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Monthly Archive for June, 2009

Will I lose my home if I declare myself bankrupt?

Published on June 29, 2009 in Bankruptcy. 5 Comments

This is one of the most frequently asked questions by debtors when considering lodging a bankruptcy petition.  But you do have choices and it is very important that you research this area before making such a life changing decision.

This article is written by Joanne Wood who declared herself bankrupt in February 2006. From the age of 17 Joanne worked as a court reporter at the Central Criminal Court. She is the author of Bankrupt 130 of 2006 – a remarkably candid account of what happened to a family after bankruptcy.

In the weeks running up to my own bankruptcy hearing in February 2006 I tried to gather as much information as I could  relating to this point.  But to be totally honest with you my mind was a mess.  The eighteen month battle to save my financial credibility had taken its toll. I was mentally and physically shattered.

The thought of deciphering pages and pages of legal gobbledegook filled me with horror.  I just wanted someone to give it to me straight.  Was I going to be homeless?

Now, if you have considerable assets (equity) in your home then the bankruptcy court is not for you.  You would be better off selling your own home, paying off your debts and starting again with a clean financial bill of health. If you do not take this course of action and then decide to go bankrupt, the Official Receiver will insist that you sell your home and take the required assets he needs to pay off your creditors. Do not allow this situation to occur.

The same applies to endowment policies. These policies will be taken by the Official Receiver and sold to pay your creditors.  If you have any endowments, surrender them and pay off your debts. You will avoid bankruptcy and keep your home.

Make sure you have considered both the above factors before lodging a bankruptcy petition.  Bankruptcy has to be the absolute last option.

The long periods of silence from the Official Receiver’s office can be very frustrating and the matter of selling your property will not be dealt with until the end of the 12 month bankruptcy period, although  you will be asked to provide two house valuations in the first few months.

Do not tell the estate agents what you want these valuations for as they may charge you for this service.  Just say that you are considering moving home. You will not have any spare money from the allocated bankruptcy budget to pay for these hidden costs.

Be warned: Do not stand by the letterbox on a daily basis waiting for progress with your bankruptcy.  It will not happen.  Months can go past without any communication from the Official Receiver’s office.  The not knowing how my future would end sent me slightly demented.  If you want answers to questions then pick up the phone.  They may not always be available but they do return your calls eventually.

If, at the end of your bankruptcy period there are any assets in your home you will be asked whether or not you wish to buy back your interest in the property.

This is how it works:

For instance, your property is valued at £400,000 and after costs (mortgage, secured loans and solicitors’ fees, etc) are taken into account there is a surplus of £100,000 the Official Receiver will inevitably aim to recover that money and pay it to your creditors.

The Official Receiver will allow a third party to buy back the beneficial interest (equity) in the property. What this usually means is that if you can persuade a good friend or member of your family to pay the Official Receiver the required sum (this has to be paid in one lump), the house will be transferred back on your behalf.

Now, a large sum like that is an awful lot to ask someone else to pay on your behalf and probably rarely happens but there is a more likely case scenario which is worth considering.  For instance the assets, after costs may only be as small as, say, £4,000.  This is something you really need to do your homework on.

Ask yourself. Is your property worth so much to you? e.g.

  1. It is the family home lived in for decades and you cannot bare to sell it
  2. The property has been completely renovated with you own bare hands and needs very little maintenance and is your dream house
  3. Would it be cheaper to find the £4,000 to buy back the interest in your property than trying to find expensive moving fees and stamp duty for another house?

This is something to think long and hard about.  Ask yourself.  Can I afford such a large mortgage?  Is the housing market still falling, could I go into negative equity and, is it worth the large monthly outlay? Or would the mortgage payments be less than paying rent for instance?

The renting issue is a subject close to my heart and something I feel I need to address.

Although fortunate enough to be able to keep our property after bankruptcy because it had fallen into negative equity we eventually decided to move home a year later because our mortgage payments were so enormous.  But we were in for a very nasty shock.

Firstly, we were unable to secure a rented accommodation until we had exchanged on our house sale.  Apparently, these are the letting rules. This then gave me just two weeks to find a suitable property, before the completion of my own house sale.

This was then followed by the Credit Agency checks.  Another week past. Time was now running out to find a home for my family. I truly believed I would be out on the streets. This was a very stressful time for all of us.

Obviously our credit rating had been severely damaged by the bankruptcy order.  As discharged bankrupts we were unwelcome lodgers for some.  Eventually we did find a landlord that was content to house us but at a cost of twelve months rent up front and another £1,800 deposit.  Total £13,800. We did not have this sort of money and were forced to ask relatives for a loan – a humiliating experience. But it was a case of swallow your pride or live on the streets.

One year on renting and we were again asked to pay for financial checks, despite the letting agency knowing we were discharged bankrupts.  Obviously we would not pass the credit check but a fee for both of us was still required. Permission was given for us to continue with the rental, but only on the basis that we found a guarantor whose earnings were thirty times the monthly rent.

Curiously, I was never once asked the question, have you been to prison for fraud, theft of deception.  I haven’t by the way but I still would have liked to have been asked.  Apparently being bankrupt is a crime, I feel.

So, if you do finally decide to fight for your home then make sure you keep up your mortgage payments and any other secured payment on your property throughout the duration of the bankruptcy order.  With credit crunch Britain reducing its work force daily it is vital that you feel secure in your employment and can meet the monthly commitment.

Although mortgage lenders are under government pressure not to move in quickly and repossess properties there is no guarantee that they will behave in this fashion.  If you do find yourself in difficulties then pick up the phone immediately and let them know.  If you ignore them they will take legal action swiftly.


Dealing with Bailiffs – Rules and Solutions

Published on June 24, 2009 in Bankruptcy. 5 Comments

In the last article I discussed about who bailiffs are and what they do. In this article I will focus on how to deal with bailiffs.

Bailiffs are not Debt Collectors

They are actually more than that. While a debt collector can call you, mail you or come to your house and threaten you, a bailiff has the power to seize your belongings. Even if they cannot enter your house, they have the power to take away your car if they are confirmed that it belongs to you.

Dealing with bailiffs?

If you have outstanding debts you may receive letters that they will be sending bailiffs to recover debts. But there is no need to panic. You need to take prompt action to restrict the bailiffs from knocking your door.

If you have arrears on your council tax, call them up immediately after you receive the letter. You can request them to stop bailiffs and make a repayment offer. If anyone else is equally liable for the debt tell them directly. You should also send the request via mail. The Council usually asks the debtor to pay off before the financial year ends.

If you are on an income support they also allow you to pay a small amount every week to meet up with the debt. An approximate £2.90 per week gets deducted directly from your income support benefit. However if you do not want a direct deduction you can write a letter to the council and the bailiffs informing them that you can make the repayment on your own every week.

In case of other creditors, you can avoid the bailiffs by arranging a suitable repayment plan with them.

Bailiffs knocking at the door?

Many credit agencies send bailiffs without informing the debtor. However if you get a hint that bailiffs will be visiting, you can get a letter from your local advice agency. The letter will say that the bailiffs are not allowed to enter your house. While you pass it on to the bailiffs they will know that you have already consulted an expert and are aware of the laws.

According to bailiff’s rules, they can only enter your home if you permit him or he gets in through unlocked doors. If he enters he will make you to sign the Walking Possession Arrangement to seize your belongings and sell them off to pay your debts. You can keep your belongings as long as you repay the debt as per the arrangement. But if you falter they will take away your possessions forcefully.

However the bailiff cannot enter your premises illegally. They are not allowed to break doors or windows and enter forcefully. If they do, you may not sign the Walking Possession Arrangement. Some bailiffs threaten to call the police, but the law does not provide them with the power of doing so. In return you can call the police if they break in illegally and act violently.

Where you may complain about Bailiffs?

Unlike a debt collector a bailiff cannot work unlawfully or misbehave with you. Nevertheless, if the bailiff breaks in illegally, take away essential things forcefully, damage your belongings, or take away more than what is required to pay off your debts, you can complain. You can call the police straight away for help.

If you are complaining about bailiff sent from a private firm, then you need to talk to the legal authorities who have sent them. For County Court bailiffs, complaint should be made addressing the Manager of the County Court. Complaints about council tax collection bailiffs should be lodged to the Council office. Lastly if the bailiffs are sent to collect fees for criminal charges then you may complain at the desk of Clerk of the Justices of the Magistrates’ Court.

Who are Bailiffs and what they do!

Published on June 22, 2009 in Bankruptcy. 0 Comments

I have noticed that sometimes people confuse debt collectors with the bailiffs. I have already written on debt collectors and how to deal with them. In this post I will focus on Bailiffs.

Who are Bailiffs?

Bailiffs are individuals appointed and authorized by the court to collect debt from the defaulters. They are sent to the debtor’s home only when the debtor is unable to get into an agreement with the court regarding debt payment.

They use legal powers to seize and take away some of the debtor’s belongings in order to settle debts. However, this tactics is not always used as their threats alone make the debtor pay off.

Types of Bailiffs

Bailiffs are of two types.

  1. County Court Bailiffs – These bailiffs are employed by the County Courts and they work on enforcing CCJ debts.
  2. Private Bailiffs – They are hired by the private firms who work under the consent of the Magistrates Court and Birmingham City Council for collecting fines on Council Taxes.

What bailiffs can do and what they cannot:

  1. On a visit, the bailiff should carry his identity card and show it, on request.
  2. He cannot enter your premises unless he is invited – “gaining peaceful entry”.
  3. Bailiffs can only come inside your premises if they do not use any force.

However a bailiff can enter your premises if:

  1. He is invited by a responsible adult
  2. Climbing through an open window
  3. Crossing the fence by jumping to reach the back door
  4. He finds an unlocked door

But this does not include:

  1. Breaking doors, locks and windows
  2. Invited by a young child
  3. Pushing past the people to get inside
  4. Resisting the debtor when he tries to shut the door on him

Nevertheless if they somehow get to walk through an unlocked door or even an open window they will make it a walking possession order. This implies that they will make a list of all your belongings. Then they will settle an arrangement with you which will of course depend on their terms. Thus they will take away your belongings even if you do not agree to the arrangement.

What are they allowed to take away?

Bailiffs are only allowed to take away things that are considered non essential. It includes car, televisions, music systems, DVD players etc. They can also seize things that are jointly owned with the debtor.

The bailiffs cannot seize:

  1. Fittings and fixtures
  2. Goods that are on rent
  3. Goods that has been hired
  4. Goods that belongs to some other person

When a Bailiff comes to collect fines for Council Taxes or CCJ debts they are not allowed to seize items that include:

  1. Bedding, clothing, furniture, household belongings and provisions that is required for basic domestic living.
  2. Books, vehicles, working tools and everything that is necessary for his employment, vocation or business.

The fines of council taxes and the CCJ debts can be collected anywhere within England and Wales. These debts may be collected at any time.

Fees of the Bailiffs

Initially there are no charges when the walking possession agreement is signed. But after the warrant is issued, the creditors pay up the fees and add it to the debt. The fees depend on the type of judgement that has been made against the debtor.  For more information refer to the link: http://www.hmcourts-service.gov.uk/

Why you need to deal with priority debts seriously

Published on June 19, 2009 in Personal Finance. 0 Comments

In my last posts I have been talking about different ways to fight against debt. Today I am going to write about priority debts.

What are priority debts?

These are debts on most essential utilities and facilities that you require for a decent living. Priority debts usually include rent or mortgage of your house, electricity, gas, telephone and water. Taxes and child maintenance payments can also be included in the priority debts. The name priority debts itself suggests that it must be dealt with highest priority. If you fail to make payments for these priority debts then the authority may prohibit you from using these essential utilities.

Non payment of your priority debts can

  1. Take away your home
  2. Put you in jail
  3. Cut off your utility services
  4. Confiscate your goods using bailiffs

However, if you are having any priority debts there is no need to panic. You will be notified before they take any action against you. You will also be offered options to make repayments and avoid any legal action. With a priority debt it is always advisable to consult a debt advisor and act accordingly.

Paying off your priority debts

Mortgage and rent comes first in the list of your priority debts. If the amount of arrears in your mortgage is too high then it becomes important for you to contact your lender and try to make an agreement to reduce your initial payments and to get extended repayment term.

The lenders generally negotiate on the basis of your credit history. It becomes easier for you to manage priority debts if you pay your debts every month even if the amount is small. Nevertheless there are certain payments that the court may consider as priority debt. County court Judgements and administration orders are also considered as priority debts. Thus both of them should be dealt with equal importance.

While rent and mortgage can take your home away, non payment of council taxes can put you behind bars and confiscate your properties as well. Hence priority debts should be treated with urgency in order to avoid severe consequences.

Statutory Demands – Procedure, Compliance and Loopholes

Published on June 18, 2009 in Get Out of debt. 1 Comment

Lately the recession has brought a lot of people under the prying eyes of the creditors. Do not be astonished if someone receives a statutory demand from a creditor. Most if the creditors will think twice before taking a big risk.

What is Statutory Demand?

Statutory demands are like a ‘warning sign’ for the debtors who owe a huge debt to the creditors. The debtor receives a 21 days notice from the creditor to pay of his debt in full, failing which the court can start bankruptcy procedures against him.

Statutory demands are treated as a precursor to bankruptcy petition. Sometimes it works wonders for the creditors as most of the debtors tries to avoid a bankruptcy proceeding.

This does not throw you in a dead-end. You can take your chances and start bargaining with your creditors. If you are unable to pay within the stipulated 21 days, request your creditor for an instalment payment option. In most cases the creditors agree to an instalment payment as it will also relieve him from the hassles of petitioning for bankruptcy.

The Statutory Demand Procedure

A statutory demand is signed by the creditor or the person who is acting on behalf of the creditor. The demand will state complete details of your debt like:

  • Total amount of debt
  • Reason for sending the statutory demand
  • The date within which you have to pay

While the creditor sends the demand, he levies interest on the debt. Thus you may find the amount higher than you have expected. The interested gets levied till the date of issuing of the demand after which it freezes.

Debtors who acquired secured loans against their property are sometimes asked to pay back by selling off the collateral. Then again, if a secured debt enters a bankruptcy process the collateral will get sold eventually. Thus at times debtors find it easier to pay back their debts on a statutory demand rather than on a bankruptcy.

It is the responsibility of the creditor to ensure if a debtor has received the statutory demand or not. This implies that the creditor will personally visit the debtor to deliver the demand or he will send it via first class post that will be duly acknowledged by the debtor on receiving. The creditor has to prove that the debtor has received the statutory demand.

Statutory Demand Compliance

Once you have received a statutory demand you have to comply with it. You cannot ignore the demand or leave your home just to avoid paying, because the demand will be advertised in the local as well as the national newspaper. Hence you will be legally bound to comply with the demand from the date of advertisement.

You may object to it in writing along with a signed affidavit, stating the reasons of disagreement. However the court may dismiss the demand of the creditor if you can support your objection with valid evidences. If you fail to provide any evidence to prove that you don’t owe any money to the creditor, the court will start the bankruptcy proceedings henceforth.

The Loopholes of Statutory Demand

The domino effect – Practically, not many creditors issue a statutory demand because it may have a negative impact on their. The news of the issuance of a statutory demand may spread around and thus the creditor may lose many prospective customers.

A statutory demand must show the name of the creditors or people acting on their behalf. Otherwise it will not be valid. If the debtor is unable to reach the creditor then it will be considered invalid.

It is very important to note the time and name of the person you wanted to speak to and the person you actually talked to. You must also try to note the conversation.

Criminal Bankruptcy Order – Procedures and Consequences

Published on June 17, 2009 in Bankruptcy. 0 Comments

It is unquestionably a difficult situation for anyone who is facing a criminal bankruptcy order. This article may help you to get an overview on criminal bankruptcy orders.

What are criminal bankruptcy orders and the procedures?

Criminal bankruptcy order was first introduced under the Powers of Criminal Court Act in 1973. This act states that a Crown Court can make a criminal bankruptcy order against a dishonest person who has caused loss or damage to one or more people.

In such a situation, the Director of Public Prosecutions (The Official Petitioner) or the sufferer presents a bankruptcy petition in the Crown Court. The court orders “criminal bankruptcy” proceedings depending on validity of the petition.  However, the sufferers of the offence must prove all the claims they have made.

The proceedings of Criminal bankruptcy order starts after the police verification or investigations by senior officers. Nevertheless the Inland Revenue or HM Customs & Excise can also get into investigation.

A criminal order will be made if the person concerned is found guilty of one or more related offences. But if the person is already facing charges of compensation order then the criminal bankruptcy order cannot be charged against him.

If a person is prosecuted with criminal bankruptcy then the court may charge a heavy penalty or imprisonment (up to 7 years). He will also get a criminal bankruptcy order that will state the following:

  1. The amount of financial damage that has been caused as a result of the offence. It will also state if the convicted has committed more than one offence.
  2. Names of people (appeared in front of the court) who have suffered a damage or loss as a result of this offence
  3. Specification of loss or damage that each has suffered because of the offence committed.
  4. The relevant dates (first offence and recovery dates)

A criminal bankruptcy order can be made against more than one offender. Although there are no provisions for making up a joint bankruptcy petition on this order, the same order will act as a bankruptcy petition against each offender.

Consequences of Criminal Bankruptcy Order:

It is needless to say that a person charged with sentences of imprisonment and hefty penalty will have a difficult time recovering from it. They are not automatically discharged from bankruptcy. And to add to their misery, they can only apply to the court for a discharge after 5 years of bankruptcy order.

Avoid a bankruptcy restriction order

Published on June 11, 2009 in Bankruptcy. 2 Comments

Few months back Freddie Perkins filed for bankruptcy. Maybe he had some real reasons to take this decision. But he never thought that transparency could be a fatal issue. He transferred most of his valuable assets to his wife just before filing for bankruptcy to save as much as he could. He did not care to disclose them to his Official Receiver. However the truth was unfolded and he is now facing a Bankruptcy restriction order.

Freddie Perkins is an imaginary character but you can find a lot of people like Freddie who are facing charges of being blameworthy.

What is a Bankruptcy Restriction Order or BRO?

Bankruptcy restriction order is invoked when the Official Receiver finds out that the bankrupt has been blameworthy or dishonest before or during the bankruptcy process. If the Official Receiver finds something like this, he or she will report it to the court for a review. If the accused is found guilty, the court will invoke bankruptcy restriction order on him or her.

The strictness of the order depends on the severity of misbehaviour. The bankruptcy restriction order has a long term effect which can remain from 2 years to 15 years. However, if you are found guilty of any criminal activity or fraud, the order can remain from 11 years to 15 years. The order will depend up on your bankruptcy offences.

Here are some reasons that may invoke Bankruptcy Restriction order:

  1. Acquiring debt uselessly with no expectation to repay it: It also includes increased debts on credit cards.
  2. Unreasonable extravagance or gambling that has led to bankruptcy
  3. Going in for a transaction at undervalue: If you give away or sell your assets just before the bankruptcy at a cheap price the Court may invoke BRO. This transaction can be reversed by a court order.
  4. Preferring some creditors over others: You are not supposed to repay debts to your preferred creditors only. While you enter a bankruptcy every creditor must have a fair share of repayment.
  5. Fraudulent activities: If the bankrupt steals money to pay debts he can be imprisoned too.

There are various other reasons that can make a person get charged with the BRO. For example:

  1. Contributing excessively in pension plans
  2. You have entered a bankruptcy hiding the fact that you have already had a bankruptcy within 6 years.
  3. If you have failed to supply the goods that has been claimed in the bankruptcy
  4. If you neglect the business affairs that have caused bankruptcy
  5. If you do not cooperate with the Official Receiver

If you are charged with the bankruptcy restriction order the court will invoke these following restrictions:

  1. You will not be able to act as the director of a company.
  2. You cannot take part in any promotion or formation of a management without the permission of the court
  3. If you take up a loan over £500 within the BRO you have to inform the creditor about your status.
  4. You cannot work as an insolvency practitioner or as a manger of a company.
  5. You cannot become a member of the parliament in England and Wales.

A borrower can apply to the court against the allegations made against him by the Official Receiver. BRO can sometimes be annulled or shortened upon the basis of the borrower’s application to the court.

How to Set Up a Credit Union?

Published on June 9, 2009 in Personal Finance. 2 Comments

In the last article we talked about how a Credit Union can save a lot of people from loan sharks. If you want to do a community service, think about starting a Credit Union. Yes; you can do that. In this article we will discuss basics of starting a credit union. If you need more information, write a comment or contact http://www.abcul.org/

A lot of activities run concurrently in the process of setting up a credit union. To start the process, register the Credit Union with the FSA. You would also need to develop a group or community with the required experiences and skills to manage and run the union. Some of the basic requirements are knowledge or experience of business process, marketing, finance, HR and IT.

You also need to make sure that the members are committed enough and have enough time to volunteer. It is also important to carry out a ‘Pledge Drive’ to understand and identify the primary demands of the proposed community. This will also help you to develop a business model.

Setting up and running a credit union may seem an expensive process. The cost of operation, office setup, staff etcetera may vary between £30,000 and £70,000 for the initial 3 years. Thus you need to secure sponsorships from sources like employers, business groups, housing associations etcetera.

The credit union involves different stages of development. It is a little difficult to put these different stages in a specific order. However the following can help you get the basic idea.

  1. You need to decide on the communities or group you would like to include in the common bonds.
  2. A group of skilled and experienced people to develop a successful union.
  3. Run a pledge drive and develop a business plan projection
  4. Get your business plan, procedures and policies approved by FSA.
  5. Look for funds and donations to run the Credit Union
  6. Hire employees to run the credit union. The employees must have Approved Persons Status from the FSA and well trained to run it smoothly.
  7. Promote your credit union to get new members and to meet the business goal.

It needs a lot of effort to set up a credit union. It will take months to submit your application to the FSA for a review. You also need to convince them that you have the best team and competence to run a union. Nevertheless, before you start with the process make sure to visit the website of ABCUL and FSA. Joining the ABCUL will help you to get the extensive information on the process and services. The membership fees are £50 a year.

Lately many credit unions are merging to develop a sustainable and stronger union. They are extending their ‘common bonds’ so that more people can benefit from the credit unions. FSA also supports this move.

Financial Solutions from Credit Unions

Published on June 8, 2009 in Personal Finance. 0 Comments

A Credit Union is a non profit organisation that is jointly managed and owned by its members. These Unions act as a place for community savings and financial cooperatives. The members pool their savings (weekly / monthly contributions) and provide affordable loans to the members of these communities.

The Credit Unions are gaining popularity very fast. The main reason is that people with poor credit history or low income are also eligible to get an affordable loan from them. The number of Credit Unions has increased to 779 with more than 814,538 members. The total amount of assets is more than £900 million. The Association of British Credit Unions Limited or the ABCUL has more than 490,000 members.

How does a Credit Union work?

‘Self-help’ is the basic principle that runs a credit union. The members of a Union pool their money in and offer financial services like loans and insurances to their members. The unions also offer yearly rewards or dividends to the members. They do not invest in share market rather put the money in bank or government bonds to keep it secured. Outside funding or investments are not encouraged.

Lately the Credit Unions have undergone a number of reforms to develop a strong and sustainable Union. Every Credit Union follows some specific norms but with the latest reforms a member of a Credit Union can obtain loan from any Unions even if he has never saved with them.

According to the Credit Union Act of 1979, all Credit Unions need to be registered under the Financial Services Authority or FSA. The FSA monitors credit Unions on a regular basis and they are audited independently.

One of the best advantages of the Credit Union is that they offer life insurance at no extra cost. Thus your savings are protected from fraud or theft. The insurance also states that your nominated beneficiary will receive up to twice the value of your savings.

How much does a Credit Union charge?

It is a rule that no credit union can charge more than 2% per month for a loan. But most of them charge a meagre 1% per month which comes to around 12.7% per annum. While the high street banks or regular lenders are quoting the lowest rates at 7.3% a year, they do not provide small loans. Credit unions can lend as little as £50 and they even do not charge any early repayment fees. Thus it can be one of the best possible solutions for people who need a small loan. The repayment terms are flexible and can be paid back within 3 months to 5 years.

How much you need to save?

As a member of a Credit Union you can save whatever you can afford regularly. It can be as small as 50 pence a week but you have to be regular. While you save, you get an annual dividend of not more than 8% on your savings. If it is a new union then it might take you a few years to earn dividends.

When can you obtain a loan?

After 12 weeks of saving you will be entitled for a loan. The amount will depend upon factors like:

  1. How much you need
  2. Ability to repay
  3. The policies of that Credit Union

More interestingly, if you are a credit union member, you can obtain loan from any credit union.

How to become member of a Credit Union?

To join a Credit Union you need to share a common bond with the members of a particular community. For example:

  1. You may live in the same area
  2. You have a membership of the same trade union
  3. You are working for the same company.

So, look for a community where you share a common bond with the members.

What is Subprime lending?

Published on June 6, 2009 in Personal Finance. 0 Comments

The term Subprime Lending was popularized in 2007 by various media groups when the credit crunch hit the world economy.  It was introduced for the benefit of low income group and for borrowers with bad credit history. Since they do not qualify for a conventional loan, this worked as a useful alternative to get credit in affordable terms.

The subprime lending was first initiated in 1993 in USA. However it started accelerating around 2000 when the market had enough funds to provide credits to the conventionally unqualified or high risk borrowers. Since sub prime lending has regulated norms it helped high risk borrowers to avoid loan sharks and get loan under favourable terms.

Subprime lending does not follow any specified terms or conditions. It mainly depends on the borrower’s requirement, income, credit rating, debt ratio, loan amount and collateral. It is mostly used for taking up mortgages or refinances.

Borrowers with excessive debt, high default rates, bankruptcies or IVA opt for subprime loan and thus it is risky for both the creditor and the borrower. Sub prime lending also involve doorstep lending where a small amount is lent out to a borrower from a low income group.

Subprime lending includes bad credit loans, sub prime credit cards and sub prime car loans. These easy financial tools specifically enable the low income group to meet their requirements. On the other hand these financial services are given out on a rate higher than the usual. It is affordable for people who are taking up mortgages or short term loans.

The overall market of the sub prime lending has grown considerably and now it is worth much more than £30bn in UK alone. The growth was remarkably faster than the usual loan market. However, after the recession there has been a slump in the market and the rate of interest charged by the lenders has become exorbitant. The lenders are not doing very well too. Some of the top lenders have shut down (Ameriquest, MLN etc.) or filed for bankruptcy (New Century) and some of them are up for sale (Option One). However, many of the subprime lenders like Wells Fargo, HSBC Finance, Countrywide, CitiFinancial etc. are still functional.

However, before you go for a loan, ask yourself – do you really need a loan?

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