How to tackle debt: from mortgages to credit cards

Know what you owe

The first step in dealing with debt is knowing exactly what you owe and who you owe it to. Payments for any formal debts, such as loans or credit cards, are usually taken from a bank account. Go through old statements and add up all of the direct debits each month.

For loans, dig out the original agreements or check online banking – see how much you borrowed, what is outstanding and for how much longer you are due to be making repayments.

To this you need to add any borrowing from friends or family, and any outstanding credit card debt. If you are in arrears on rent, council tax, energy or water bills, this is also debt. Write down the companies, when payments were missed and how much they are.

This might be scary but it is important to work out the extent of your debts – you might even find that having a concrete number to tackle is less terrifying than just knowing that you are struggling.

Build a budget

The next step is to build a budget using your financial commitments and all of your income. National Debtline has a tool on its website that can guide you through this.

Be sure to include expenditure that only occurs occasionally, such as Christmas presents.

As most debts are billed every month, it is important to set out your budget on a monthly basis. Once complete, you will have a comprehensive picture of how your finances are, which will show you if your income should cover your repayments or if it falls short.

Prioritise and sort debts

Not all debts are equal. Some can cause more problems than others. Identify and deal with your priority debts first. If you have limited money each month, direct it to repaying these.

“Rent or mortgage arrears, energy bills and council tax are your priority debts as there can be serious consequences if you don’t pay them,” says Lorraine Charlton, a debt expert at Citizens Advice. “Many organisations have put in place protections for people who’ve struggled to pay their bills during the pandemic.”

After housing-related debts come bills for your gas and electricity, phone, internet, TV licence and court fines.

Citizens Advice also lists goods bought on hire purchase – which could be taken back by the seller – and unpaid child maintenance among those that must be paid first.

Secondary debts could be credit or debit cards, payday loans, unpaid water bills and parking fines, as well as money that you owe to family and friends. Often the consequences of not dealing with these debts will be less severe than with priority debts.

Contact creditors

As soon as you fall behind on any payments it is worth contacting the company or person you owe to see if you can buy yourself some time – mortgage lenders, for example, will consider payment holidays or a switch to an interest-only loan for a while, and other companies will consider repayment plans.

The charity National Debtline suggests giving a summary budget to creditors. This is a short document that can illustrate if you make an offer to them, it is reasonable and affordable.

a close up of food: Secondary debts could be credit or debit cards. Photograph: Thomas White/Reuters© Provided by The Guardian Secondary debts could be credit or debit cards. Photograph: Thomas White/Reuters

Creditors may agree to lower repayments if they can see you are offering what you can afford. StepChange, the debt charity, says it is possible to negotiate settlements with creditors where they accept a percentage of what is owed if it is clear they will not get the full amount of money.

If you find you owe a creditor money that you are not currently repaying, contact it via email so that there is a record to confirm details of the amount, and tell it that you are trying to deal with your debts.

Beware, though, that in some cases, if the debt is old, the creditor has a limited time to take you to court to pay – usually six years. After that it might not be able to force you to pay. But if it is under, or close to being under, the time limit might restart.

Get help

Dealing with debt can be an intimidating prospect but there are many organisations there to help.

StepChange (0800 138 1111) gives free debt advice to 650,000 people every year. National Debtline (0808 808 4000) gives advice to people across the UK. The Debt Advice Foundation (0800 043 40 50), another charity, offers free advice about loans, credit and debt. Citizens Advice (England – 0800 144 8848, Wales – 0800 702 2020) has been in operation for more than 80 years, giving advice on legal and debt issues, among others.

If you need time to assess your debts and how to deal with them, the government’s Debt Respite Scheme offers a 60-day space when creditors are not allowed to add interest or fees to any of that, or to take enforcement action against you. You do have to pass eligibility checks and must continue to keep making regular payments if you can afford to do so.

The scheme can only be started by a debt adviser or a local authority that provides debt advice.

Consider formal solutions

When informal arrangements with creditors are not enough to help you clear your debts, you may need to consider an alternative. Take advice before doing so, as most options have long-lasting implications.

A consolidation loan could work for you – it is a new loan used to pay off all of your other debts. It may make your monthly repayments more affordable and help you stick to a repayment schedule but you might not get a good interest rate, and you will have to be disciplined about not taking on other borrowing.

An individual voluntary arrangement is an agreement to pay off debts over a specific period

A debt relief order is an option if you owe less than £30,000 and do not own your own home, have substantial assets or much spare income. It usually lasts for a year, during which creditors can’t force you to pay off debts unless your situation improves.

At the end of the period, the debts are usually written off but it will stay on your credit record for six years and there’s a £90 fee you have to pay.

An individual voluntary arrangement is an agreement to pay off debts over a specific period, based on what you can reasonably afford. The money is paid to an insolvency practitioner who distributes it to your creditors, an arrangement that usually lasts for up to six years. The creditors have to agree before an IVA can go ahead, and there are fees to pay the practitioner.

An administration order is an option if you have an unpaid county court judgment and owe no more than £5,000 in total. You pay a monthly amount to the court which shares it out to your creditors.



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