Debt isn’t just a financial problem; it can take over your life. The nature of borrowing means interest compounds over time and if it isn't dealt with it will spiral you into trouble; so the earlier problem debts are handled, the less likely they'll turn into a crisis. My aim here is to provide a step-by-step path through the mists.
(Length: 23 minutes)
Or, watch the sections separately on Google video:
Are you in debt crisis? (3 mins)
Cutting the cost of debts checklist (9 mins)
Budgeting, Bank Charges, Benefits (5 mins)
Where to get further help (5 mins)
Are you in debt crisis?
There are two very separate approaches to dealing with problem debt, depending on whether you’re technically in debt-crisis or just have worrying or large debts.
I define debt crisis as when you cannot afford to make the minimum repayments on all your debts and meet all necessary outgoings. While those who can meet the minimum repayments can still have very severe debt problems, the solution is different.
What to do if you're in debt-crisis.
First of all don't panic at the name. I've never yet heard of someone with debts so bad there isn’t a path through them; starting to deal with them will make you feel better and speed up the process. In fact let’s begin with an email I received that shows there is always hope, no matter how bad you think the situation is:
“I had always been brought up to believe that being a bankrupt was just one step away from being a burglar so when it became apparent that my daughter was reeling from the pressure of unpaid debts, bankruptcy was not a consideration. Her debt was that bad, that even living as a pauper she couldn’t afford the interest charges. Yet still the credit card companies offered to increase her credit limit and her bank offered to consolidate her loans.
After taking the time to research the matter thoroughly and getting loads of advice we decided that bankruptcy was the best option and although it’s not a step that should be taken lightly my daughter is alive again. She has a genuine fresh start after 7 years of increasing money pressure, and it has made the world of difference to her. Of course, she has to be careful with her limited resources but is now able to manage and live a reasonable life…..and not lie awake at night worrying about money!”
So the reason it's a crisis is because if you don't deal with it immediately, the nature of debt means it’ll get worse fast. Yet the sheer fact you're reading this article means you've started to deal with your situation.
However, it's important to understand the checklist below is primarily to prevent debt crisis not for those already there. This is because there are a range of great free, non-profit debt counselling agencies who will give you one-on-one help if you're in crisis; and no web article can provide the same interactive help. Therefore my preferred solution is to direct you to them: see the debt counselling section.
Having said that, if you've only just slipped into debt crisis, it's worth reading the checklist first, as there may be some tricks you've missed, that could allow you to meet your minimum outgoings and thus avoid your crisis snowballing out of control.
What to do with problem debts if you’re not in debt crisis?
First of all, don't visit a debt counselling agency; not just because the non-profit debt counselling agencies are heavily oversubscribed and should be left to those in urgent need; but more importantly the solution they use isn’t for you.
They use specific negotiations with creditors and where necessary IVAs or bankruptcy; these are serious measures, designed for those with limited alternatives, in effect drawing a line and saying "this person is no longer within the system”. This results in the ensuing debilitation of your credit score and access to financial and some consumer products.
Those not in debt crisis, but with problem debts, should follow the checklist below. The MoneySaving techniques included are very different to those the debt counselling agencies use. Here it's about beating the system to minimise your costs and put you back on financial track. Also, read the Money Makeover article to make sure you're squeezing the best out of every penny you have.
If you want help or want to talk about it, there are many people in the Debt-Free Wannabe Forum in a similar boat, all supporting and helping each other out of debt.
If you’re really stuck and want to talk to someone, then don’t go to your bank, it will just try and flog you it’s own products. If you’re on a low income (such as claiming any benefits or tax credit) Now Lets Talk Money is a free Government helpline, on 0800 0121656; which will give you financial advice. Though you’ll find for picking best products and how to work through debts, the advice on this site is much more specific.
Are you hiding your debts??
Many people hide their debts, sometimes even from themselves, by not opening statements or not totalling their liabilities. If that’s you, don’t worry, the fact you're reading this article means you're ready to take the next step. You can only sort your debts out if you know the scale of them.
Yet if you're hiding your debts from your partner or loved ones, and are very scared of telling them, then my suggestion is to read through the solutions first, work out the basics of what you're going to do, and go to them with an action plan.
It’s much easier that way and remember; if you're prepared to take action the question isn't "will I ever get through this?", but "when will I be through this?"
Are your debts causing depression/relationship problems?
Debt problems can be all pervasive - if you're having problems it can hit your relationship and your personal wellbeing. If you're feeling depressed then the Samaritans is always there to help either through its website or on the phone (08457 90 90 90). If you're worried about your relationship then Relate has lots of useful info too.
Dealing with problem debt: The basics
No one gets into debt because they want to. Debt is never an aim; it comes from spending money you don't have. However good or bad your reason for doing that, getting a disciplined handle on your spending patterns is a must; this entire site is dedicated to saving money on everything and anything, and how to cut back where needed.
That's why in this guide, my prime focus is on cutting the cost of your debts themselves, rather than looking at the bigger picture of all spending.
If you're wondering how bad your debts are, as the old adage says, size isn't everything. Even if your debt is manageable, one big danger signal is not knowing where it came from. If you didn't ‘buy a car or a conservatory’, but have simply used credit cards or loans to fill the gap from continually spending more than you earn - that's a major problem. If you continue to do this, more of your income will go to service the debts, leaving you borrowing more and more and creating a debt spiral.
Never borrow more to get out of debt
Traditional debt advice says ‘never borrow your way out of a debt problem'. Yet this ignores the varying cost of different debts. A more savvy approach is "never borrow more to get out of a debt problem."
If it’s possible to borrow more cheaply elsewhere to replace existing borrowing, then this can provide a huge boost, as lower interest rates mean more of your cash goes towards repaying the actual debt rather than just servicing the interest. Those with big debts may save thousands a year in interest by being more savvy with their borrowing.
Communicate with your lender
It's very important to get on top of debts as soon as possible. Don't default or miss payments. Let your lender know if you’re going to be unable to pay; it's always better to talk to them, though of course preventative measures such as reducing interest, expenditure, and being a smart consumer are the best form of action.
Step-by-Step Debt Problems Checklist
There is no one size fits all solution. The idea of the checklist is simple: explore every option and use each one that works for you. Some of the initial points will only work for those with a decent credit history and not too severe debts, but it's still worth checking. Once you've found something that works, don't stop, continue down the list to see if there's anything else that will help.
- Shift your debts to a cheaper credit card. Suitable for: Mid to High Credit Scorers.
Used correctly and with discipline credit cards are the cheapest borrowing possible, especially when shifting debt to new ‘balance transfer' offers. It's possible to get long term borrowing on a credit card at under 5%; even if you don't have a great credit score there are still attainable deals
- Get a cheap personal loan. Suitable for: Mid to High Credit Scorers.
Standard personal loans can give you a consistent cheap debt, though not as cheap as the cheapest credit cards. Plus as you must make fixed repayments each month, it helps provide structure. Unfortunately though, those with poor credit scores will often not get decent rates.
- Check Credit Reference Files
Those rejected from credit card or personal loan lending without an obviously poor credit history should check their information held by the credit reference agencies, Equifax, Experian and Call-Credit, isn't erroneous.
- Credit Card Shuffle - cut debt costs without new credit. Suitable for: Poor to High Credit Scorers.
It's possible to cut the interest rate on existing debts even without getting new products. Many credit cards allow existing customers to move other debts to them at special rates. Correctly shifting balances and prioritising repaying expensive debts first can create substantial savings.
- Use savings if you have any
The interest paid on savings is usually far less than interest charged on borrowing, so paying off debts with any savings makes sense. Traditional logic does say always have an 'emergency cash fund'. I disagree.
After paying off debts, don't cut the credit cards up. Lock them away strictly in case of a substantial emergency. If no emergency happens you're quids in, and can then start a cash emergency fund. If it does, use the cards and you're no worse off than when you started (and then follow the other techniques here) and you've saved substantial interest costs in the meantime.
The reason this comes after the main debt switching steps is that you should first try and cut the cost of your debts where you can, then use what savings you have to pay off as much as you can - but focusing on the remaining high interest rate debts.
- Is your credit agreement challengeable?
Any credit agreement, for example credit cards, loans and catalogue agreements signed before 6 April 2007 have to adhere to a strict format set by the Consumer Credit Act. If this format is not followed you can challenge the enforceability of the agreement with your lender. Examples of errors include signatures and contact details missing from the paperwork and incorrect APR calculations.
Therefore if you are stuck in a high rate, unjust deal, you could consider challenging the agreement for legitimacy. The website Financial Agreement Solutions offers a free check of agreements; though it then offers to challenge your lender for you on a no-win no fee basis or allows you to download the details for £155 to challenge your lenders yourself. However if your agreement does seem to be challengeable it’s worth going to the Citizens Advice Bureau first to talk to them about helping you rather than shelling out cash.
A challenge could result in getting you a better deal, such as freezing or wiping off interest and charges or your lender accepting a ‘full and final settlement' to pay off the loan.
- Remortgage: get a new deal to help your debts. Suitable for: Low Mid to High Credit Scorers.
A mortgage is simply a type of loan secured on your home (meaning if you can't pay it back the lender can take your house). The additional security for the lender means it can offer a cheap rate over the long term.
The first thing to do is check if there's a cheaper deal available, to cut your monthly costs; as for every 1% you can drop the rate on £100,000 mortgage you save £1,000 a year. You may also be able to move some of your existing debts onto your mortgage (whether at the new cheaper rate or the same rate). On the surface this looks like a no-brainer; the debt is cheap and as it's over a long time the amount you pay each month will be lower.
Yet it's not quite that simple; it never is, is it! It means you'll be shifting 'unsecured' debt to 'secured' debt so there's an increased risk of losing your home if you can't repay; plus you may be forced to increase your life assurance and other associated costs if mortgage debts increase. And it may not actually be cheaper, paying off over a longer period means you end up paying more interest; e.g. 5% over 20 years is actually much more expensive than 10% over five years.
Don't be totally put off though, if the other routes above haven't worked, it's still worth considering - especially if you've a flexible mortgage so you can pay the debts off more quickly. Yet do carefully consider it first.
- Check out secured loans. Suitable for: Very Poor to Poor Credit Scorers, but be careful.
This is a loan of last resort and if you fail to repay it you can lose your home. However, in certain limited circumstances, it is the best option. Those with expensive debts and some (not too substantial) credit history problems may be able to cut their interest rate this way.
Full article: Best Balance Transfers
Full article: Cheap Loan Related Article Cut The Cost Of Existing Loans
Full article: Your Credit Rating
Full article: Credit Card Shuffle Related Article: Other Credit Card Articles
Full article: Pay Off Debts With Your Savings
Full article: Remortgage Guide Related Article: Sneakily Get Mortgage Advice For Free
Full article: Cheapest Secured Loans
Reduce your outgoings and manage your money
The following are a few ways to manage your cash and reduce your outgoings, though this is no substitute for systematically scanning all the articles on the site where you'll find a vast array of MoneySaving; yet I've picked the most appropriate to those with problem debts.
- Budget & Reduce outgoings
Massive MoneySaving is possible on everyday spending by moving to better products and very importantly, by budgeting effectively to allow quicker and easier debt repayments.
If you have debt problems then doing a budget is crucial, critical, necessary, a must, absolutely imperative (I think that covers it). Even if the above solutions are working, getting a handle on what you spend will future proof your finances.
The big problem with most budgets though, is… they don't work. However, I have tried to devise a system that's slightly different and presents a real picture of your finances. To help there's a free spreadsheet which is very easy to use, even for computer novices. Please try the Budget The MoneySaving Way system.
- Earn under £66,000? Check your benefits
Any family with income under £66,000 may be entitled to some form of benefit and you can do a quick check up for free in just five minutes.
- Bank and Credit Card Charges reclaiming
If you have problem debts it is very likely you will have incurred bank charges at some stage for going beyond your overdraft limit, having cheque and Direct Debits bouncing or late payments on credit cards. If so you can join the 100,000s who’ve written to their bank asking for a refund of your last six years’ charges and get all your money back.
- Is an IVA right for you?
If you’ve seen the adverts on tv, you’d be forgiven for thinking that an Individual Voluntary Arrangement (IVA) is the answer to all debt worries. The promise of a ‘little known government loophole that can write off 75-90% of your debt’ is not to be taken lightly. An IVA is a serious financial arrangement and is only suitable for a small number of people. If you are in debt crisis read my guide to find out if it could be the right thing for you.
Full article: Budget Planner: How to manager your money
Full article: The Five Minute Benefit Checkup
Full articles: Bank Charges Reclaiming, Credit Card Charges Reclaiming Guide
Full Guide: IVAs: Are they worth it?
Debt Councelling, where to get one-on-one help
For those in debt crisis (see definitions at the start) who are consistently struggling with debts and meeting repayments, free personal help is invaluable. Do it as quickly as possible, the longer you leave it the worse it gets.
The right people to go to
You need non-profit debt counselling help, in other words a one-on-one session with someone who is paid to help you, not to make money out of you. This is different to ‘free’: many commercial companies say they’re free as you’re not charged directly, but you’ll still pay somehow. The places I'd recommend are:
Consumer Credit Counselling Service - Website: CCCS Telephone: 0800 138 1111
National Debtline - Website: National Debtline Telephone: 0808 808 4000
Citizens Advice Bureau - Website: Citizens Advice or visit your local CAB centre (find nearest
Community Legal Advice - Website: Community Legal Advice Telephone: 0845 345 4 345
These counsellors use a variety of techniques, you may be put on a debt management plan, where they negotiate with your creditors. You may be recommended an IVA (Individual Voluntary Arrangement) or even bankruptcy (not as scary as it sounds). They will certainly show you how to prioritise the most important debts to enable you to keep food on the table and roof over your head.
Most importantly they're not judgmental, they're not there to tell you off, they're just there to help you sort out the problem. The sooner you talk to them the better. It may help you sleep at night.
Unfortunately they can be oversubscribed. If it takes time to get an appointment with them, use the info on their websites to start to plan. There may also be a local debt councillor in your area, such as Christians Against Poverty (not about religion even if it sounds like it) but ensure it is a non profit/Charity.
The wrong people to go to
Avoid any of the beasts that advertise debt help or management on the TV or in red top newspapers. They are commercial companies who simply want to make cash out of you, they don't care. While in the short term their plans will make your payments lower, in the long run it'll cost you dear. Avoid them. Don't touch them. Don’t go near them.
I think this post from the Chat Forum explains it better than I ever can:
"We, my wife and I, are on a seven-year plan with CCCS" (that's the Consumer Credit Counselling Service, one of my recommended agencies – Martin) "having recently changed from a commercial debt management company after hearing Martin on Radio 2's Jeremy Vine show. The simple action of swapping to the CCCS has shaved over two years off the length of our plan as the money we were paying the management company now goes to our creditors instead! Of course, that also means a financial saving of nearly eight grand over the term of the original plans 10 year period."
This includes IVA companies who advertise about “a little known government loophole”. While it sounds good, it’s only for a few people. If it is for you the debt counselling agencies should suggest it.
Join other Debt Free Wanabees
One important thing to remember about debt is you're not alone. In fact amongst the wider group of MoneySavers, this site has a specific community of people in various level of debt (from bankrupts to limited credit card overspending) all working together and supporting each other to get debt free.
For support and encouragement and to post your S.O.A. (statement of affairs) to let others who are also in debt and have been through many similar issues, pick through your finances, visit the Debt-Free Wanabee Board (though for specific questions about this article itself click this link
It’s completely free and you can be anonymous
While it is necessary to register and pick your user name, only MoneySavingExpert.com itself will have access to your e-mail - and the only reason this is needed is to stop people spamming the site. Be assured though you will never be contacted, sold anything, and your e-mail will never be passed on.
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