Munster Express Online

“I guess we have to get used to the idea that this is the ‘new normal’”, a friend of mine who owns a little café in Dublin, said to me recently.

Her revenue is down about 30 per cent; she’s laid off staff, taken a pay cut herself but is still in business.

She’s also had a long talk with her bank and while they won’t extend her much credit, they are pleased that she’s also slowly reducing her debt and overdraft use.

This is a good news story, in my book. It’s a sign that small business people are learning to adjust to the ‘new normal’ that is a very different business environment than the heady days before 2007.

That’s not such a bad thing either. The boom was a false economy, built on a mass of debt and spending, supported by an incompetent political, civil service and banking elite that were all personally benefiting from rising fees, commissions and tax revenue that ensured re-election and the continuation of the political gravy train.

Since this column is about personal finance, let’s look at what’s happening on the debt front, starting with the outstanding €110 billion householders owe.

Despite the new legal code that prevents the banks from pursuing legal action for mortgage arrears unless at least a year has passed, this only applies to cases involving the family home, not investment property, and only if the debtor fully cooperates with the bank in facing their liability and how to deal with it.

The banks have also eliminated all tracker loans and have or will be increasing interest rates.

They’ve tightened up mortgage lending and switching conditions; require higher down payments; an unblemished credit and savings record and secure employment.

They are not extending the total mortgage based on a couple’s combined income anymore, nor will they easily sanction a loan if the down payment comes from a parent or parental guarantee.

The biggest lender over the past year – AIB – has closed the switching window to existing homeowners who want to move their loans (especially costly fixed rate ones).

Since very similar lending conditions now apply to personal loans as well debtors (or those people in serious negative equity) need to take a realistic stance when trying to sort out their long-term debt position:

* Make a list of your debts, how much you owe each creditor each month and how much annual interest applies.

* Prioritise your debts by interest rate and how essential is the service/product. For example, if keeping the lights or heat on is your top priority, you must pay your ESB or gas bill first. Consider that while your mortgage interest cost is the lowest, if you build up arrears, you could lose your house.

Credit card debt is the most expensive, but it is a non-recourse loan – it is not secured on your house. However, this won’t stop your goods being seized if your unpaid balance is handed to the sheriff.

* Cut your lifestyle costs to the bone, shop around for lower service costs (insurance, utilities, etc) and do a family budget.

* Once all this is in place, contact your lenders or creditors before they contact you and make a proposal to them for a new debt repayment schedule that results in them eventually being paid.

* Get a copy of Eddie Hobbs’ book, ‘Debt Busters’, which takes you through the above stages.

MABS, the free money advice service, can also help you with this process as can FLAC, the free legal aid centre that helps with serious mortgage arrears.

One ‘solution’ you should avoid – certainly as a first resort – is to hire a debt consolidation or management company to sort out your finances.

These companies are springing up all over the country. A very large UK operation is understood to be opening an Irish office soon, but they are entirely unregulated.

Anecdotal evidence suggests that their high costs and low standards could create yet another future mis-selling and governance problem.

Banking consultant Bill Hobbs has just submitted a draft consumer protection code on consumer debt managers to the new Expert Group on Consumer Indebtedness.

In it, he calls for the introduction of a set of standards that will oversee the services they offer, how they advertise their services, gathers and uses client information, discloses their fees and charges, conflicts of interest, how they corrects error and handle complaints, etc.

These debt management companies (DMC) charge their clients in different ways, explains Hobbs.

Some charge an upfront fee plus a monthly sum for taking the single payment you make to cover all your debts (or the new repayment schedule) and distributing it to your creditors; others take a proportion of the savings that might be negotiated if all your debts are refinanced.

This is a process that you do not have to pay for if you can prepare your case properly, consult a MABS official or even go to your local credit union for help.

The danger of a whole new unregulated body of debt managers emerging as we get used to the ‘new normal’ in this heavily indebted society is that they could end up being the real winners, not you.

To contact Jill, Email jill@jillkerby.ie