Debtors in Financial Difficulty

When you cannot pay your debts

Source: Reader’s Digest’s You and Your Rights

When a family’s income drops because the breadwinner is injured or has been dismissed, retrenched or forced to take a lower-paid job, finances must be rearranged immediately.

The first thing to do if you should fall into debt is to compile a list of all your debts and try to calculate how much of your income will be available over the following few months to pay them. After you’ve done this, try to prepare a realistic schedule for repayment.

Only a court can force you to pay anything. A magistrate will not order you to pay an unreasonable amount towards settlement of debts. Therefore, if a creditor rejects your offer to settle through installments, it is unlikely that the courts will view this refusal sympathetically. Remember, however, that a creditor will be entitled to attach and sell your assets before bringing you to court to obtain an order for you to pay off the debt by installments.

Quick Tip – What to do if you cannot pay your debts

If you cannot pay your debts, inform your creditors immediately. Do not try to evade your commitment to your creditor. He or she is likely to be more sympathetic if you explain your circumstances and offer a smaller payment until your financial position improves.

Quick Tip – Paying by installments

If there is a judgment of debt against you, apply to court to pay by installments. If you are already doing this, but your income has again dropped, ask the court to reduce your installments to a more manageable size.

Mortgages and rents

A home is a family’s top priority. If you’ve bought your home on mortgage bond, your bank may allow you to make interest-only repayments for a stipulated period to help you over a bad financial period. Although every application will be dealt with on its merits, much will depend on your previous record with the bank. If you are allowed to make interest-only repayments, you will have to make increased monthly payments as soon as your circumstances improve in order to clear the arrears on repayment of the loan itself.

Note, however, that this will not assist anyone whose mortgage has been running for only a short time, since at the early stages of a capital repayment mortgage a large proportion of the monthly repayment consists of interest.

A bank is unlikely to agree to suspend repayments, although it may extend the loan period. Only as a last resort will it sell a house to clear a mortgage. If you have an endowment mortgage, you may find that your insurance company is prepared to waive premiums for a time, allowing you to pay only the interest on the loan.

Warning – Varying the terms of payment

By law, if a buyer in an installment sale or a lessee in a financial lease agreement wants to vary the terms of payment and the shop or finance company agrees to do so, the old agreement between them must be terminated and a new one entered into. However, the old agreement must be ‘settled’ on the basis that the buyer or lessee is not liable for any future finance charges. Furthermore, the shop or finance company may not charge the buyer any fee for entering into the new agreement.

If the shop or finance company does not want to vary the agreement so that the buyer or lessee can pay reduced installments, it can either bring a court action to recover all the money owed to it, or it can repossess the goods involved in the agreement.

Private rents

Private property owners may occasionally be willing to accept reduced rents from tenants who are in short-term financial difficulties. This rarely happens, however. The best course of action for a tenant facing a long-term drop in income is to try to find a cheaper place to stay or to share accommodation.

Insurance policies

If you are unable to meet your life-assurance policy premiums, you can surrender the policy for cash, provided it has run for a minimum period stipulated by the assurer. If you want the policy to continue to run, it will keep itself going for as long as there is sufficient surrender value to pay a month’s premium – money is therefore advanced as a debt against the policy’s surrender value. If this situation continues until there is no surrender value left, the policy will lapse.

When your financial circumstances improve, you can either pay increased premiums until the debt plus any interest charged is repaid (sometimes there is no interest), or continue paying the premium and take a lower payment when the policy matures, by writing off a portion of it against the debt.

In all cases the assurer will be prepared to allow the policy to remain static, as a paid-up policy, where it has a surrender value. Retirement annuities automatically become paid-up on non-payment of contributions. If premiums on other types of policies cannot be paid, the policies usually lapse.

Installment sales, leases, loans and hire 

Installment sales, lease agreements and loans from finance houses occasionally include insurance against a customer’s inability to pay owing to illness, injury or unemployment. Should you find yourself in such a predicament and if you are party to such an agreement, you should immediately write to the company concerned. (Be prepared to supply further details of your changed circumstances.)

If the agreement does not contain such provisions, contact the finance company of the store that supplied the goods and explain your difficulties.

If the installment sale agreement has only been running for a short period, the store or company may agree to repossess the goods. Invariably, you will have to forfeit payments already made and will have nothing left to show for it.

Warning – Unscrupulous creditors

After repossessing goods, some unscrupulous creditors may ‘sell’ these items in execution at nominal prices privately to friends, relatives or even third parties and will still hold you liable for the outstanding balance on your account.

Try to ensure that the goods are sold at a public auction. Alternatively, try to obtain a valuation of the goods before they are repossessed. You may even find a third party who may, with the permission of the creditor, be prepared to take possession of the goods on the same terms and conditions you agreed to in your initial contract.

Personal loans

If you explain your difficulties before you fall into arrears, it is possible that you will be allowed to make interest-only payments for a certain period. Generally, however, a finance company can sue for money owing as soon as payment becomes overdue.

Television rental

Most television rental companies expect customers to honour their agreements, irrespective of personal circumstances. Many refuse to take back a set before the hire period has expired or to make a refund of rentals already paid.

Maintenance payments

A man, who is paying maintenance to his wife or ex-wife or to children, or both, should apply to court to reduce the order.