This page is most important for people who are “snowballing” or in a Debt Management Plan.
For everyone else, it’s ok to sell ‘the small stuff’, see below, but the rest is either irrelevant, complicated or not possible:
- if you are in a DRO you basically have no assets to sell;
- in an IVA you may have assets but these should form part of your IVA – if you decide that you want to sell the house for some reason (perhaps your work has moved so you need to) then you must discuss what will happen to your IVA with your IP, see I want to sell my house to end my IVA for details;
- in bankruptcy, your assets don’t belong to you, they belong to the Official Receiver.
Don’t hoard cash
Apart from a small Emergency Fund, you shouldn’t really be holding much in cash if you have a debt problem.
Ways of realising value from your house
You may have a lot of money locked up in the value of your house. If so have a think about each of the five ways you could use it:
- you could sell it. If selling your house means you can clear all (or almost all) your debts then you should seriously consider it. This is never an easy decision – read Selling your house for more thoughts on this.
- you could remortgage or get a secured loan. This isn’t that easy any more and read the Pay less interest page for the major disadvantages that you must consider carefully
- if you have an endowment, then you may be able to sell that. This is the same as increasing your mortgage to clear your debts, but it has the advantage that you don’t have to get a new mortgage which can be difficult or not at a good rate. You will also lose the monthly payment you are making into the endowment, which is good, but also lose the element of life assurance, which may or may not matter to you. But if you decide to do this, you need to have an alternative plan for repaying your mortgage. Check out how much extra you would need to pay each month if your mortgage was a repayment mortgage – you can get a rough figure from using any mortgage calculator such as this one. Also there may be other options to consider: it can be surrendered back to the insurance company; it can possibly be made fully paid, so that you only get the money on maturity, but pay no more premiums; or it may be possible to sell on the open market via a broker for more than the surrender value.
- if you have an offset mortgage, you could take any money out of the offset account. In there it is effectively earning the rate of interest that you are paying on your mortgage – which is peanuts compared to what your unsecured debts are probably costing. So this makes sense, but again it means that you will have a bigger mortgage task to tackle once the unsecured debt problem is resolved.
- if you have a spare room you could rent it out. This doesn’t let you clear debts immediately but lets you pay them off a lot faster. It has the advantage that it is more flexible than the other house value unlocking options – you could give it a go for 6 months and decide if it works for you. And of course if putting up with a lodger for a few years clears your unsecured debts, after that you can have the house to yourself again.
Ask yourself if the interest or dividends you are getting from your investments is more than the interest you are paying on your debts… No? Sell them!
Of course the shares may go up in value – but they might go down too. Pan Am went bankrupt in 1991, leaving the owner of this share certificate with a pretty but worthless piece of paper.
If you have shares in some form of employee incentive scheme, you may be reluctant to sell them / take your money out as you will be losing valuable tax benefits. But you should still stop and think hard about this. You have problem debts – you need that money now. Don’t let the tax tail wag the dog is a good maxim when it comes to finances.
A house you are renting out
Is this a profitable investment or a millstone round your financial neck? The rent you are getting needs to be more than the mortgage you are paying to cover your other costs – insurance, agent’s fees, repairs, void periods etc. On a rough rule of thumb you should be setting aside 15% of the rent each month to cover voids and repairs – if you aren’t then it is a disaster waiting to happen.
If the house rental clearly is profitable, then you need to consider if this profit after tax is a good return on the equity you have in the property. It might be contributing a useful £150 a month to your budget, but if you would get £30,000 if you sold it, that would clear a lot of credit card debt which is costing you far more than £150.
If it isn’t profitable and it has negative equity then have a think what your situation would look like without the house. Remove the income and the expenses from your Financial Summary and add in a new unsecured debt for the amount of money you would still owe the mortgage company after it was sold, allowing for estate agent’s and solicitor’s costs. Many people are struggling to hang on to a property that they will never live in again (perhaps it’s too small or your job has moved) in the hope that house prices will rise – don’t be one of them, take a cold hard look at your options, including bankruptcy if necessary.
If you have shares or bonds in your pension scheme, you can’t easily sell them and pay the money off your debts. If you are close to retirement age, it may be possible to take your pension early and this may give you the option of a tax-free lump sum, which you could then use to clear your debts (if this is insufficient to clear them, then this may be a situation to consider a Single Payment IVA). Taking your pension early and/or taking a tax-free lump sum may reduce your pension – working out whether this is a good idea for you may be complicated. This is going to be an increasingly important subject from 2015 as changes to pensions then will make it easier to get money from them.
Unlike most other assets, your car is guaranteed to be worth less next year than it is this year. Expensive cars often cost more in car tax, insurance and petrol as well – add up just how much it is costing you every year. Have you included realistic maintenance costs and parking charges in that figure? How could you manage without the car or, if you have two cars, just with one? Imagine you have lost your license – what would you then do to cope?
What would you get if you sold them? Say you could raise £800. If you had £800 in your pocket today, what would you do with it – go out and buy some jewellery? Probably not…
Unless there is a lot of sentimental value in the valuables, you should consider selling them if your debt situation is serious. Of course if a bit of belt-tightening and a lot of careful budgeting will see you clear in a couple of years, then selling things you love to bring that forward to one year probably isn’t worth it.
The small stuff
Selling old clothes or toys the kids have grown out of or DVDs isn’t going to solve your debt situation. But it could help you with some very useful shorter term goals – kick-start your debt reduction or get you the beginning of an Emergency Fund so your family has more security whilst paying off your debts. The decluttering might be a good thing as well! So have look at eBay or Amazon or a car boot sale.