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Thursday, 23 October 2014

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Tales of the unexpected debt

The rising cost of motor fuel and household bills is in the press on a daily basis. With the cost of living increasing faster than earnings, your disposable income is constantly being reduced.

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Oh no! Higher household bills and now mortgage renewal and self-assessment tax payment

But what if this ongoing squeeze is compounded by a large or unexpected liability? How do you cope and what should you do?

The potentially unexpected type of cost that may arise at this time of year might be a self-assessment tax payment or a mortgage renewal.

If you are self-employed and you have historically generated good profits in your business, you will be making payments of self-assessment tax on account at the end of every January and July based on the profits you made last year.

Current year results and profits may not be as good, and if you have not been able to retain sufficient cash from last year, the self-assessment tax you now have to pay at the end of July may be disproportionate to your current earnings.

Alternatively, a mortgage renewal in the current financial climate will almost certainly lead to a hike in the underlying interest rate and, consequently, the monthly repayment you make.

This will almost certainly be the case if in the past you have entered into a fixed-rate deal.

In extreme cases borrowers may already be facing negative equity and/or a bank with new tighter lending criteria; as a result they might not even be able to take out a new mortgage on their existing property.

So what is the answer and how do you cope with a large or unexpected liability? Unfortunately, there is not a one-size-fits-all approach and the nature of your individual circumstances will impact on the options available to you and the most appropriate solution.

For example, the best approach for a self-employed individual with an underlying profitable business that is facing a one-off liability will be different to the approach for an individual who can no longer meet their ongoing commitments and has no realistic prospect of doing so.

In addition to their assets and liabilities, everybody will need to look at not only their current but also their expected future income and expenditure.

A number of non-statutory debt solutions are available that may be a viable alternative to the worst case scenario of being declared bankrupt.

These include remortgaging, debt consolidation, debt management plans, write-offs/settlements with or without deeds of arrangement and the more formal Individual Voluntary Arrangement.

Due to the number and complexity of the options available you should always take professional advice from a qualified individual or organisation, most of which will offer an initial consultation free of charge, to determine which of these is the most suitable solution to your own circumstances and also to ensure that whichever option you chose, it is correctly implemented.

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