Being in financial difficulty can feel very lonely. It can seem as though there are no solutions to this overwhelming problem. However, while it might be hard to imagine them, there are constructive and positive steps you can take to work your way towards becoming debt free.
At CABA, we offer supportive, non-judgmental debt advice. Our debt advisors are told every day by the people they help, that they wish they’d taken steps to address the issue sooner. This guide is intended to give you a starting point to help you begin to tackle your debt.
Do I have a problem?
If you’re still unsure whether you have a debt problem, here are some key questions to ask yourself:
- Can you put a figure on what you owe?
- Do you pay all of your bills on time?
- Have you recently exceeded your overdraft or credit limit?
- Are you borrowing more to cover existing debts?
- Do you use your credit card for cash?
- Are you repaying the bare minimum each month?
If 1 or more of these signs apply to you, then it might be time to consider taking steps to address the matter.
How do I know what I owe?
If you’re unsure of your outstanding debts, start by contacting the 3 major credit reporting agencies (Experian, Equifax, TransUnion) and asking for a copy of your credit report. Some creditors choose to report to only 1 or 2 of the 3 national credit reporting agencies, so even if a debt you owe isn’t appearing on 1 report, it may appear on the others. Although these reports won’t provide an exhaustive list, as lenders are not required to report to these agencies by law, it will list the debts that have been reported, the amount outstanding and provide contact information for your lenders. By law you’re entitled to 1 free copy of your credit report per calendar year.
If you do have a creditor that does not report to any of the credit reporting agencies, you will need to go over past bills and account statements or contact the company directly to determine what you owe.
Find time and space in your diary this week to sit down and start building your budget plan. It should be an hour or two and at a time when you know you won’t be interrupted or distracted.
First, list all of the income your household has coming in. This might include salaries, benefits, pensions, contributions from family and so on. If you’re self-employed, you should aim to keep business and personal finances separate and only list the salary you take home.
Next, try to work out your expenses, not including debt repayments or bank charges. Try to be as honest and as accurate as you can, ideally looking through your bank statements. Don't forget to include infrequent expenditure too and average it out across the year - for example MOT and repair costs for your car, the costs of Christmas, and any social trips or outings.
Maximise your income
Is there any way you can bring more money into the household? For example, are there any welfare benefits that you’re entitled to but not claiming? If you’re earning a salary, are you sure that your tax code is correct and that you’re not overpaying (or underpaying) tax? There are other creative ways to raise income such as taking in a lodger if you have a spare room.
You may also be able to make some reductions in your expenditure. Even very simple and quick changes can result in big savings. Check out our list of practical money-saving tips to get started.
It’s vital that you’re able to meet your essential expenditure from your income, not including your debt repayments, otherwise your debt will continue to increase. If your living situation is unsustainable then you may need to make some difficult decisions. While it may be hard to think about selling your home, if you’re struggling to stay afloat a clean start may be your best option.
Reduce your debt
You may be able to reduce the interest rates you pay and monthly payments by:
- Transferring your debts to a 0% balance transfer credit card
- Consolidate high-interest loans in a longer-term, lower interest loan
- Pay off any high interest debt
The debts you should address first are called priority debts. These are debts that, if left unpaid, could lead to you losing your home, your gas and electricity being disconnected, your belongings being taken by bailiffs or you going to prison. These will typically include your mortgage or rent, gas and electricity, council tax, income tax, TV licence and child maintenance.
While it can be tempting to deal with the creditors who shout the loudest such as your credit card, the consequences of non-payment for these are not as severe as non-payment of a priority debt.
If you’re behind or struggling with payments, contact your creditors and let them know about your situation. Tell them you’re taking steps to tackle your debt, even if you haven’t decided how much you can afford to pay. Keeping your creditors informed may prevent them from taking any immediate action.
Once your priority creditors have been addressed, you should then move onto non-priority creditors including credit and store cards, unsecured loans, overdrafts and your water bill. In general, any money you have left over after making payments towards priority debts should be divided up between your non-priority creditors. Write to your creditors and ask for any interest and charges to be frozen, and find out if they will agree to what you’re offering to pay.
There are several different options for addressing debts, including informal solutions such as a debt management plan, and more formal insolvency options including an Individual Voluntary Arrangement, bankruptcy or a Debt Relief Order.
You should consider your options carefully and explore the implications of each thoroughly. You should also be wary of fee-paying debt advice providers that make promises about writing off debt that sound too good to be true – because they usually are.
Debt management plans (DMPs)
If you have around £100 or more available in your budget each month to pay towards non-priority debts, you can arrange a DMP with a debt management company. This involves making one payment a month to cover all your debts. You must usually have 3 or more creditors and owe at least £5,000 altogether to be eligible for a DMP. Some DMPs are free, but others involve set-up costs and handling fees, so shop around before you commit yourself and make sure you use a company licensed by the Office of Fair Trading.
If you have a lot of debts and you can’t see how you could ever pay them off, you could, as a last resort, consider filing for bankruptcy. Bankruptcy does have serious consequences: Any assets you have, including your home could be sold to pay towards your debts. Being made bankrupt will affect your credit rating and if you’re an ICAEW member you could also be disqualified and as a result may lose your job. You will normally be discharged from bankruptcy after a year. Find out more at www.gov.uk/bankruptcy.
An IVA is an alternative to bankruptcy. These formal arrangements are made through the county court and involve paying an agreed amount towards your debts over a specified period, usually between 3 and 5 years. You must set up an IVA through a licensed insolvency practitioner, who will charge considerable fees for preparing and running your agreement. It’s usually only worth setting up an IVA if you owe more than £15,000.
Debt relief orders (DROs)
A DRO is a cheaper option than bankruptcy if you owe less than £15,000, have less than £50 a month spare income and have less than £300 worth of assets and a car worth less than £1,000. Unlike bankruptcy it doesn’t involve going to court, but you must apply to the official receiver for a DRO through an authorised debt advisor. Like bankruptcy, DROs are usually discharged after 12 months, which means your debts will be written off after that time.
Find further information on other debt solutions at www.gov.uk/options-for-paying-off-your-debts
Speak to CABA
Tackling your debt can seem a daunting prospect but it’s okay to ask for help. If you’re unsure about any of the steps in this guide, if you’re struggling to agree with your creditors or if you would just like to talk things through, CABA is here to help.
Our friendly debt advisers will be able to offer guidance and assistance to help point you in the right direction.