Help Needed re: Parents' mounting debt

Hi all, I hope I have the right forum - I have never posted on the internet before, so this is all new to me - apologies in advance for any mistakes I make. To cut a long story short, I discovered over the weekend that my parents have accumulated a large amount of unsecured debt which they have been worried sick over. I arranged an appointment with MABS but we are none the wiser and would truly appreciate any advice that anyone could give - we are all up the walls.

Some details are as follows:

They have a mortgage of €60k approx, which is being repaid at €820 a month and there is 6 years left on it.

They have credit card debt of €30k (3 cards: 14k with MBNA, 9K with AIB and another 7k with AIB). There havent been purchases on the card recently but the interest the cards are accumulating is cruel.

They have a Credit Union loan of €12k, but there is a savings of €5k in the credit union, so debt could be reduced to €7k

They have a €4k overdraft which the bank has called them in over.

In total this makes debt of approx €42k.

Income wise, they have about €3620 gross a month, but until Christmas they will have €4220. My father is 61. When all living costs are paid, up to Christmas they would have maybe €300 a week to service a loan, but after Christmas they will be pushed to have €150-200 a week.

We postponed the meeting with the bank re: the overdraft, and went to MABS. Our initial thought was to try to consoldiate all debts into one loan and try to repay that every month for teh next four years, but MABS advice was to not pay the MBNA card for 7 months and ignore calls, when it would be turned over to a Debt Collection agency and all fees/interest would be frozen. Given that this was the biggest debt though, we are really frightened about how much interest would accumulate in the next 7 months, and my parents would not be able to deal with the pressure calls/letters.

They suggested turning the AIB cards to their insolvency department and taking and converting the overdraft to a loan. My parents are terrified of the word insolvency though, and I dont really understand it.

We are not experienced in this area at all, so I was hoping for a second opinion. Basically from my parents perspective, they would like to have all of these debts cleared in four years time when my dad retires. Their mortgage is not cleared until he is 67, so they dont want two loans when on a pension.

I know this is very long, but if anyone has gotten this far and can tell me if MABS advice makes sense (of has another suggestion), I would really appreciate. We are up the walls and I hate to see my parents upset. I am an only child, married with big mortgage and creche bills, so it kills me to say that I dont have any money to help them out.

Many thanks.

Hi Son

The first priority is to ask how these debts arose?

There isn't any point in some financial engineering - stretching the debts or reducing the interest rates, if they use the money released to overspend again.

Brendan

Thanks Brendan for the fast response, I really appreciate it. The debts arose for reasons that I would prefer not to state here in case it identifies me or them, but I can tell you that the cards have been cut up and the only car loan they have is paid this month, and they have no intention of getting a new car or getting new credit cards. Their plan would be to just withdraw the money they will have to live on on a weekly basis and live off that and leave everything else in the bank to pay the bills. The money released will definitely not be used to overspend again.

Cashier, thanks for your response. I will say that the credit cards weren't used for extravagant purposes eg holidays, nights out, meals out etc. They live a very simple life, just made some bad business decisions.We wanted to consolidate and we thought they could service a loan with the money they have, but MABS advised against it, which is why I wanted to get other people's opinions. I think it would be easier to service a loan that try to pay off the credit cards as is - the interest accumulating monthly is huge.

Wanting to consolidate is one thing but banks are not inclined to do that any more. No bank wants to take on extra risk so if all the debt was with one bank there would be a better chance of it, is the mortgage & overdraft with AIB? If it is then they might be inclined to refinance their 2 cards and the overdraft. Even paying off 200 a week until your father retires is insufficient to clear these loans not to mind interest accumulating. I don't know but I would have thought MABS advice would be accurate, they are the experts at this after all. What they advise will ruin your parents credit rating but I am sure that doesn't matter at this stage as they are unlikely to be borrowing again.

Thanks Cashier & Wbbs. We thought consolidating sounded better. Yes, the mortgage (never missed a payment), overdraft and two credit cards are all with them. We wanted advice from MABS before meeting them, but as we don't understand their advice, maybe we should go meet them anyway.

What MABS are telling you to do will result in the interest/fees on the cards being frozen which means at least the debt will not continue to increase. The interest racking up on the card accounts each month is more than likely huge and makes clearing them with small monthly payments practically impossible. Only when the card debts are not being paid does the bank turn them over to their insolvency/debt management/arrears, whatever they call their dept or turn them over to debt collection agencies, and in turn only then will the interest be frozen.

You could ask AIB about consolidating considering the bulk of the debt is theirs, they might do it, if they did it as a top up mortgage, assuming there is value in the house, then that would be a cheaper rate but could only run to end of mortgage term. Your parents income may not qualify them for a loan that size over that term. Also there is the disadvantage that debt that is now unsecured becomes secured on their home which the bank will almost certainly insist on even if they don't do it as a top up mortgage.

Depending where you are based you could also try your local Citizens Information Office if you have one, most of them have a system whereby twice a month you can get a 20 minute appointment with a solicitor who can give you verbal advice only on your query. There might be a bit of a wait for an appointment but you might be lucky and get one really fast. They might be able to explain the MABS suggestion better to you so that you would know where you stand when approaching the bank.

MABS advice was to not pay the MBNA card for 7 months and ignore calls, when it would be turned over to a Debt Collection agency and all fees/interest would be frozen. Given that this was the biggest debt though, we are really frightened about how much interest would accumulate in the next 7 months, and my parents would not be able to deal with the pressure calls/letters.

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I must say that I do not like this advice at all.

First of all, presumably your parents ran up the MBNA debt themselves and should take responsibility for it, whether you like MBNA or not.

Secondly, as your parents have a good income, surely MBNA would not write it off that easily.

Thirdly as your parents have equity in their home, would MBNA not simply seek a judgement mortgage?

The interest on the mortgage is about €3,000 a year, yet your parents are paying €10,000 a year in repayments. Mortgage lending is the cheapest source of finance. They should investigate getting a mortgage holiday to free up cash to pay off the credit cards.

As a minimum, I would think that they should reduce to interest only on the mortgage until the Credit Cards are paid off.

Check if the CU rates are lower than the Credit Cards. They probably are and if so, see if they will lend to clear off part or all of the credit cards.

I don't think MABS is suggesting MBNA or AIB will write off the credit card debt, they are suggesting a way of getting the interest frozen to stop the debt increasing, they would still be liable to pay the debt, it would be just more manageable without interest accumulating on it and lets face it, the credit card companies charge a fair old rate of interest so will still get a good whack out of it. Their mortgage repayments are in the final years of the mortgage so the capital part of the repayment is high, a payment break would free up income to put towards the credit cards but I wonder what the interest charge on the cc's each month is? This information may have influenced the MABS advice.

Many thanks Brendan and Wbbs. I am so addled I probably didn't make it clear that my parents don't want to follow MABS advice and want to pay off all loans in full, ideally though with the interest stopped on the cards, otherwise it the debts would continue to accumulate. We thought consolidating a loan would be a good way to do that. We never thought of a mortgage holiday/interest only plan, so we will look into that. The only thing is the mortgage won't be paid till Dad is 67, so don't think they will be too open to extending this, which is what I imagine would happen with either of these two options.

WorriedSon said:

The only thing is the mortgage won't be paid till Dad is 67, so don't think they will be too open to extending this, which is what I imagine would happen with either of these two options.

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This is a common error in thinking about finances.

Which would you prefer to have after a few years?

• A mortgage of €30,000 @4% interest
  or
• A Credit Card balance of €30,000 @18% interest

You are effectively running up a CC bill at 18% to pay capital off your mortgage. This makes no financial sense.


Your dad must take an overview of all his finances to reach the correct solution.


Brendan

Thanks Brendan. I completely agree with you - I just meant the banks might not be open to it - my parents would be fine with this I agree re: looking at his finances holistically - I am off to search for a good finanical expert. I will keep you posted - many thanks again everyone.

WorriedSon said:

Thanks Brendan. I completely agree with you - I just meant the banks might not be open to it - my parents would be fine with this I agree re: looking at his finances holistically - I am off to search for a good finanical expert. I will keep you posted - many thanks again everyone.

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In the circumstances, they should just go ahead and do it. Brendan's advice is spot on. Cut the repayment part of the mortgage, use the difference to quickly pay off the credit cards and make a good dent in the other debts. A year at interest only, followed by a slightly higher repayment for the final years of your parents' mortgage would effectively solve what is really a poor cashflow situation.

If these were my parents I'd advise to forget talking to the banks, MABS and consolidation. The debts were run up and they should take the pain (and perhaps learn something). They have a good income and the debt should be quite manageable. I would suggest they keep a spending diary and go through expenditure line by line with a view to significantly reducing same and freeing up cash to blitz the debt.

My suggestion would be to leave the mortgage alone and clear the overdraft first while paying the minimum off the credit cards and CU (although perhaps if you offset the shares against the loan the CU will allow you to reduce the repayment while maintaining the agreed repayment period). Once the overdraft is gone then focus on the credit card with the smallest balance and clear that (endeavouring to clear both OD and first CC by Easter 2013 if not Christmas 2012), followed by the next one and finally the MBNA card (which will be a slog) . . the CU would probably be the last thing I'd tackle.

I know this may not be optimal from an interest rate viewpoint however it's simple and the bite-size progress made with the OD and then then first CC may spur them to stay the course.

I think the MABS advice is spot on - stop repaying in order to freeze the interest. I also agree with Brendan - the debt should be paid back. I don't think it's in anyone's interest to keep taking pain on the interest at this stage.

MABS advice is generally good, but bear in mind that the lenders don't have to accept it, so make sure the banks they want you to talk to actually do what is expected instead of refusing the budge. Its hard to know what to say on the MBNA card though - these are reputedly the worst company for telephone harassment and your parents being older probably will be more intimidated by them than others. I'd be inclined to put in a very small payment to them just to keep them at bay.

Good luck though, my parents went through the same about 6 years ago. PTSB were looking for the full arrears to be paid on the very end of their mortgage - they had about 2500 arrears over 5 months on a remaining mortgage of about 6k, or they were going for repossession (house is even now worth about 350k so it was in PTSBs interest).

Thanks everyone for your advice. Michaelm, I just wanted to say that it was a bad business decision that got them into debt. They want to pay off everything and aren't looking to get out of it and are more than happy to take the pain

lff12, great to hear from someone whose parents came out the other side - hope they are enjoying their retirement

The update is that the bank agreed to consolidate the Overdraft and 2 credit cards into a four year loan at about €520 a month. The credit union wouldn't let them use their savings to pay off some of the loan unfortunately, but they will look at lowering it. If it is lowered to €50 a week, they will have the bank loan and credit union all paid off by the time my father retires in four years. It still leaves the issue of the MBNA card. My father is going to do nixers and make sure he can meet minimum repayments and look at selling some business items he has to make a dent in the overall amount. The bank mentioned potentially being open to a mortgage holiday (going interest only) in the future for 6-12 months, which would make a huge dent in the CC over 12 months, but we are still working on it. We are going to engage with MBNA via MABS and see what they say and go from there.

I have worked out a monthly budget with them and every penny is accounted for - there is no room for emergencies or luxuries (which is absolutely fine by them - they never had them anyway), but fingers crossed everything will work out.

Thank you all so much again - I really appreciate your honest input and advice.