What To Do About Debt

Step 2: Prioritise your debts

There are certain accounts that you MUST pay before all others – the mortgage or rent for example (you don’t want to be made homeless after all do you). Fuel supplies are also a priority as they can disconnect you, Council tax, CSA payments, Court Fines and such like can all use a court bailiff to recover money owing and, in extreme cases, can result in a spell in prison so make sure they’re paid.

Income Tax or VAT arrears – again, prison is an option and don’t forget your TV license as it’s also a criminal offence to watch TV without one. There may be other debts personal to you that you regard as priority. These debts are your priority – if you’re required to respond to a letter or phone call on any of these then DO IT NOW - DO NOT IGNORE THESE DEBTS. All other debts are classed as non-priority debt, and in this section we’re talking about unsecured borrowings like a bank overdraft, store and credit cards, loans, loans off friends and family, student loans ... you get the idea. Whilst these debts are classed as non-priority it doesn’t mean you can forget about them or ignore them. These debts will be managed to avoid any potential court action to recover money due and to keep the lenders informed, happy and off your case!

Step 3: Your Budget

Now you need to establish exactly what money you have coming in and going out each month – again no guessing, be exact. Get your bank statements, bills etc together and go through it one by one and make sure you get everything listed. This is usually a very interesting exercise ... quite often it’s not until you check that you realise that you’re still paying £50 a month on a TV package that perhaps you don’t need or those charity donations that perhaps can’t afford to make right now.

Income should be after tax and deductions – everything that is a regular guaranteed income – wages, tax credits, maintenance payments, second income etc.Expenses include the following:

Housing Costs. Not just the mortgage or rent but also the insurance, any life insurance or endowment policy along with any re-mortgage or secured loan .
Council Tax
Gas, Electric (or other fuel) and Water charges
Monthly Housekeeping. You’ve got to live so work out the realistic amounts for what you spend on food, toiletries, cleaning materials, school dinners, cigarettes etc – include everything you buy on a regular basis and be realistic. Include also an average amount for family clothing – list it all out separately so you can see if it’s possible to make a saving that may help solve the problem.
Telephones – Land-line and any mobiles
TV licence
Travel costs. Car- including any loan, fuel, insurance, upkeep plus any other public transport cost.
Other insurance policies – life insurance not linked to you mortgage, PPI, travel insurance and such like
Cost of essential childcare
Other essential expenses – maybe a monthly prescription fee, dental costs etc
Rainy Day fund – money you need to set aside each month to fund the replacement or repair of any essential item

Now you’ve got the facts and you are able to see exactly what the situation is and can easily identify any savings that can perhaps be made – perhaps you didn’t realise you were paying £40 a month on mobile phones plus £20 on a landline, do you need the whole satellite TV package, can you cut down to 10 cigarettes a day etc – all economies will help.

Also – don’t forget it’s not all about saving money – consider too the possibility of making more money each month – could you get an additional part time job, could you rent out that spare room, are there any benefits you could be claiming – you know your situation so have a think about it.

By adding up all your incomings and taking away all your expenses will now tell you exactly how much you have left over each month to pay off your debts and hence how good or bad the situation actually is.

Now that you have all the facts you can also decide if you are going to try to sort out your problems yourself of if you are going to seek outside professional help. Any external support that you seek will ask for the information that you have just got together so whatever you decide you will need to complete the above exercise.

Step 4: Your Priority Creditors

Your priority creditors, as you established earlier, now need to be contacted straight away – don’t delay or wait for them to contact you first, either pick up the phone or write them a letter and explain that you are in debt, explain why you are in debt and convince them that you are now addressing this issue and aim to sort it all out as quickly as possible. If they are threatening you with court action then tell them you are now “on the case” but that you need a few weeks to sort out your finances and ask them to hold off further action for at least this period to give you chance to sort out your finances.

This doesn’t sort out your problems but does give you time to sort it out without the worry of letters, phone calls or court action.

From the budget you have now compiled if you have money left over each month you are in a position to negotiate and agree a re-payment plan with your priority creditors. You can either do this directly or through a third party. Talk to them – you may be able to agree on a minimum payment plus a small amount extra to repay arrears. Talk to them or write to them or use an external agency to negotiate on your behalf, they are usually human and will want to make this agreement as much as you but, whatever you agree, make sure you stick to the agreement or contact them in advance if you know you have a future problem.

If there is no money left in your budget each month or not enough for you to pay your priority creditors you need to seek professional advice without delay, you will find some useful contacts at the bottom of this page but your local Citizens Advice Bureau is usually a good place to start and advice is completely free.

Step 5: Your Non-Priority Creditors

After agreeing payments with priority creditors if you have money to spare the options you have are as follows:

1: Make an offer to each of your creditors yourself

2: Employ a Debt Management Company to work with you and negotiate on your behalf

3: Apply through the Courts for an “Administration Order”, basically a court order that allows you to only pay a proportion of the debt.

4: An Individual Voluntary Arrangement or IVA – a legal agreement with your creditors.

5: Put all your debts into one affordable loan – a consolidation loan (check suitability first).

6: Check the new Government initiatives such as Mortgage Rescue Scheme or Homeowner Mortgage Support.

If there is no money to spare each month then your options include the following:

1. Ask creditors to write off all or some of the debt

2. Apply for a Debt Relief Order

3. Apply for Bankruptcy

4. Check the new Government initiatives such as Mortgage Rescue Scheme or Homeowner Mortgage Support (links below).

There are many, many agencies out there who can help and advise you, you'll find many of them listed on this site - help is out there and available so never be afraid to ask.

Alternative resources: www.WhatToDoAboutDebt.co.uk (UK), www.WhatToDoAboutDebt.com (US), www.StudentsAndDebt.com, www.IHaveDebt.org, www.HelpMeOutOfDebt.co.uk,