Court: Debt Consolidation Loans Do Not Qualify for Variation

Adam Brand Adam Brand | Operations Director

Debt consolidation loans can be very helpful financial tools by eliminating high-interest debt and replacing it with financing that is less expensive and easier to manage. However, that does not mean a debt consolidation loan is a right solution for everybody. There is a lot to think about before using this kind of financing. For example, did you know that debt consolidation loans do not qualify for variation in a child-support situation?

A recent case finally settled by an upper tribunal ended when the judge reached the conclusion that debt consolidation loans do not qualify for variation based on Regulation 12 of the Child Support (Variations) Regulations. The case was originally brought to court by a non-resident parent looking to have child-support payments reduced due to him still paying on a secured loan taken out to consolidate debt while the two parents were still living together. The court ruled against him in the first case, then on appeal to a lower tribunal, and finally on appeal to the upper tribunal.

Secured Loans and Child-Support

In the original case, a non-resident parent cited Regulation 12(5) that allows for a reduction of child support payments if the non-resident parent is paying off any debt that was incurred for the benefit of the family, prior to the divorce proceeding. The non-resident parent in this case asserted that his debt consolidation loan qualified because it was used to benefit the family while still intact, by eliminating high-interest debt in favour of a more manageable secured loan. The court did not agree.

All three courts ruled that the original debts incurred for the benefit of the family ceased to exist once they were paid off via the debt consolidation loan. Because those debts no longer exist, the non-resident parent did not qualify for a child-support variation. This essentially means the non-resident parent must continue paying off the secured loan while also maintaining current levels of child-support.

Lessons to Be Learned

None of us goes into marriage expecting it to end in divorce. Likewise, it would be unreasonable to forgo the benefits of debt consolidation in the fear that you and your spouse may someday in the future decide to part ways. Yet there is still a valuable lesson to be learned here: a debt consolidation loan is only a good idea if you truly have the financial means to repay it.

Debt consolidation loans are almost always guaranteed by using the equity in your home as collateral. This results in the lender putting a second charge on your property. In the event you cannot make your payments, your house can be seized and sold to cover the loan. You would still be responsible for repaying any outstanding balance if the sale did not satisfy your debt. Clearly, debt consolidation loans do come with some risk.

On the other hand, the amount of risk one does incur with this kind of loan is relatively low. Risk to the lender is low because collateral is available to satisfy the loan in the event of default. Risk is relatively low to the borrower because the thought of losing one's home is a strong incentive to make sure repayment is made.

If your family is currently struggling under a mountain of high-interest, unsecured debt, you might consider looking into debt consolidation loans. Getting a loan with a lower interest rate and friendly repayment terms can help you get your personal finances back on track while also improving your credit rating. A wise use of debt consolidation could make a big difference in your financial future.

Sources:

  1. Stowe Family Law ?? http://www.marilynstowe.co.uk/2015/08/11/child-support-secured-loan-no-longer-for-family-debts-by-john-bolch/
  2. BAILII ?? http://www.bailii.org/uk/cases/UKUT/AAC/2015/406.html

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