sense of hopelessness, but they also had to deal with fear,” said Frank Conway, director of moneycoach.ie, a debt-management company run by the Irish Mortgage Corporation.
They had lived the life in the Celtic Tiger and had four credit cards on the go between them. During the boom, using their credit cards was not a problem as strong income meant that card balances could be paid off quickly. It was a convenient use of money and a way of life.
However, with the downturn and severe loss of income, credit cards took on a whole new role: they were now using their credit cards as a source of income, to pay household bills such as groceries and other bills. So not only were they in negative equity, but they were also in negative income.
Clare, a teacher, had a debt of nearly €40,000 at the credit union.
And they also had two personal loans, one with Bluecube and another with HFC.
How they got out of trouble
The first thing they were advised to do was to make a diary of all their income, housing costs, other priority payments, every-day expense and other expenses.
The were told to include everything from trips to the hair-dressers to make-up costs and health club members' fees.
They were advised to seriously revise their budget.
Obvious expenses such as annual holidays were put on the back burner. Smoking, which was costing over €400 per month, had to be significantly reduced, if not eliminated. Insurance costs, including health insurance, car insurance, Life (& mortgage) protection as well as home insurance all had to be reviewed for lower-cost options. Even the weekly grocery bill meant that looking for lower-cost options was a must. This was all necessary before any contact could be made with creditors about a reduction to their monthly payments.
Parts of the revised budget were rejected and it was fine-tuned until a point that it was acceptable to all eight financial institutions involved.
Their net disposable income was worked out at €316.71 a month and the creditors agreed that they would accept this on a pro-rata basis. In other words, the creditor that was owed 40 per cent of the couple’s overall debt got 40 per cent of their income a month and so on.
So, for example, the Ulster Bank, which was owed close to €2,000, was originally scheduled to get €50 every month. Under the new plan it got just €5.83.
So where’s the catch?
“It is important when finances get tight that one understands and can document where their money actually gets used. Fully documenting this is an important first step when managing one's finances through difficult times. Creditors will work with what you have in the main,” says Frank Conway.
Remember you’re not the only one in debt
The most important thing, says Mr Conway, is to demonstrate you are committed to reducing and paying off your debts.
When you come up with a proposal for repayment don’t include anything stupid. “I had one couple who spent €980 a month on cigarettes, but with that you are goosed. No bank is going to take that seriously, plus your life policy will be up by 30 per cent.”
Another individual who came to him was spending the top amount on Sky Sports, something that could be considered a luxury by a bank to whom you owe money. “But he said he didn’t go out to the pub anymore and he was actually saving money by watching Sky at home. The point is if you can demonstrate that you are doing everything you can within reason you could include that on your financial proposal,” said Mr Conway.
Another tip Mr Conway has for those trying to prioritise who they pay first is to stop paying your bills by direct debit.
He had one woman who had a loan account (for a car) and a current account with the same bank. She decided to hold back on making her monthly loan repayments but found the bank had dipped into her current account to make a repayment on the car loan. “The moment you sign up for direct debit, you give away control,” he warns.
CASE STUDY 2
The 'upside downer'
Cassie, 24, lives in Dublin and appeared on The Consumer Show in 2010 to tell how she found herself up to her eyes in debt and desperately needed help.
She told how, at the age of just 22, she and her partner got a mortgage of 13 times their joint income of €30,000.
It was 2009 and the recession was already beginning to bite – she and her partner subsequently lost their jobs.
But with the help of a debt-management company they reached an agreement with their creditors including a write-off of some of the debt on their credit cards – what is known as a ‘full and final settlement’.
They are what personal finance adviser Eddie Hobbs called the “upside downers” – where the balance sheet is skewed. “They owe more than they own,” says Hobbs.
Here's what they told the Consumer Show:
Cassie: I got my mortgage about three-and-a-half years ago, about €390,000. At the start of 2009 I lost my job. I then found out I was pregnant and then my partner lost his job, so we were really struggling to pay for everything.
Keelin Shanley: You had no income coming into the house?
Not very much, social welfare and that was it.
Cassie: So we're trying to pay the mortgage and in line with meeting it we then used credit cards to pay for bills or for shopping and that sort of thing.
Eddie Hobbs: Cassie, to put your case into perspective, you were lent a mortage by one of the main banks, a mortgage that was 13 times your income when you were about 22 years of age.
Cassie: That’s correct. Now at the time we could afford it. But as situations changed we couldn’t.
Eddie: So you had no wriggle room?
Cassie: No, because obviously we were both working but then I wasn’t working and then he wasn’t working, so we didn’t have an income to support it.
So when the credit card was really getting unmanageable and the car loan on top of that, I just approached a top debt-management company to help me because I didn’t know what else to do. So I got a cash pile together and negotiated a full and final settlement for me on both the loan and the credit card and it cleared it.
Keelin: So Cassie, getting professional advice, is that what it takes?
Eddie Hobbs: Well, Cassie represents the Celtic Tiger cub. The level of borrowing was absolutely enormous, which I think was reckless. The actual giving of a mortgage of that level to someone of your age is absolutely gobsmacking. But even today your mortgage, which is about €1,490 a month, represents about 58% of the income coming into the house. So you’re surviving on the balance.
Cassie: It is difficult sometimes, because we can’t afford the luxuries, but we have a roof over our head and food in the fridge and that’s the main thing.
Keelin: But you’re also suffering significant negative equity.
Cassie: Yes, I think it’s about €200,000.
CASE STUDY 3
Debts to family or friends
It is only natural to turn to family or friends for help when times get tough, but often the debts that can accrue can cause havoc with your personal life and can become an emotional noose around the neck, says Eugene McDerby of Moneyvillage.ie, a debt-management company.
“The pressure people feel is often greater than anything a bank can put you under,” he says.
He had one woman who had borrowed €3,000 apiece from two neighbours for a small business. The business failed and she ended up being unable to pay the neighbours.
“They texted her everyday. They threatened to tell the parish priest which in a small village where she lived was like putting a poster up. She was so stressed by it I think she would have had health problems if she didn’t clear that. If she saw her neighbours' cars at the shop, she wouldn’t go in to the shop, she would drive on, it was that bad,” said Mr McDerby, who offered to help.
So what advice does he have for people in this situation? All debt-management agencies, whether MABS or a private operation, advise you to come up with a financial statement showing your outgoings and income.
The next step is to prioritise those debts into debts that are secured – i.e. your house or your mortgage – and those that are not – credit cards etc. The priority payments are always the secured debts. Personal loans to family or friends are not secured and therefore not priority. So no bank will accept a repayment plan which includes X amount per month to your brother, sister, cousin, neighbour or ex-partner.
“They want payment ahead of anyone else,” says McDerby.
In this case he could see that this woman was so terrorised by her neighbours that emotionally she should pay the debt off before addressing her other debts, which were pretty hefty - €70,000 in all.
CASE STUDY 4
Couple whose income halved
Middle-class debt mountains are a by-product of the Celtic Tiger, when people partied on equity release from their homes which soared in value.
Many will be able to identify with the following couple, who turned to Moneyvillage for help after finding themselves in debt of €70,000.
During the good years they had a combined income of €200,000. They got a mortgage to buy a property for €800,000 in north county Dublin. They also felt comfortable enough to decorate the front drive with a couple of top-of-the-range cars – he went for a Jeep and she got a brand new Mini-Cooper for a run-around.
Then disaster struck. He lost his job and her job was cut to three days a week.
Eventually he got another job in sales but this time with a salary of just €50,000. She was earning less than €20,000.
There were no bonuses because he wasn’t able to sell as much any more. Outgoings on the Jeep alone were €2,000 a month.
“What happened in the old days”, says McDerby, is Mr X “would have gone to the bank and topped up his mortgage to pay off the debts."
“This man, however, was lucky. He spotted his difficulties early and decided to sell his house and the car. He also renegotiated his other personal debts which would have included credit card, overdraft and personal loan and got himself back on to an even keel."
CASE STUDY 5
Clinging on to the Celtic Tiger lifestyle
Eddie Hobbs calls them ‘the muddlers’. They acknowledge their difficulties, but don’t do much about them. They might get some savings from gas and electricity, “but really what’s happening is the muddlers are holding onto a lifestyle in 2010 that is ancient history. It was the lifestyle before the crisis. And they need to go back in the time machine to the type of life they had in 2001 and 2002 and start again”.
Often, these are couples with a joint income of more than €150,000 in the boom.
Classic symptom is your credit card debt isn’t going down and it’s now a core long-term loan and your overdraft is beginning to creep up. That’s the classic sign of over-spending.
Eddie says: “The first thing is to run a cash diary for a month so you can see where the cash is being haemorrhaged. You then add to your normal recorded summary of what you’re spending on credit cards and cheque books and so on. You now know what you’re spending and where you’re spending. You then cut back and bring it in within your income.
“Also need to look at how you consolidate your loans. Is there a way of getting your loans down to the cheapest? The credit union might be able to help with that.
“The problem is the gateway drug into a lifestyle date is the credit card. That’s the crack cocaine especially if you have an abuser in the family.
“Get the credit card and cut it horizontally so you disable it. Cut the top off it. You can’t swipe it any more but you can use it online so it will cut out the impulse buying.
"Last thing to do is share the plan, not with your hamster but with your family because they are part of the process."
