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Case Study – Debt Consolidation

Jo and Mike’s Story

Jo and Mike M. lived in the south west of England with their two children, aged 6 and 3. They lived in a three bedroomed semi-detached house on a new build estate which they purchased with a joint mortgage in 2001. They owned two cars, a second-hand ‘runaround’ for Jo and a new car that Mike used for work.

Mike worked in IT sales as a Product Manager. Jo worked part-time as a Teaching Assistant in the school that their eldest child attends. Whilst she worked their youngest child attended a local private nursery.

The Finances

Jo and Mike liked to enjoy life and had never had any significant money worries in the past. Mike earned well in his job – he was one of his company’s top salespeople. His base salary was not in itself spectacular but he consistently earned very good commission on his sales and regular bonuses. Jo’s salary was not huge but just about covered the childcare costs of their youngest’s nursery fees. She gave up full-time work when they had their first child and has only recently returned to working part-time. Her aim has always been to return to work full-time once her youngest goes to school in a couple of years.

Jo and Mike found managing their finances a bit tighter after the kids were born – a fairly typical experience for many young couples. Their mortgage was a joint one that was initially based on both their salaries but this has had to be paid by Mike’s salary alone in recent years once Jo gave up work. Her part-time earnings didn’t really make an impact in recent years as they were mostly all used up paying their nursery fees.

In a surprisingly short space of time Mike and Jo found that they had spent all of their previous savings on non essential and luxury spending. They were also not able to carry on saving here either to replace the money that they were spending. They were both unwilling to change their lifestyle too much, however, and continued to upgrade cars, to take holidays abroad and to buy luxury household items as they liked.

In recent years much of this spending was done via personal loans and on credit cards. Up until recently they spent freely on their credit cards and used Mike’s quarterly bonuses to pay them off, at least in part. By the end of last year they worked out that they had around £15,000 of debt on a variety of credit and store cards and an outstanding balance of just under £3,500 on an unsecured personal loan.

The Problem

In summer last year Jo started to suffer from a stress related illness and decided to give up work for a while to take a break. Both she and Mike decided to leave their youngest in nursery to make sure that Jo could really spend some time concentrating on recuperating.

Unfortunately as the year progressed the oncoming recession hit Mike’s business hard. Although his position itself seemed safe, his company as a whole was finding it hard to make new sales and many of their regular contracts had been put on hold. This meant that the couple had to rely more and more on Mike’s basic salary. It became apparent to them at this stage that he was more likely not to earn commission for awhile rather than to earn it. His company then announced that as a cost-cutting measure they would also not be offering bonus schemes for the time being. Mike and Jo made the decision at this point to take their youngest out of nursery for the time being to save money.

The problem facing the couple was the debts that they were having to service. Mike’s basic salary just about covered their mortgage payments and their essential living costs however did not leave a lot over to repay what they owe. Although they could manage to make their monthly loan repayment they were left with very little cash to effectively service their credit card debts.

Over the course of the next few months the couple were unable to do more than repay the minimum payment on their credit cards. Their situation did not get any better. Their cooker broke down and needed replacement and the car that Mike uses for work needed some costly repairs. These all had to be paid for by credit card.

The couple, at this stage, felt that they were in a vicious circle. Unable to make in-roads on their credit card debts they were also having to rely on them for emergency finance. This all just contributed to making their situation worse. And, they were fast approaching their credit limit on all of their cards and realised that they would be unlikely to be able to raise these limits any more given their current income restraints.

At this stage, when Mike sat down and looked at their finances he worked out that they had around £400 a month spare that they could use to put towards repaying their debts. This was based on a good month when they had no unexpected expenses. Mike then looked at the debts that they had outstanding and calculated that they would, at current rates, need around £450 to pay off their personal loan and to make minimum payments on their credit cards.

The couple decided at this stage that they needed to get some help. Mike was particularly concerned that they do something before things got any worse – his brother had lost his business a couple of years previously and had had to declare himself bankrupt, losing his home and most of his assets. This wasn’t a procedure that Mike wanted to go through. And, he was also all too aware that, even if they could make their minimum payments on their credit card debts, it would take them years to pay off what they owed if they couldn’t up their payments.

The Solution

Mike started to take a look at debt management advice sites on the Internet. He felt a little better at this stage as it became obvious to him that he might not need to take such a drastic step as going bankrupt – there were actually a lot of alternatives that he could look at instead.

He did not, at this stage, however, find it easy to choose which solution would actually suit their circumstances best and, worried about making the wrong decision here, he decided to use an online debt advisory service to help him out. The service he used helped him to:
  • Put together a formal budget based on his incomings and outgoings.

  • Work out how much surplus cash he was likely to have on a monthly basis and how much he would need to repay his debts (which matched his own calculations).

  • Talked him through all of the options that might suit him best and gave him reasons why he couldn’t take on other choices or why he might not want to.

After a long chat with one of the site’s debt counsellors Mike came to the conclusion that he might be best suited to take out a secured personal loan that he could use to consolidate his debts. As his counsellor pointed out, taking out a secured loan would considerably cut the interest rates he would be charged as he would be offering security to potential lenders.

Mikes discussed loan terms at length with his counsellor. At first Mike was keen to take on a shorter term loan but this would, as his counsellor pointed out, mean higher repayments. His counsellor recommended that Mike looked to actually take out a relatively long term loan to start with but that he chose one that would allow him to overpay or to make a repayment in full without penalty.

As the counsellor pointed out to Mike this would ease the pressure and make it cheaper for Mike and Jo to repay their loan in the short term. Once things started to pick up at work and Mike started to earn commission and bonuses again then they could take a view and repay the loan early if they liked.

Mike did some research on loan rates and lenders and opted, in the end, to go with a loan from the bank that had given him his mortgage in the first place as they were offering the best deal with no early repayment clauses to catch him out later. The deal he got here allowed him to repay his existing unsecured loan and all of his credit and store cards. His new payment? £180 a month.

Mike and Jo Today

A few months down the line Mike and Jo are much happier and are much less stressed about money. The budget that their debt counsellor helped them set up has shown them that it makes sense to live within their means and they have even been able to start saving for those rainy day costs and emergency expenses using the money that they had spare after their debt consolidation.

Their aim still remains to pay off their consolidation loan early. In the meantime they have set themselves the target of not buying anything that they cannot pay for on the spot, even if this means waiting and saving up to buy stuff. They have closed down all of their credit card accounts apart from one joint account which they use for emergencies and which they have so far (fingers crossed!) not had to use.

Their youngest child will soon be starting at a state nursery which won’t cost them any money and Jo is feeling well enough to work for a few hours a week with a view once again to returning to work in a year or so. So, things really are looking up!

As Mike says: ‘Getting help from someone who could look at our situation in an impartial way was the thing that made this all work for me. I couldn’t see the wood for the trees and I was petrified that I’d have to declare myself bankrupt. The counsellor I spoke to put me at my ease within minutes and could very quickly tell me that bankruptcy wasn’t an option I should be looking at or a threat I should be worrying about at the moment. Within half an hour I knew exactly what would work for us and we were sorted out in just a couple of weeks.’
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