Susan Burke may live on a 200-acre estate, but she is facing bankruptcy if she
does not sort out her finances. The 57-year-old has a hefty divorce
settlement to pay, mortgage and debt repayments that she cannot afford and
four grown-up children living at home.
“I have been struggling with my finances for years and now I would like to get
smart,” she says. “I know that I will have to downsize to pay off my debts,
but can I afford to sell the house?”
Her estate is valued at £800,000 and comprises a seven-bedroom house, fishing
lake, spring-water bottling plant and various barns. The divorce settlement
allowed Su to keep the estate but she had to pay her ex-husband a lump sum
of £400,000. She remortgaged the house to do this but still owes him
£180,000, on which she has to pay interest at 7 per cent.
Her mortgage, currently £365,000 on a house worth about £450,000, is with
Birmingham Midshires on a standard variable rate of 7.2 per cent, making her
interest-only monthly repayments £2,030. Su also owes HSBC £16,000 on a
personal loan, £10,000 to the Co-operative Bank and £10,000 in credit-card
debt. She is also in a dispute with a local solicitor over £12,000 in fees
for writing contracts.
“I have considered taking out an individual voluntary arrangement but I do not
qualify for one because my income is technically minus £800 a month,” she
says.
Su and her new husband, Kevin, have a spring-water bottling plant producing
£7,200 a year; two agricultural barns rented out at £7,600, although the
tenants do not always pay rent; and a sheep-farmer tenant who is paying
£8,400 for grazing and £3,600 for the fishing lake. In total their annual
income is about £26,000.
Last month Su sold 70 acres of land to an eco-village and received £6,000
upfront - this money was spent paying off bills and debts. She does not
expect to obtain the remaining £210,000 from the sale for at least 18
months. The eco-village is applying for planning permission to build “a new
settlement of nine eco-smallholdings, a campsite and a community hub
building”. This might make Su's house harder to sell because the eco-village
will be on her doorstep.
There are another 90 grazing acres and 50 acres of woodland, which are worth
about £1,000 an acre. However, before Su sells any land she would have to
pay her tenant farmer £140,000 to quit. Another problem is that if she sold
to a normal farmer, her spring water would be compromised by the use of
heavy machinery on the land, so she would need to choose her buyer
carefully.
The four barns on Su's estate have planning permission to be converted into
dwellings, but this would cost an estimated £70,000 each. She says: “Ideally
I would like to sell or let the house and move myself and my husband into
one of the barns, with my children in the other three, but I can't see how
we could afford to do that.”
Su recently cashed in her £29,000 pension pot with NFU, providing her with a
lump sum of £7,000 and an annuity guaranteeing her £85 a month for the rest
of her life. She is not paying into another pension and does not have any
savings.
Susan Burke: what the experts say
FINANCIAL PLANNING
Dennis Hall,
Yellowtail Financial Planning
“Su's annual income is approximately £26,800 before tax and national
insurance, whereas the annual interest on the two biggest debts alone comes
to £38,800. With no other cash, Su appears unable to pay her debts and her
creditors are probably beginning to ask questions.
“Insolvency rules mean that if someone defaults on an unsecured debt of more
than £750, a creditor could begin proceedings leading to bankruptcy, whereas
secured creditors would first take possession of the property in the event
of default.
“It is vital that Su remains in control of the situation to avoid a ‘fire
sale' of assets should a receiver be appointed. First, she should take
specialist advice from an insolvency practitioner who is skilled at
negotiating with existing creditors. If she can freeze the interest on her
borrowings for a while, it might give her the breathing space she needs. She
should then begin selling those assets that currently do not produce an
income, such as the 50 acres of woodland.
“Retaining ownership of all the barns does not seem feasible in the short term
and she should resign herself to selling one or more to raise the capital
that she so desperately needs. The overarching strategy should be to hang on
to the income-producing assets and secure a place to live long-term. The
house and the woodland do not meet this objective and should go.”
Action Plan
Find a skilled and reputable insolvency practitioner.
Try to achieve an agreement to freeze interest while selling assets
to repay debts. Keep your creditors informed.
MORTGAGES
Jonathan Harris,
Savills Private Finance
“Su needs to raise money to pay her husband the remainder of the divorce
settlement and to clear her high level of unsecured debt. She does not have
much of an income, however, and a lender will want to see that she can
afford the repayments if she tries to increase the mortgage on her home.
“She is paying a high rate of interest at 7.2 per cent and remortgaging should
enable her to lower this. Assuming that the house has a free title, Su could
consider a buy-to-let or holiday let and remortgage her house accordingly.
The advantage of this is that the lender would take into account rental
income when deciding how much she could borrow, rather than her income.
“Unfortunately, it doesn't look as though the bottling business is making any
money, so she should consider carefully whether she should cut her losses.
If she did, she could offload some land to a normal farmer: this would
generate £410,000, which would be a boost to her finances in the short term.
She should try to negotiate with the tenant farmer over the £140,000 that is
needed for him to quit.
“She should convert the barns. Depending on their size, one or two could house
the family, with the remainder used for a bed-and-breakfast or holiday-let
business. Specialist finance is available for this sort of work.”
Action Plan
Remortgage main house to a buy-to-let or holiday let.
Look at specialist finance for developing the barns.
PENSIONS
Laith Khalaf,
Hargreaves Lansdown
“Unfortunately, Su's pension is in a bit of a pickle and I suspect that she
will not be able to retire for some time. The £85 a month is not enough for
her to live on in the long term, but at the moment I can't say that saving
into a pension should be high on her list of priorities given the debts that
she needs to service.
“Once she has addressed her debts and frees up some cashflow, then perhaps she
can turn to bolstering her pension provision. A clever way of making a
pension contribution without committing cash is to use any existing
investments to fund the contributions. For instance, if she ends up selling
some of her land, then for each £80 she puts into a pension the Government
will add £20. But in doing so she would tie up those assets for the long
term and would not be able to use them to pay off debts. Furthermore, to
obtain tax relief she will need to have some earned income in the year in
which she makes contributions.
“Failing that, she will still have the annual universal pension allowance of
£3,600, so she may have to stagger investments over a number of years. When
she reaches state pension age she will be able to collect a state pension of
up to £90.70 a week, depending on her employment history.”
Action Plan
Obtain a state pension forcast.
After debts have been serviced, consider ways of bolstering pension.
Susan's response
“I am going to focus on turning the house into an income producer. I had not
heard
of specialist lending on holiday lets so I will
aim to remortgage the house that way. Although I would need to spend £5,000 on
furnishing the house properly, the returns could be as much as £6,000 a
month in
the high season, which would certainly
cover the payments and start to pay off
the mortgage.
“Of course, that means that I will need to live in the barns, so finding
grants to renovate those will be my first priority.
“I had not heard of insolvency practitioners, but I shall definitely look into
hiring one if it means that my debts will become more manageable.
“My lack of pension is not ideal, but I think that the eco-village and my
children will be grateful enough to look after us.”
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