Dealing with Debt - a practical guide (Financial advice - birth to death)

Member Name: xalala

Product:	Financial advice - birth to death
Date:	18/03/04 (221 review reads)
Rating:

Advantages: You learn about yourself dealing with it, Getting sorted out gives you a sense of pride

Disadvantages: It makes you angry at the institutions who claim to be caring but aren't, It can be a painful and depressing process

?He solemnly conjured me, I remember, to take warning by his fate; and to observe that if a man had twenty pounds a year for his income, and spent nineteen pounds nineteen shillings and sixpence, he would be happy, but that if he spent twenty pounds one he would be miserable.?
- Mr Micawber advises David. Charles Dickins, David Copperfield

Never a truer word was spoken. Poor Mr Micawber never really got the hang of living below, or within, his means. But we can, in fact we must.

Britain is in a staggering amount of debt. The latest statistics calculate that we owe more than £10 billion between us. That?s an average of £3,383 per person, not including mortgages. The Citizen?s Advice Bureau reports that it has witnessed a 47% increase in the number of people with debt problems, and says its average client has debts of around 14 times their monthly income.

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My story
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I got into debt as a student, like many people. I graduated owing the Student Loans Company four full loan amounts (the old sort), plus owing my bank the maximum overdraft (OK, plus a bit more), and my parents more than I really care to think about.

I worked on clearing the debt, got a job and started paying my parents back. Then I bought a flat, my parents lent me some of the deposit and the student loan company suddenly expected to be repaid. That was a very expensive month!

Fortunately I managed to carry on, through extensive use of credit cards and cleaning out all (two of) my accounts, current and savings. Eventually, I paid off most of my debt ? the student loan is still being paid, and I can?t contemplate eating beans on toast?

Anyway, while I was paying off my debts I came across a lot of people in a much worse situation than me, and a
lot of advice both good and bad. There were people who took an overdose because it all seemed too much, and people who threatened to. It's not worth that.
>
Below is what I consider the good advice.

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The Lightbulb Moment
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This is the moment of realisation that you are headed for a serious problem in the future, unless you spend some time making sustainable, well thought out changes now.

Effectively, by getting into debt you are borrowing money from your future self. After all, you?ll have to pay the money back sooner or later, usually with interest.

Some people, and fortunately I was one, have their lightbulb moment before debt becomes a serious problem. Some find it takes a lot longer, like a friend of mine who currently owes around 3 ½ times his gross annual salary.

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The Statement of Affairs
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OK, so you?ve decided to tackle your debt head on. The first thing to do is complete a statement of affairs (SOA).

A statement of affairs is basically a piece of paper where you set out your income (salary, partner?s salary, benefits), essential outgoings (mortgage or rent, council tax, utilities etc) and your debts (loans, credit cards, overdraft and so on).

To fill out a SOA can be hard work, but don?t be daunted. You need to collect information about each of your regular bills and your debts, but the main information you need is the amount you pay/owe, the amount you have to pay each month and the interest rate (APR) on your debts.

Once you have completed your SOA you will find one of several things. Either:

A: Your monthly income exceeds your outgoings plus your debt repayments.
Hurrah! Keep paying off the debt, introduce yoursel
f to the concept of snowballing (see below), make sure you don?t get into any more debt and sooner or later you will be debt free.

B: Your monthly income is slightly less than your outgoings plus debt repayments.
Each month you are getting further into debt. If you don?t stop the slide, sooner or later
you?ll be in real trouble. Nonetheless, there are options. First on the list should be taking a close look at what you?re spending your money on and looking to reduce it.

C: Your monthly income is much less than your outgoings plus debt repayments.
This situation can be more difficult to deal with, usually because by this stage you?re robbing Peter to pay Paul, feeling overwhelmed by it all and fast appearing to run out of options. Still, all is not lost ? as a good man once said, you only owe them money, not your life.

Remember that some of your outgoings have a higher priority than others ? you should pay your mortgage or rent and your council tax bill before any debts, as if you stop paying these, you may lose your house or be put in jail. Council tax is the only bill that you can still be jailed for not paying.

There are a number of steps to take once you know exactly what the situation is. So, without further ado?

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Spending Diary
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I would strongly recommend keeping a spending diary for at least a couple of weeks, and preferably for a month or more. Write down everything you spend, down to the 50p on a can of coke, the newspaper on the way to work, the bits and pieces from the supermarket on the way home. Tally up the amount at the end of each day.

Once you have kept your diary for a while, go back and review it. Try breaking it down into categories ? eg food/drinks at work, entertainment (pub drinks, cinema tickets etc), transport (bus or train fare, petrol) and work
out how much you are spending per month on these areas. Work out ways that you can reduce the amount.

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Reducing outgoings/Increasing income
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There are all sorts of things to do, but depending on your circumstances, not all will be available.

Mortgage/rent: Make sure you?re on the cheapest mortgage deal possible. Why
pay SVR when you don?t have to? Negotiate with your landlord to reduce your rent payments ? the rental market is meant to be softening, there are other options out there.

Shop around for your home and car insurance, make sure you?re getting the best deal. Do the same for your utilities ? most people are still with British Gas and their local electricity supplier, but there are much better deals and it?s easy to do.

Transfer your credit card (and ?overdraft?) balance to a 0% credit card for 6 or 9 months. It?s amazing how much extra you can pay off the total when you don?t have to pay any interest. Some card providers (Egg is one) allow you to transfer balances to current accounts as well as other credit cards.

Look at your cable TV/Sky subscription, and either reduce it or cancel it completely. How many of those channels do you really watch?

Swap your mobile so it?s on a PAYG tariff. Don?t pay the monthly contract charges. Stop using your mobile to make calls unless you get free minutes as part of your deal. In which case ? use your mobile rather than your land line!

Do you buy a paper or a coffee on the way to work? Look at alternatives ? read the paper online, pick up Metro instead (it?s free) or, top tip, ask the PR department nicely if you can borrow their papers over lunch. Make a flask of coffee at home to take into work.

Make packed lunches to take i
nto work instead of grabbing a sandwich from M&S or eating in the canteen.

If you drink a can of diet coke at your desk every day like I do, buy it in bulk from the supermarket every week or two and take it in with you.

Do a car boot sale to raise extra cash ? we even sold 3 half-full tins of paint at ours for £1 a go.

Sell things on eBay or Amazon marketplace ? books and CDs go better here than at a car boot sale, usually.

Get paid for writing your opinions on Dooyoo and/or Ciao!

Increasing your inco
me once you?ve cut out the unnecessary spending gets more difficult. Perhaps the simplest way of increasing your income is just to ask for a pay rise ? make sure that you have some evidence to back up your request though.

Volunteer to do as much overtime as you possibly can, and put the extra money towards your debts. Make sure you claim your expenses on time ? the money is better in your pocket than your companies.

Make sure that you are claiming all the benefits that you are entitled to ? especially since the changes earlier this year. If you are the only adult in the household, check you?re getting a 25% reduction in your council tax. Check that this applies if you are living with a student, too (I think it does).

You could consider getting a part time job. This could be anything from shelf-stacking at your local supermarket to babysitting in the evenings. Getting bar work can be quite good, as it means that you won?t be spending your money down the pub but you will still be in the same atmosphere.

If you have a particular skill or hobby, look at turning that into a source of income. It could be dressmaking, design skills, DIY, washing cars, computer skills or gardening ? anything that people are willing to pay for help with.

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Negotiating with yo
ur creditors
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If after all the above you?re still having problems, it?s time to start negotiating with your creditors. It?s up to you whether you choose to do this yourself, or whether you approach a company to do it on your behalf.

If you choose to approach a company, choose payplan or CCCS! Both are charities, funded by the financial services industry. Don?t go to a company like Baines and Ernst, as they charge you a fee to represent you and deal with your creditors.

Basically, you can negotiate with your creditors to freeze the interest on your debt and/or reduce your level of payments. You
will need to prove to them that you are paying as much as you can reasonably afford. However, what one creditor considers reasonable may not be accepted by another, they are all different and some are particularly difficult to deal with.

You should make sure that you have a written record of all conversations, including time, name and summary of what was discussed. If possible, keep communications in writing, in order to leave a paper trail. This is because, if your creditor decides to take you to court for a CCJ, you will be able to prove that you have been reasonable in offering to make payments to them.

Occasionally, a creditor may refuse to negotiate with you. This is, essentially, just bullying tactics. After all, if you can?t afford to pay, you can?t afford to pay. What many people will do in these circumstances is cut down their spending on essentials like food and heat, and give the money to their creditors instead. DON?T DO THIS!

Organisations that can help, as I said, include the Consumer Credit Counselling Service, or CCCS. They can be contacted on 0800 138 1111 or www.cccs.co.uk. Also, Payplan is av
ailable on 0800 085 4298 or www.payplan.co.uk. Both provide a free, confidential debt management service funded by the financial services industry.

To work out how much to offer each creditor, work out what percentage of your total debt you owe them. For example, you owe Messrs Leech and Co £1250. Overall, you owe £7572.63. You have £200 a month to use repaying debt. So, do the following:
200 x 1250
7572.63
Using the above example, you should be paying Mr Leech no more than £33.01 of your £200. Of course, if it?s a credit card and the minimum payment is only £11.69, then you may want to only send them that much and use the rest of the £33.01 to pay off another debt quicker ? check out where your money would be most effective in the snowballing section below.

Because you?re paying less than
the full monthly payment, your debt may get passed onto a debt collection agency. They can actually be more reasonable than the original creditor. There?s a lot of fear and mystique about what a debt collector can do, exactly, so here?s a down and dirty guide:

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What debt collectors can do to me
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Without a court order, not a lot really!

Threats are often made about ?sending someone round? to get your money, and mostly these are a complete loads of cobblers. Debt collection agencies may have a license to visit sites, but even then they have no right of entry into your house. If you choose not to let them in, they can?t do much about it. So if they do come round and you open the door to them, don?t let them in for any reason ? not even if they claim to be desperate for the loo, or needing to make an urgent phone call. Once they have been invited into your home, they then retain the right to come back when you?re not there and, if they can get in without forcing entry ? for examp
le through an open window or unlocked door ? then they are free to do so. If you want to, you can simply refuse to discuss the matter with them.

Even once a creditor has obtained a judgement against you, they then have to execute that judgement. There are a variety of methods, including a warrant of execution, attachment of earnings, application for oral examination (where you are examined on oath in court, to check what your assets are), and an application for bankruptcy.

If your creditor sends you a summons, don?t worry. Complete the forms sent with it and make a realistic offer of payment (the same as you?ve been making so far as above). Don?t forget to send it back, and take a copy of the forms before you send it off. Once you get to court, the creditor will be asked if they accept your offer. If they will, then that?s what is agreed. If they won?t, then there will be a hearing.
<
br>At the hearing, both you and the creditor attend and the judge looks at your SOA (which is one of the forms you have to complete with the summons), considers your proposal and orders you to pay a set amount. If you?ve been reasonable with your offer, the judge will usually order that amount. Judges have often been known to order payment at an amount lower than the debtor?s original offer.

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Consolidation Loans
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Rather than worry about paying lots of separate creditors, you might consider taking out a consolidation loan, or remortgaging to pay off your debts.

STOP!

Before doing that, do you know how you got into debt? Are you positive that it won?t happen again? A poll over on the Motley Fool (www.fool.co.uk) revealed that 86% of people who had taken out a consolidation loan proceeded to get even further into debt.

What you are actually doing is spreading your debt ov
er a longer period of time, making the overall interest that you?ll end up paying much, much higher.

Many consolidation loans are also secured loads. If you default on one of those, you could end up losing your house. They also tend to have quite uncompetitive interest rates. I would strongly recommend thinking again.

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Snowballing
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Once you have enough cash to meet your monthly outgoings and debt repayments plus a little to spare, it?s time to look at the concept of snowballing.

The idea behind snowballing is to single out one debt and throw any extra money at that debt until it?s paid off. Once you?ve paid off the first, the monthly payment for that debt plus any extra cash you have available gets put towards the second debt on your list, and so on.

There are a few ways of ranking your debts. The most efficient way of doing it is to put the debt with the highest APR first, as in percentage terms more of your cash is going on meeting interest
payments than paying back what you owe. However, if the debt with the highest interest rate is also one of the biggest, so would take the longest to pay off, consider putting a smaller debt above it on your list. This has the advantage of being paid off sooner, so keeping you motivated.

If you want to play around and see how long it will take you to pay off your debts, check out the snowball calculator at www.geocities.com/schizeckinosy/Snowball.html. It?s american, but just turn the $ into £ in your head (unless you?re american, of course).

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Summary
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1. Don?t panic ? you only owe them money, not your life
2. Complete your statement of affairs
3. Contact your creditors ? ideally before they contact you
4. Take control ? it will truly, honestly make you feel better

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More in
formation
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You can apply for your credit files from the two organisations below, at £2 a time. It?s worth getting both, as each company records slightly different information about you and your finances.
Experian: www.experian.co.uk
Equifax: www.equifax.co.uk

National Debt Line: 0808 808 400 or www.nationaldebtline.co.uk
A free advice line about dealing with debt. There?s a lot of information on their website with links to other organisations that can help.

The Motley Fool: www.fool.co.uk.
Especially recommended are the Dealing with Debt, Living Below Your Means and Comfort Café discussion boards, and the Get Out of Debt centre. Registration required (it?s free).

The Samaritans: 08457 90 90 90 or www.samaritans.org

Citizen?s Advice Bureau: www.citizensadvice.org.uk, or www.adviceguide.org.uk for their information sheets on what to do about debt (and a whole host of other things).

Please, if you're in debt and don't know what to do about it, talk to someone. Feel free to contact me, I'll do my best t
o help. Write anonymously on the Fool boards, speak to CCCS, call the national debt helpline.

YOU DON'T OWE ANYONE YOUR LIFE

Summary: