Martin Henderson is in a fix these days. Because of his failure to repay a loan he had taken a few years back, he has been adjudged as a bad credit case. And, in spite of much effort, he has not been able to get a loan or a mortgage. Lenders do not want to take risk by offering loans to him, and he is severely in need of money.

This is not a single case. There are many who are facing bad credit and the problems resulting from it is making their lives difficult.

Failure to pay the debts in most cases is unintentional. Most people are mainly concerned with the immediate relief that the loan or credit will offer. They do not want to mar the immediate relief by thinking of the repayment in future. They feel that their present income is enough to meet these extra expenditures. It surely is sufficient to meet the cost of repayments, until the financial condition changes for worse, and it becomes difficult to make the repayments on time.

Some creditors make the payment terms flexible for borrowers who are going through financial depression. Others will wait to see that the customer mends his ways. If not, then they report the matter to the credit reference agencies. Credit reference agencies monitor all actions of the borrower on his debts in their respective credit file. The main credit reference agencies are Experian and Equifax. These agencies record information about the defaults on loan or mortgage.

The defaults being registered in the credit file has serious repercussions for the borrower. This will impede the borrower from getting loans in the future. County Court Judgement registered by the County Courts keep the record of bad credit for a period of six years. This can be reviewed if the customer pays off the debts within a month of the judgement. A further delay can make the judgement irrevocable.

Individual voluntary arrangements are another form of bad credit that disqualifies customers from getting good deals in loans and mortgages. Individual voluntary arrangements or IVAs for short is a step that saves individuals the brunt of bankruptcy. The individual or the official receiver, trustee or bankruptcy courts can request the creditor for IVAs. Through this arrangement, the debtor can sort out an arrangement for the payment of the debt through a well-defined plan within a period normally extending to 5 years. Since this is a legal arrangement, both the debtors and the creditors are bound by it. The failure by the debtor at any point of time gives right to the creditor to take action against the other party. Even though IVAs lead to the repayment of the debt, it tarnishes the credit of the borrower.
However, IVAs are suitable only for those who believe that they can pay the debt in full by making small monthly repayments. If not, or if the debt contracted is a sizeable figure, then bankruptcy will be the only solution. Though more painful as the borrower will have to lose most of his belongings, this will free the customer of the debts in the least time (two to three years is the normal time of repayment). The bankruptcy courts negotiate the settlement of the debts with the creditors, and make the payments after liquidating the assets. The credit file shall however include the name of the borrower among the bad credit cases for about 6 years.

So just as we plan our work schedule, it is vital to plan the repayment of the loan or mortgage. A certain amount of insurance paid along with the loan repayments, will assure that the loan is paid in full. This is known as loan protection. Mortgage protection is available similarly to ensure that the mortgage is paid in full. These will add to the monthly cost but will offer peace of mind.

Debt consolidation loans can help curb the menace of debts. Though many lenders reject the loan application, some are ready to take up the risk. These settle all debts incurred by the individual through a single loan. However, one must avoid the bait of taking debt consolidation loans at high rates of interest. This will only save you from one danger, only to push you into other.

Last but not the least comes the debt management options undertaken by the individuals themselves. One must learn to live by the limits. Taking too many loans or mortgages will only worsen the finances.

So, the next time you plan a loan or mortgage, think twice. Taking advice from independent advisors about the amount and type of loan or mortgage will go a long way in improving your financial health.



About the Author
James Taylor holds a Master's degree in Commerce from JNU he is working as financial consultant for

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