How to get out of debt

By David Nicholson | Published on

Britons are in greater debt than ever before, with an estimated 411 people per day to declare bankruptcy or insolvency in 2009. If you're feeling out of your depth when it comes to finance, follow our step-by-step guide to getting out of debt and staying out – or at least keeping it to a minimum.

• Stay calm and don't feel scared or guilty, even when someone is threatening you. There is help available.
• Don't borrow more money to pay off your existing debts, without getting independent advice.
• List all your creditors and debts and draw up a statement of your financial position, giving details of your income, living expenses and any other payments, with the amount left over to clear your debts.
• Tell your creditors about your situation – once they know about it, they're more likely to respond sympathetically.
• Rent – where you could be evicted.
• Utility bills (you could be cut off)
• Council tax payments
• Child and ex-partner maintenance orders
• Magistrates fines
• Inland Revenue and VAT payments

Include expenditure on:
• Average fuel costs over the year
• Car costs
• Food
• Leisure and holiday costs
• Clothing
• Housing costs such as renovations, Council Tax and your mortgage
• Other interest payments

Include income from:
• Your employment, if you are in work

And prospective income from:
• Job Seekers Allowance
• Child Tax Credit and Working Tax Credit
• Income Support
• Incapacity or disablement benefits
• Housing benefits
• Council Tax and Income Tax relief
• Could you do part time work or take in a lodger?
• Could you use public transport instead of shouldering the petrol and maintenance costs of owning a car?
• Could you spend less on holidays and entertainment? These could be challenged by creditors, along with expenditure on alcohol, tobacco, lottery tickets and pets

Credit culture

As individuals, and as a nation, we in the UK reached record levels of borrowing in 2008. The total personal debt at the end of October 2008 was £1,455 billion, a rise of 4.7 per cent on the same time in 2007. Most of this (£1,220 billion) was secured on property: the average mortgage debt for the 11.7 million UK homeowners was £103,903.

The consultancy KPMG estimates that 411 people per day will be declared bankrupt or insolvent in 2009, with around 160 properties being repossessed each day. Citizens Advice Bureau say the number of people coming to them with debt problems rose by 40 per cent during 2008.

A prime cause of these higher numbers was the sustained increase in UK property prices between 1997 and 2007, which encouraged people to borrow against the value of their homes.

First steps

There are many basic things that can help you to regain control of your finances and start to get out of debt. The first is to admit you have a problem and to seek help. If you ignore the problem or fail to reply to correspondence, it will make things worse.

Here are some practical things to bear in mind:

Call an agency for free specialist advice

The Consumer Credit Counselling Service (CCCS) helpline can be called on 0800 138 1111 and is open from Monday to Friday, 8am to 8pm. Alternatively you can contact your local Citizens Advice Bureau.

It may also be important to contact other professionals to get help for problems related to debt, such as family, health or emotional issues.

Prioritise your debts

Certain kinds of debt need to be treated in different ways, because the penalties for non-payment are different.

Priority debts – the failure to pay these could result in a loss of goods through bailiffs or imprisonment. They include mortgages and loans secured on your home. If you don't repay these according to the terms on which you borrowed them, you could lose your home. Other priority debts are:

Secondary debts include credit card repayments, personal unsecured loans, bank loans and loans from family and friends. Non-payment of these kinds of debt may end up with a County Court Judgement against you, which could affect your credit rating and make it harder for you to borrow in the future. For more information about this issue, see our detailed guide to improving your credit rating.

It is important to make payments on priority debts before payments are made on secondary debts, although for personal reasons you could decide to make some debts an exception (such as loans from friends or family), even though payments are not legally enforceable.

Should you consolidate?

Because different kinds of debt attract different interest rates, it is generally a good idea to consolidate your debts into the form of loan paying the least interest. Usually this will be your mortgage.

Consolidation will probably mean that you pay off the loan over a longer period, and you need to pay attention to the terms and conditions of the loan, such as early redemption penalties and variable interest rates.

Credit cards often carry high rates of interest, so you should pay these off as soon as possible, so long as this does not threaten payment of priority debts.

Creating a budget

Make a list of all your actual and prospective outgoings and income, either on a weekly or monthly basis, so that you can get a realistic picture of what your budget should be.

Contact the relevant department to find out whether you are entitled to any of these payments, or call your local Citizens Advice Bureau.

Taking all of these into consideration, calculate a budget that covers all of your expenditure and leaves you with surplus money to repay your debts over a realistic timeframe (say, five years). Think about where you could feasibly cut back on spending.

Contacting your creditors

Write to each of your priority creditors to ask them to confirm the amount you owe them, including any arrears and penalty charges. Explain that you are in difficulties and say why. Put in the letter that you are trying to resolve your situation and will send them a financial statement, with an offer of payment.

Keep copies of all the correspondence you send and receive, and make sure than any verbal agreement made on the phone is put in writing. Make a note of the name of the person that you spoke to.

Once you have the full details of all your debts, send another letter to each creditor, starting with the one nearest to a final sanction (e.g. having your home repossessed).

Explain again that you are facing financial difficulties, state what your debts are and make an offer to pay a certain amount each month or week. You could ask for them to freeze interest payments and other charges, in order to allow you to repay the debt. Ask them to confirm in writing that they accept this offer.

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