Property investor

When it comes to managing finances, it is vital to prioritise your debts and repay secured creditors first

WITH SO much talk in the past week about massive sovereign debts, banks with distressed property loans, billion euro debt and subordinated bond holders, the average punter could be forgiven for sidestepping his own financial woes.

But a pay cut or a reduced working week – not to mention the loss of a job – has meant that many mortgage holders are no longer able to pay their bills in full – or at all.

An ominous sign of the times is that more than 32,000 mortgage holders are already over three months in arrears on their mortgages.

This repayment is invariably just one of a number of bills that surface every month and as repayments are missed with increasing frequency, the pressure from the bank will inevitably build up. The experts advise those in difficulties to take two forms of remedial action. First of all they should prioritise how they pay their bills. Secured creditors should be looked after first and if there is anything left over then it can go to the secondary debtors.

A second way to reduce the pressure is to negotiate lower repayments with the bank. Whether or not this concession is made frequently depends on the borrower’s ability to produce an accurate income and expenditure account showing a fall off in income.

Any hint of wastefulness or an extravagant lifestyle will automatically rule out the client. But by now even the property developers have got rid of their racehorses, their helicopters and their jets.

The most important priority is to understand who should be paid first – the mortgage provider or the credit card company. In a tough old world of debt collection, there should be a clear distinction between priority debts and secondary debts.

Frank Conway of Irish Mortgage Corporation identifies priority debts as mortgages and mortgage arrears, utility bills such as gas and electricity, court fines and judgments and car finance repayments. Essentially, a functioning home and a car to get you to work without the threat of jail are prerequisites to earning a living.

Secondary debts are generally categorised as debts that are unsecured, such as credit cards, personal loans, bank overdrafts and store credit cards. Because unsecured creditors such as American Express and Visa are always more vulnerable, they are invariably the first to mount an aggressive collection campaign of pestering the client with phone calls and letters warning of immediate court action and the implications for future credit worthiness of reneging on the debt.

As a general rule, a reduced repayments schedule is often acceptable provided the client makes an open and honest disclosure of the facts.

A debtor who can show a fall off in household income has good reason to believe the bank can and will change the ground rules in these difficult times. It is only by engaging with the bank that a revised schedule of payments can be agreed.

Frank Conway , who has very considerable experience of banking and the mortgage sector, is convinced that borrowers can manage their finances even in the most challenging times. However, he stresses that it is vital to be well prepared before approaching the bank and to have good knowledge of how lenders operate. By the same token, he says clients should have “the tenacity not to be forced to make a payment to a lender who operates an aggressive collections regime”. But, he says, it is important to stick to a financial repayment plan once it has been agreed.