If you need to start from the beginning please click How to Get Out of Debt part 1
Step 4 Maximise Your Income to Reduce Your Debt Quicker
Be certain that you have included absolutely everything, and then consider if you can obtain any further additional income.
Possibilities may include:
- Job seekers allowance if you are unemployed or are made redundant.
- Income support: this is available for people on low incomes and who meet certain criteria relating to work, sickness, age, savings e.t.c. Check with your local benefits agency (Directgov) whether you are entitled to this.
- Child Tax credits and Working Tax credits-if you are working but on a low-income.
- Incapacity or disability allowance, including mobility or attendance allowance.
- Income tax, check your code. Particularly if your circumstances have changed, as you may be entitled to a rebate. Contact your regional tax office for advice.
- Maintenance are you entitled to this? Contact the Child Support Agency.
- Housing Benefit or Council Tax relief. Your local council can advise on whether or not you qualify.
- Additional part-time work.
If unsure seek advice from Money. Benefits and Tax Sections of the Directgov website at www.direct.gov.uk
Income maximisation is a very important part of the debt resolution process. Creditors want to be reassured that you have considered all of the options available.
Step 5 Review Your Expenditure
It is important to include all household expenditure and financial commitments in your statement, whether regular or irregular. Variable items such as fuel bills should be averaged out over the year and the use of budget plans, stamps or tokens may assist with this.
Creditors may challenge amounts spent on food, clothes, travel e.t.c. So is there any way that you can reduce these to a realistic level in relation to the size and circumstances of your family? The cost of running a car may need to be justified against using public transport. For example, is it essential for travel to work, shopping or school, as other means of transport are not available? Leisure and holiday costs may also be challenged by creditors, along with expenditure on cigarettes, alcohol, lottery, pets e.t.c.
Once again check your expenditure carefully to be sure that everything has been included and all reasonable savings have been made. Try and make your expenses less than your income, otherwise your debts will grow. However do be realistic as you may have to live on this budget for several months or even years depending on your circumstances. It is important that you concentrate on reducing non-essentials rather than basics such as food and heating.
On completion of your income and expenditure review you can now finalise your financial statement before sending it to your creditors as part of your negotiations with them.
(See Steps 6 and 7)
Step 6 Negotiate With Priority Creditors
On completion of your financial statement deduct your total expenditure from your total income to see what money (if any) you are left with to start reducing your debts.
If you are in arrears you will first need to negotiate with your priority creditors (re-read step 2 for definition). This needs to be done as soon as possible to prevent implementation of their sanctions. Even if Legal proceedings have started it is never too late to make an offer and seek a voluntary agreement.
List all your priority debts and send this schedule, along with your financial statement, to each priority creditor. This letter should detail the reasons for your financial difficulties and include a reasonable offer for payment of arrears, provided you have surplus money available. An example letter can be downloaded from here.
When negotiating with your creditors:
- You should never offer all your available income to one creditor. Remember to take your other debt into consideration first.
- Start your negotiations with the debt nearest to its final payment.
- Don’t feel obliged or pressurised to pay more than you can actually afford. As this is important to maintain the payments once agreed.
- Do not divulge account and reference details to anyone other than the creditor concerned.
- Even if creditors don’t agree to your first offer, start paying it as this will begin to reduce your arrears and may persuade them to change their minds. If they see that you are serious about your intentions.
- Ensure you get and retain any receipts for payments made and any verbal agreements must be confirmed in writing.
As payment is agreed with each creditor, you should include this in your financial statement. So that other creditors can see your current situation and you can adjust to living within your new budget.
If you have no surplus income for priority creditors after re-assessing your budget you must still contact them and support your financial position with your financial statement. You should also remember that some creditors have the legal right to make direct deductions from wages or income support via the Department for Work and Pensions (DWP).
For ‘Fuel’ debts, pre-payment meters can be installed and allows the arrears to be collected over a period of time and are a good way of avoiding disconnection.
For mortgages and secured loans the following options should be considered:
- Never abandon your property or hand the keys to your lender.
- Always contact your mortgage lender at the first sign of problems arising and keep them informed of any changes to your circumstances.
- ‘Interest only’ or other reduced payments for a limited period of time.
- If your financial situation starts improving, seek to repay your arrears over a set period of time.
- Consider re-mortgaging on to a different basis, e.g transferring from an endowment on to a repayment mortgage. But be careful to check and compare terms and conditions, initial and longer term interest rates, early redemption penalties, administration charges e.t.c.
- Voluntary sale of your property usually will yield a higher price rather than a forced sale after repossession. But consideration must also be given to alternative accommodation. As the local authority may decide that you have intentionally made yourself homeless. Such a sale may not produce enough equity to clear the outstanding mortgage/loan and you may be legally obliged to repay the outstanding balance. Even if the lender has agreed to the sale.
Homeowners Mortgage Support (HMS)
HMS helps people who are having difficulty meeting their mortgage repayments, but are likely to get their finances back on track in the near future. To be eligible for HMS support you must have had a temporary drop in income and be unable to meet your minimum monthly mortgage repayments.
If your accepted for HMS your lender will delay some of the monthly interest due on your mortgage. This will reduce your payments for up to two years. The money isn’t written off you will have to pay it back eventually. This is also known as deferring your repayments.
Mortgage Rescue Scheme
The Mortgage Rescue Scheme is a Government scheme which is run by your local council authority. The organisation which runs and manages housing for your council. If you are eligible you could receive financial help to stay in your home. You make your application for help from the scheme from your local council. To be eligible for the scheme someone within your household needs to be of ‘Priority Need’. When you apply for the scheme, your local housing authority will talk you through some other criteria you will need to meet.
Where to go for further information
Further information on the Mortgage Rescue Scheme and the Homeowners Mortgage Support scheme as well as some other really helpful advice to do with rent arrears, repossession and evictions can be found in the Home and Community section on the Directgov website – www.direct.gov.uk
Shelter also provide help and advice for those facing repossession and evictions and can be found at http://england.shelter.org/ger_advice/
They can also be contacted on (free phone) 0808 800 4444 8am to 8pm Mon-Fri and from 8am to 5pm Sat-Sun.
The Citizens Advice service also helps people resolve their legal, money and other problems by providing free, independent and confidential advice. To find out more information and to find your nearest branch visit www.citizensadvice.org.uk
Ready to move onto the next part of this series then click here for Part 3.