Lessons we should learn from Sarah Ferguson

The Duchess is in debt. What should we do if in the same position?

Perhaps I’m just getting old and grumpy, but I despise the modern-day celebrity culture. Hell will freeze over before I ever willingly sit down and watch one of the seemingly endless ‘reality’ shows following Jordan, Peter Andre, and the like.

However, while their antics are generally an irrelevance to me, occasionally these figures in the public eye do something interesting or useful, something that we can all learn from.

And just for once, Sarah ‘Fergie’ Ferguson, the Duchess of York, has done just that.

Going broke

Earlier this year, Fergie was caught out by a sting by a Sunday tabloid, where she was trying to ‘sell’ access to her husband – who is of course an ambassador for British business, a job which appears to consist of playing an awful lot of golf around the world - to a ‘wealthy foreign businessman’.

The whole thing was exceptionally embarrassing for all involved, but more importantly brought to the public’s attention that the Duchess was clearly short of a few bob.

It has since emerged that Fergie is facing the possibility of bankruptcy, with personal debts of at least £2m. Clearly, there are some lessons here in how to manage your money – and what to do once your debts start to spiral.

It pays to budget

The most obvious lesson is of course not to spend all of your money. Ferguson has hardly lived a life on the poverty line, enjoying a high-profile marriage, writing many children’s books and acting as a spokeswoman for Weight Watchers.

However, she had expensive tastes, and spent more than she could afford pursuing them. That's a simple budget failure, and it’s a failing many of us are guilty of. Catch up on these five simple budgeting tips, and hopefully you won’t end up in a similar position.

What is bankruptcy?

Bankruptcy is a term that many of us are familiar with, but we don’t necessarily understand what it means, and how it will affect our financial future.

In the words of the Government’s own Insolvency Service, bankruptcy is a way of dealing with debts which you cannot pay – you are freed from your debts so that you can make a fresh start, and your assets are shared out fairly among the people you owe money to.

Doesn’t sound too bad does it?

However, it’s not something that should be undertaken lightly. You have to hand over all of your bank accounts, pensions, any assets you may have, and may even need to appear in court to explain exactly why you are in such a position.

Plenty of restrictions apply too. You will have to declare your status as a bankrupt when applying for more than £500 in credit, you won’t be able to act as the director of a company, nor create, manage nor promote a company without the court’s permission.

There are also certain jobs, such as working within the police force, which you cannot perform if you’ve been made bankrupt.

Finally, there is the stigma attached with having been made bankrupt, though thankfully I don’t think it’s anywhere near as bad as it once was.

So yes, your debts are wiped out and you get to start with a clean slate, but that clean slate comes at a price.

The alternatives

Thankfully bankruptcy is not your only option should you fall into debt problems.

Debt relief orders

A debt relief order is an option for those people who don’t have a huge amount in the way of assets. The order, which lasts for 12 months, is suitable for those who do not own their own home, have little surplus income (after tax, you cannot have more than £50 disposable income a month) or assets, and  have less than £15,000 of debt.

After a year the debts are discharged, though you will still have to pay ongoing commitments, such as rent and utility bills.

One thing I like about DROs is that you can only apply for them through an approved intermediary – in other words a specialist adviser who knows that this is truly the best option for you.

Individual Voluntary Arrangements

An Individual Voluntary Arrangement (IVA) is essentially a formal agreement on your part to pay your creditors all or part of your debts.

With an IVA, you will need to work alongside an insolvency practitioner and apply to court for an interim order. This basically prevents your creditors from presenting a bankruptcy petition against you while the order is active.

The insolvency practitioner will then explain the details of your proposal to the court - in other words, how much of your debt you feel you are able to pay off - and whether your creditors should be called to consider it. If a meeting is then called, 75% of creditors (in terms of the value owed) will need to agree to the IVA, which will then be binding.

The big benefits of going for an IVA are that you may have a little more say over what happens to your assets (your home for example), and that you may have a little more flexibility in how your debts are paid off. You also avoid some of the restrictions that apply from going bankrupt.

However, IVAs are not always the right choice – I’d definitely advise having a read of IVAs unsuitable for 98% of debtors to find out more about how they work, and whether they represent a good move for you.

Informal arrangement

A third option is to go down the informal route, speaking to each of your creditors to try to arrange a way to pay off a portion of how much you owe each of them.

While this avoids the stress of involving the courts, any agreement is not legally binding, so the creditor is not required to follow it. In other words, they may agree to a reduced payment, but down the line demand the full amount, and there is little that you can do about it.

Getting advice – for free!

If there’s one thing all of us should do, the moment we start to fall behind with our payments, it’s to get some proper, independent advice.

Thankfully, many of us realise just how important such advice is on money matters – during 2009/10, Citizens Advice reported that debt represented the biggest single area of issues it dealt with, a total of 2.4 million enquiries, an increase of 23% from the preceding year.

However, it’s important not to simply limit yourself to Citizens Advice, as plenty of other outfits offer advice absolutely free, such as the Consumer Credit Counselling Service, The National Debtline and Advice UK.

There are also a lot of organisations that offer debt advice for a fee. While I’ve no doubt many of these firms offer decent guidance, I’ve never quite seen the point in paying for something that you can get for free.

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