John and Anna were both working with reasonably well-paid jobs. They were homeowners with 1 car and generally had 2 holidays per year. They considered themselves to have a good standard of living even though they, like most people, supplemented their lifestyle by using credit cards. They had paid for their car with a £7000 bank loan. Anna fell pregnant and although this was unplanned, they were both delighted at the prospect of becoming parents.
John & Anna’s debt problems began when Anna went on maternity leave. She received full pay for 6 weeks but then this fell to the statutory amount. There was now significantly less money coming in each month and they found themselves increasing the use of credit cards and their overdraft facility at the bank to maintain their lifestyle and pay for all of the things they would need for the new baby. This was not too much of a concern, as they had both decided that Anna would return to work and at that time they would be able to sort out their debt.
After 4 months maternity leave, Anna returned to work although they decided that this would be part-time because of the expense of a childminder. This meant that although Anna was earning again, the household income was still less than it had been before she fell pregnant. In addition, the household expenses were now significantly higher with the cost of the baby. John and Anna realised that they would have to do something about their increasing debts, which now totalled £14,500. They first decided to take a £15,000 loan to consolidate everything which would reduce their monthly repayment.
Unfortunately, John and Anna did not realise that although they now had just one loan to pay, the monthly payment was too high for them to pay without putting pressure on their finances elsewhere. Therefore, although they kept up their loan payment, they found that their overdraft started to creep up again. They had also not cut up their credit card and this was used to pay for general expenditure. The balance therefore started to increase again. John and Anna had got caught in a ‘cycle of debt’. They were continually ‘Robbing Peter to Pay Paul’ i.e. borrowing money from one place to pay off debts in another. When they calculated what they owed now, their debts were nearly £30,000.
They were able to get their debt problem under control using an Individual Voluntary Arrangement.
(all names are fictitious)