Don't Ignore Your Debt

02-Sep-2009

In today's society, debt is a part of everyday life.  House prices are at such a level that most people would not be able to buy a house without the aid of a mortgage, and bank overdrafts become a habit for many from their teenage years onwards.  However, there is a massive difference between necessary debt (mortgage, student loans) and destructive debt that ties you into paying back the same loan or credit card for years after you first needed the money.

Credit Action, a money education charity, recently found that £181m is paid in interest in the UK each day, and that a property is repossessed every 11.5 minutes.  These are worrying figures, indicating a level of personal debt that is becoming increasingly unmanageable.  A common reaction to excessive debt is to pretend that everything is fine.  However, ignoring the problem will only make it worse. A greater awareness of your financial situation can mean cutting your interest payments in half and avoiding serious repercussions like losing your house.

Face up to the debt

It's easy to get into the habit of spending beyond your means, especially if you spend a lot of time with friends or family members who earn more than you do.  However, credit is not bottomless and your creditors will soon lose patience if you continually borrow more than you are able to pay back.  It seems obvious, but you have to start by admitting that your debt has become a problem.

Write a list of the people or companies that you owe money to, and work out how much interest you pay to each company per month.  The debts with the highest interest rates are the ones that will get you into the most trouble, so these need to be your focus.  Also, unwilling as you may be to admit to others that you have debt issues, your lifestyle needs to change immediately.  That means no more expensive nights out, new clothes and grocery shopping in Harrods, at least until you're earning enough to afford it.

Don't ignore your post

If you 'forget' to open the bills that come through the letterbox, your creditors are not going to go away.  In fact, the pressure on your to make your repayments will only increase, and you will soon be bombarded with telephone calls from debt collection agencies.   Some can be pretty aggressive in their communications, so try and sort something out before it gets to this stage.

Look over your bank statements and work out where cutbacks can be made.  Be ruthless and cut any 'luxury' spending such as magazine subscriptions and Sky TV.  When you know how much money you have available to start paying off your debts, call everyone on your creditors list.  Starting with the ones to whom you owe the highest-interest debts and the ones where you have missed the largest number of payments. Explain that you have been having some financial trouble, but that you want to sort out the situation.   They should respect the fact that you are being proactive, and either agree to freeze your interest or enable you to make manageable payments towards your outstanding debt.  If they are unhelpful at first, do keep trying.  It might take a couple of phone calls to get through to someone sympathetic. 

If communication has broken down completely, you may need to resort to a debt management plan or an Individual Voluntary Agreement (IVA), where a debt specialist liaises between you and your creditors to put together a repayment plan.  Do be aware though that both a debt management plan does cost money, so if you are considering this route make sure you also contact a free service such as the Citizens Advice Bureau to find out what services are available to you.  Also, the consumer credit counselling service is free to call on 0800 1381111.  For Scottish debt solutions, please follow the link.

Keep a record of everything

If you have a large number of creditors, chances are that you will be speaking to a lot of different people.  Make sure that you always get a reference number for each call and if possible the name of the person that you have spoken to.  When you get letters and phone calls, keep the letters in a file and make a note of the dates, times and content of the phone calls.  The reason for doing this is to protect yourself if you should have to go to court. 

One way for companies to reclaim money that they are owed is to apply for a county court judgment (CCJ) against you.  This means that you will be summoned to your local court and, if you lose the case a judge will order you to pay back the money.  This type of judgment is recorded on your credit report for six years, so if it gets to this stage you may have trouble borrowing money in the future ? so do your best to sort out the situation before this happens.

If it seems too good to be true?

Although debt consolidation loans can be a temporary solution to high-interest debt, you should be extremely careful about choosing this option.  After all, you are effectively swapping one debt for another.  If you do decide to go down this route, you need to commit to making every payment in full and on time.  There is one situation where you should consider this option; when you have credit card debt or another type of high interest short-term loan and you are stuck in the 'minimum payment' vicious circle.  

Credit cards in particular are happy to let you make a minimum payment each month (usually £5) because you are then paying off the interest and therefore stay in debt much longer.   The longer that you don't pay off any of your balance for, the harder it is to do because the interest mounts up.  Therefore, if you are unable to ask family or friends for help and simply do not have the funds to pay off the cards, a longer term loan with a lower interest rate will give you some breathing space, and preserve your credit rating.