How to get out of debt

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People fall into debt for all manner of reasons, for most it is usually a change of circumstances such as the loss of employment or perhaps a health related issue. This post is designed to help those who are looking to repay their debts in a reasonable, affordable way and to also help them stay out of debt in the future. There are six steps to do this and this guide here will go through all of them.

Before I start I would like to mention places where you could seek further assistance, if you have serious debt concerns it is imperative that you find help as soon as possible from a trained Money Adviser/Debt Counsellor.

National Debtline 0808 808 4000
The Consumer Credit Counselling Service 0800 138 1111

You can also contact your local Citizen’s Advice Bureau, however, it is really important that you see a specialist Money Adviser as they have significantly more training than their generalist counterparts. There are MANY commercial firms who might imply that they give free impartial advice, they are looking to make money out of you so please steer clear, if a fee-charging option (such as an Individual Voluntary Arrangement [IVA]) is the right option for you, a Money Adviser will soon tell you.

The fundamental key to getting your debts in order is to begin by completing a comprehensive financial statement. Here are the steps that you’ll need to consider.

STEP ONE: YOUR INCOME

Lots of people are in debt because they don’t receive all the money they are entitled to. It’s really important to ensure that you are maximising your income by claiming all you are entitled to. Here are a few pointers.

Tax: Check with your local tax office to ensure you have the right tax code, a surprising number of people are not!

National Minimum Wage: As of 1st October, this has risen to £5.52 for an adult aged 22 or over.

Benefits & Tax Credits: There is a range of different benefits which you might have an entitlement to, this will depend on your particular circumstances. Some benefits are means-tested which means that your entitlement would depend upon household income. Some benefits are non-means-tested which means that you may have an entitlement regardless of income, these are usually sickness related benefits. You can find out more about benefits and possible entitlement by visiting one of the following sites:

http://www.entitledto.co.uk/
http://www.direct.gov.uk
http://www.jobcentreplus.gov.uk/
http://www.dwp.gov.uk/
http://www.thepensionservice.gov .uk/
https://www.taxcredits.inlandreve nue.gov.uk

Other Income: If you have grown-up children or other relatives living in your house make sure they are paying enough towards the household expenses. If you have a spare bedroom you can rent it out for a maximum of £4250 a year without having to declare it for tax purposes (it may affect benefit entitlement). Ask you tax office about the rent-a-room scheme for more information. You may also be able to request assistance from The Social Fund, this could be for essential household items or help in an emergency. If you’re looking to improve your home you could see if your local council give grants for improvements. There is also a range of grants available for insulation and draft-proofing, central heating. These are dependant on your age and if you’re in receipt of any benefits. For more information please call The Home Energy Efficiency Scheme:

0800 316 6011 – England
0800 316 2815 – Wales

If you’re over 60, you will usually be entitled to a lump sum every year called the winter fuel payment, give the helpline a call on 0845 915 1515.

Finally, it might be worth selling anything you do not need. You will be surprised how much you could make from getting rid of tat on Ebay or via a Car Boot Sale.

STEP TWO: YOUR OUTGOINGS

When it comes to outgoings it is vitally important to ensure you consider all the essentials that you will need to pay each month. These include the obvious payments such as housing costs, housekeeping and utility bills. You should also factor in the less obvious outgoings such as TV licence, health costs and emergencies. The key to an accurate budget is to ensure that your figures give a fair snapshot of how things really are, one thing to bear in mind is that a month is NOT 4 weeks, if you pay for items on a weekly basis you will need to multiply that figure by 52 and divide it by 12 to get the correct monthly figure.

One of the key stalling blocks for many is the figure for Housekeeping. This is the figure which includes food, toiletries, cleaning materials, newspapers etc. It should also include a small figure for entertainment. Your creditors will have general guideline figures that they will expect you to adhere to, if you have any reason as to why your figure might be higher than normal you will need to quantify it, perhaps you have a special dietary requirement for example. To get you started a typical housekeeping figure for a single person is £140/month, for a couple it is £230/month, for each dependant you’re looking at an additional £85/month. Please bear in mind these are very rough guideline figures and you may actually spend a bit more or possibly less. I really wish to stress that creditors will refuse a budget if you have a ridiculously excessive housekeeping figure. If you’re savvy you can shop around to find bargains, don’t be afraid to visit Aldi or Lidl and also your local food market.

When calculating your travelling expenses please remember to factor in monthly amounts for items such as road tax, maintenance, MOT, insurance, Roadside assistance as well as petrol. If you have purchased your vehicle via a lease, HP or Bill of Sale arrangement you MUST record this figure in your essential outgoings too, the reason being is that the creditor may be able to use repossession if you fall behind on payments.

It is perfectly fine to have a Sky or Virgin Media package so long as you are only paying a reasonable price, invariably this means that you may need to consider cancelling the premium channels such as movies and sports. If you’ve been with your supplier for over a year you might be able to renegotiate a cheaper package and keep these channels for a much cheaper price. You may also be able to do this with telephone and broadband packages.

You might have an entitlement to free prescriptions, dental treatment and glasses. Contact the health costs advice line on 0800 917 7711. If you cannot claim free prescriptions you might be able to reduce the cost by buying a prepayment certificate.

It is important to also factor in amounts for clothing, birthdays, Christmas, emergencies and other miscellaneous expenses, remember you might need to quantify your figures.

STEP THREE – MONEY FOR YOUR CREDITORS

Once you have calculated the figure for your outgoings you subtract it from your income. The remaining amount is called your surplus, this is the figure you can realistically use for your creditors. If you find you have no surplus or a negative surplus you should contact one of the debt help charities or the CAB for further assistance ASAP. You may wish to take another look at the earlier steps, can you increase your income? Are there any outgoings that could be reduced? Some people may look to free up extra money by altering their mortgage or by cancelling pension policies etc. It would be of utmost importance to seek independent financial advice prior to doing this.

So once you have your surplus figure worked out you can finally move on to dealing with the debts!

STEP FOUR – PRIORITY DEBTS

Priority debts are the important ones, if you do not pay these something can be taken away from you – Property, Liberty or Utility. I could write a book on the importance of dealing with priority debts, I’ll try and keep this section as short as I possibly can.

What can priority creditors do?

• They could take away your home (Repossession or Eviction)
• They could take away other secured items (such as a car on HP)
• They could cut off your gas or electricity
• The could send the bailiffs to take furniture from your home
• They could ask the magistrates’ court to send you to prison

Some creditors can take action on priority debts without going to court first so it is important to tackle these debts as soon as possible. You’ll always be given warning about any possible action, so long as you act quickly you should be able to stop any pending action.

The standard way to begin negotiations with your priority creditors is to send them a copy of your personal budget and make an offer of payment. Always try and negotiate in writing and keep a copy of any correspondence. Some creditors may have a code of practice outlining how they should deal with people in financial difficulties, always request a copy. If you have to reduce your payments on your unsecured credit agreements so that you can afford to make reasonable payments on your priority debts you should do it, although it would be important to arrive at a reasonable repayment proposal with the other creditors too (More info about non-priority (credit) debts shortly!).

If you have arrears on your mortgage, secured loan or on your rent payments it is vital that you contact your lender/landlord to try and arrive at a repayment arrangement. If you have mortgage arrears your lender should initially outline what they can do to assist you. The Financial Services Authority have produced a really useful guide on mortgage arrears, you can find it here: www.moneymadeclear.fsa.go v.uk/pdfs/mortgage_whatif.pdf
In a later article I will be covering mortgage arrears in detail, keep an eye out for it!

If you have arrears on your tenancy there are strict rules that the landlord should follow. There are various types of tenancies, each may have different rules that should be followed when it comes to repossession. Always try and negotiate in the first instance with the landlord, make an offer to keep up with the ongoing rent payment plus a little bit towards the arrears. If you require further information please take a look at the excellent shelter website: http://england.shelter.org.uk/advice/advice-4277.cfm

Another major priority debt is Council Tax arrears, it should be noted that as far as enforcement is concerned, your Local Authority has a vast array of enforcement measures they could consider using. Council Tax is still one of the few debts you could in theory go to prison over although there has to be quite precise circumstances involved for this to be a reality. If you have arrears please contact your local authority as soon as possible, it is much easier to make an arrangement with them than a bailiff! Always negotiate in writing seek further advice if you receive notice of further action. This action begins with the local authority obtaining a liability order from the Magistrates’ Court, once they have obtained this they can then chose to use various methods of enforcement with the most popular being bailiffs (Distraint). Other popular methods of enforcement include an attachment of earnings and possibly bankruptcy proceedings. As I mentioned earlier Imprisonment could be used but only if you have deliberately refused or neglected to pay, you cannot go to prison by simply not being to afford to pay the arrears.

If you have arrears on your gas/electricity the supplier could cut you off, there are strict rules for this and it should really only be used as a last resort. It might be worth knowing that you cannot be cut off if you only have an estimated bill. Many of the energy suppliers have trust funds or restart schemes which you might be able to receive assistance to clear all or part of the debt. Sometimes these trust funds may allow you money for other important bills too. If you are on certain means-tested benefits you may be able to have your arrears taken direct from you benefit. It should be noted that due to a change in the law a water company cannot cut you off for having arrears.

Magistrates’ Court Fines are criminal fines, this means that the enforcement measures possible are significant and varied. Like Council Tax arrears it is possible for the debtor to be sent to prison for non-payment although this would only be if they have behaved in a dishonest or unfit manner. If you find you cannot afford to pay your fine it would be of utmost importance to speak to the fines officer within the Fines & Fees department and request a means enquiry. You would need to take as much evidence as possible to show you income and outgoings to show the court what you can afford. If you are ever ordered to attend the court you MUST attend, you can get into serious trouble if you don’t go. There are various measures available to the court, at the hearing they could allow you more time to pay by fixed instalments, they could write-off all or part of the fine. Some times they may order you to sit at the back of the court for the day. If you have deliberately refused to pay the fine or you have been careless and not paid they could send you to prison. Please bear in mind that it is quite rare that imprisonment is used, so long as you have a good reason why you cannot afford to pay the fine (such as a change in circumstances, illness etc) it would be unlikely a committal order would be made. Bailiff action is a popular method of enforcing a Magistrate’s court fine, since July 2005 they have had the power to break in to property to seize goods although it’s very uncommon.

If you have purchased an item via hire-purchase, conditional sale or bill of sale these items having the borrowing secured upon them. This means that if you were to fall behind on payments the lender could consider using repossession action to recover goods. If you have arrears you must contact the lender as soon as possible to arrive at a repayment agreement. In certain circumstances the lender could repossess your goods without a court order so you should act quickly. There are legal remedies available to stop this action, a Time order being the most common. If you have any problems surrounding arrears of this nature there is a significant amount of help available from this forum so please post up your query and draw it to the attention of one of the sit helpers or mods.

If you owe money to friends and family members, we class these as priority debts too! Ensure that you arrive at a reasonable arrangement to get these paid, the last thing you want is to fall out with the people closest to you.

There are other priority debt types too, these include CSA maintenance arrears and certain benefit overpayments, it would be important to address these issues promptly to halt further action.

STEP FIVE – SURPLUS AVAILABLE FOR NON-PRIORITY DEBTS

Once you’ve accounted for your priorities, the remainder is the amount which will be used for your non-priority (unsecured credit) debts. These include Credit Cards, Loans, Bank Overdrafts, Store Cards, Catalogues, Home collected Credit (Provident etc).

STEP SIX – DEALING WITH THE NON-PRIORITY CREDITORS
If you still have some money remaining to pay your unsecured creditors, this should be distributed via pro-rata payments. This means that each creditor will be paid a percentage of the surplus based upon how much is owing to them. It’s a bit like dividing a pizza up amongst family members, whoever is biggest gets the biggest slice of pizza. To calculate the amount you should pay you divide the amount owing to each creditor by the overall amount of debt, you then multiply this figure by the surplus.

Example:

£4000 is owing to Lloyds for a loan
£20000 is the total debt level
£100 is the surplus

£4000/£20000 x £100 = £20

£20 is the pro-rata amount that Lloyds would be offered.

This method of dealing with creditors means that everyone receives a fair and equitable share of the amount available, it is the standard way of dealing with debts and is the same process the courts use.

If you owe any money to the people you hold a bank account with, such as an overdraft or loan you *MUST* switch to a “safe” account with a lender that you owe no money to. This will safeguard your income and stop the bank taking money out of your account to pay towards any of the credit agreements.

There are various methods that you can use to deal with credit debts, some informal and some binding via the courts. There is nothing to stop you dealing with you creditors on your own accord, always deal with them in writing and ensure you keep copies of correspondence. You should always ask your creditors to use their discretion to freeze interest and charges, this may take several attempts in writing to achieve – stick to your guns! It might be worth familiarising yourself with the Banking Code and The OFT Debt Collection Guidance, usually the creditors are more willing to help you if they know you know your rights!

http://www.bankingcode.org.uk/pdfdoc...ING%20CODE.pdf
http://www.oft.gov.uk/shared_oft/business_leaflets/consumer_credit/oft664.pdf

DEBT MANAGEMENT PLAN:

A Debt Management Plan (DMP) is an informal agreement which enlists the help of a third party organisation to help with making repayments to your creditors. The DMP firm will negotiate with your creditors with a view to having the interest frozen and any charges stopped. You would then make a single monthly payment to the DMP company who will in turn distribute the payment amongst your creditors on an equitable basis. There are many firms who offer a DMP service and charge a fee for doing so, my advice would be to not use them as there are two organisations who offer a free DMP, The Consumer Credit Counselling Service and Payplan. They will contact your creditors on your behalf and make pro-rata offers, you make a single payment to them each month, they deal with all the distribution.
http://www.cccs.co.uk/
http://www.payplan.com/

You will need a debt level of at least £5,000 to have a DMP, you will also need at least three creditors and at least £100 surplus each month. Many people have found DMPs a really good way of dealing with their debts as they alleviate the stress of dealing with creditors.

INDIVIDUAL VOLUNTARY AGREEMENT

An Individual Voluntary Arrangement (IVA) is an alternative to bankruptcy. It is a legally binding agreement drawn up by an Insolvency Practitioner (IP) which normally lasts for 5 years. The major benefit of an IVA is that the IP will negotiate with the creditors with a view for you paying back a percentage in the pound of the total debt amount, this would mean that some of the debt may be written off. Another benefit is that during the agreement the creditors wouldn’t be able to use any further action to enforce the debts. IVAs can be expensive, they can typically cost thousands of pounds so it would be important to find an IP who will charge you on a monthly basis rather than upfront. Typically, you will need to have at least £15,000 worth of debt before you even consider this option. Most IVA agreements will request that you make monthly payments although some may have a clause that expects you to raise a lump-sum to pay at the end of the 4th or 5th year. This could mean that you will have to re-mortgage your property to raise funds, it’s a vicious circle as an IVA seriously hinders your ability to get credit so finding a decent mortgage rate is nigh on impossible. Some IVA firms have a separate mortgage firm that you’ll have to go to, this means that not only will the IVA firm make thousands out of your IVA they are likely to make even more out of a re-mortgage. IVAs are big business but the vast majority of people who have signed up to one have done so inappropriately. I would imagine that they are the best option for less than 2% of people in debt. If you have more equity in your home than the level of your credit debts you may find it difficult to have an IVA unless the IP requests that you re-mortgage to release the equity for the creditors. If you are considering an IVA it is paramount that you seek further advice from a trained professional.

BANKRUPTCY

If you find that you can not realistically afford to pay your debts back in a reasonable amount of time, or at all, you may wish to consider petitioning for bankruptcy. This method involved going before a judge in the civil court who will look through your financial circumstance and decide whether or not to make you bankrupt. If you are granted a bankruptcy order your debts would be written off and you can make a fresh start. There are serious implications to consider with this option, these include effects on your credit rating, possible effects on your home/tenancy and possible implications with work. It would be important to seek further advice about bankruptcy before you petition so you can be made aware of any relevant issues. Currently, the total fee for bankruptcy is £495 although you may qualify for a reduction, you may also be able to apply for financial assistance from charities and trust funds. Most people are discharged from bankruptcy within a year although further restrictions can be placed upon you if you are found to have acted in a dishonest or unfit manner previously. If you are working you may be asked to pay a percentage of your disposable income to your creditors for a period of three years, this is known as an income payments agreement. If you feel that bankruptcy is the right option for you please seek further advice from a trained specialist.

CONSOLIDATION

This is an option you should think very long and hard about before making any decision. On paper it might seem like the ideal thing to do as you might be able to reduce your monthly instalments quite significantly, however, you do need to be aware of possible pitfalls. If your credit rating isn’t great you might find it very difficult to obtain a decent interest rate, especially in this current climate of financial uncertainty. If you owe more than £25,000 you might find it impossible to obtain an unsecured loan. Consolidation may mean that you are paying interest on interest that has already accumulated, you may also pay much more back in the long run, especially if you consolidate over a long period of time. Many people consolidate by extending the amount borrowed on a mortgage or by taking out a secured loan (aka another mortgage!), this is very risky as you are effectively turning an unsecured debt into a secured one – any change of circumstances could cause you to lose your house completely. I have lost count of the amount of people who have consolidated only to start spending on the very credit cards they have cleared with the consolidation, it’s a vicious circle. If you do go down this route you must have a great deal of will power and be sure to understand all the possible implications. It would be a great idea to seek advice from a professional financial adviser prior to signing anything.

I hope you’ve enjoyed my very brief overview, if you are keen to seek any further advice then please contact one of the aforementioned debt help charities or your local CAB Money Adviser.