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01.03.07
If you really haven't been able to repay your debts, you may receive a summons
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01.02.07
follow our six-point action plan and you'll soon be
back on your feet financially
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01.01.07
If you ignore debt, it doesn't go away
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Debt: Action Plan
It doesn't matter how much you're paid - it's a rare person who hasn't
spent more than they earn at some point in their life.
But if debt has got the better of you, follow our six-point action plan and you'll soon be
back on your feet financially.
1. Face the facts
- If you ignore debt, it doesn't go away. In fact, you could end up in court, lose the goods you've bought and find it difficult to get credit in future. If your mortgage gets in arrears, you could even lose your home. Even if you're only a little bit in the red now, it's surprising how quickly debt can build up and how long it takes to clear.
- Know your money flow. Start by working out how much income you have each month after tax and other deductions. Second, list all your essential spending (mortgage or rent, gas and electricity, council tax, food, travel expenses and so on). Then list all other regular spending (telephone, car, clothes, entertainment and the like). Finally, add it all up and minus your outgoings from your income and see what you've got left.
- If there's money to spare once you've done your calculation, you can use this to start paying off your debts. List the people you owe money to, when you owe it and how much you can afford to pay back each month. Work out a sensible debt repayment plan.
- If there's nothing left or if you're spending more than you bring in, it's time to examine your expenditure and cut out some luxuries. Alternatively, can you boost your income by taking on some part-time work in the evenings? If you've lost your job or are off work because of illness, check whether some of your bills are covered by insurance.
If you need help working out exactly what you spend on your debts check our credit review.
2. Prioritise your debts
A build up of debts can lead to fear and confusion, leaving you unable to decide which debt to pay off first. The key is to prioritise your debts in order of scariness. Here are some tips:
- Mortgage or rent arrears are likely to be your biggest worry. If you get behind on these, you could lose your home. Paying your utility bills is also important - you don't want to be without gas, water or electricity.
- Hire purchase debts should probably come next, because if you've paid less than a third of the total cost, the goods can be repossessed without a court order. Loans for important lifestyle items are equally important. For example, if a car is essential to doing your job, you really don't want it repossessed.
- Credit card bills and loans for luxury items such as hi-fis and holidays should be low priority. That doesn't mean, of course, that it's any less important to pay these off. You may not get credit in the future if you stall repayments for too long.
3. Keep in touch
Contact your lenders, creditors and anyone else sending you red bills as soon as possible. The earlier they know about the problem, the more sympathetic they're likely to be. Creditors sometimes add the costs of phone calls and written reminders to the interest you're already paying, so sorting things out quickly will stop these costs piling up.
Make sure you:
- Explain the problem and try to come to some arrangement about repayments. They probably won't write off the debt but they might be willing to accept smaller repayments over a longer period of time. This will probably cost you more in the long term, but it will make things more manageable now.
- Don't be put off by unhelpful creditors. Keep trying, and ask to speak to someone higher up in the company if the person handling your enquiry is stonewalling you.
- Give a copy of your income/expenditure statement to each of your creditors and back it up with a letter explaining the situation. The letter should quote the number and name of your credit agreement, state your earnings, say what you can pay back, ask what the best way to pay is, and say when you'd like to pay.
- Try to get the lender to freeze any interest you're paying. That way, you can repay the amount you borrowed without any extra being added on. Above all, however, never offer to pay more than you can afford. It's much better to be realistic, even if you can only pay back a small amount each month.
4. Time for some consolidation
Bringing all your debts together under one personal loan is one way of regaining control, although it isn't the best solution for everyone. If you're unsure, check out the following:
- A consolidation loan is usually taken over a much longer period than the smaller debts, so this can keep you in debt longer and increase the overall interest paid. You can even end up paying interest on interest!
- Because you're bringing all your debts together, there may be less chance of negotiating reduced payments with the lender than there would if you had kept the smaller loans. This means you may have less flexibility and more to lose if you don't keep up your repayments.
- Some lenders will only grant 'debt loans' to their existing customers and most will ask you for a list of your debts. Others will ensure that the loan fulfils its purpose by paying your debts for you.
- Always steer clear of the loan sharks and credit brokers in the classified ads, who are more likely to saddle you with more debt than you had before. In many cases, the lender will require you to put up your house as security, so you should think carefully before trying to borrow your way out of debt.
- Seek financial advice before getting a consolidation loan to ensure that you are not simply increasing your overall debt.
5. Give your debts a free transfer
The gut reaction when receiving a nasty letter with your credit card bill or bank statement may be to cut your credit card or cash card in two. But there is another way of dealing with this kind of debt - give it to someone else:
- Find a credit card company that offers a lower rate of interest, and therefore lower monthly repayments than your current creditor.
- Many companies offer to transfer existing credit card debts on to their cards. In particular, look out for card companies making introductory offers to new customers. Many cards now charge you zero interest on all transferred debts and new purchases for the first five or six months.
- Make sure you read the small print, which may mention an annual fee or a more expensive method of charging interest, such as from the date an item is purchased rather than from the date the transaction is credited to the account.
- You can also switch your overdraft to another bank (but you'll need to convince them of your ability to get back into the black). The range of fees charged on authorised overdrafts at different banks is enormous, so shop around for the lowest charges.
- Many banks now operate a charge-free buffer zone, where slipping into the red for just a couple of days goes unpenalised.
6. Swallow your pride
It's often the highest earners who get into the most trouble with debt because they're too proud to seek help.