First Steps To Get Out Of Debt
Admitting that you are struggling with debt, and seeking help, is one of the important first steps that will help you to resolving your debt problems. There is no need to be embarrassed or feel ashamed to reveal your debts and financial difficulties to your close friends or even your family. You will be amazed at how much they can support, or even help you, through your troubled times. As ignoring your problem will not go away and will only make matters worse than they already are.
There are some positive steps which you can take to improve your current situation, most of which are covered in more detail further on in the article:
- Stay calm and try not to feel guilty or afraid, even when threats are being made. Free advice and guidance is available to guide you out of your dilemma.
- DO NOT I repeat DO NOT be tempted to borrow more money to pay off your existing debts. As this will only create more problems and make the matter more severe. In all circumstances please seek free independent advice widely available in your community or online.
- Ensure you make a list of all your creditors (Everyone you owe money to!).
- Prepare a Financial statement of your financial position, including your income, living expenses and other financial commitments and the balance, if any, to clear your debts.
- Communicate with your existing creditors, ensuring they are fully aware of your current financial position. Most are usually sympathetic once they are informed about your genuine problems.
- Communicate with specialist agencies who will give you advice for free. Never pay a company for this advice, as generally they are only there for profit, and it will either cost you more or take longer to resolve the issues at hand.
- Communicate with your friends and family so you can share your problems and work effectively together to come up with a sound solution.
- Contact your local Citizens Advice Bureau (Also available in your telephone directory).
- Money problems can arise from and lead to family, health or emotional problems and you must ensure that you seek professional help for these issues also.
- Don’t despair! Keep going, clearing debt can be a lengthy process but the end result will be more than worthwhile and will help you regain control of your financial situation.
Now we can look at the more positive steps to be taken to help resolve your debt problems.
Step 1 Contact all your creditors
Creditors can not begin to help you if they are not aware of your difficulties and most importantly your financial situation. You may also need to ask them to confirm details of the amount owed, actual arrears, penalty charges e.t.c. You can download a sample letter with Microsoft Word from here
Step 2 Decide your priorities
Some debts may carry some more severe penalties than others and in return need to be dealt with firstly. Payment priority is not determined from the size of the debt, the period or arrears or even the threats being made. But instead by the actual legal remedy the creditor may have against you for recovery. A priority debt is usually identified as one that where non-payment can result in one of the following:
- Being imprisoned.
- Losing your home.
- Losing essential services or goods.
Below is a list of priority debts and the legal consequences on non-payment.
Type of Debt
Final Sanction For Non-Payment
Loss of Home
|Since April 1999 the supply can no longer be disconnected as this is classed as an essential service, however we recommend that this is treated as a priority debt as it is still unsure how water companies will pursue recovery|
|Council Tax||Taken from wages/benefits, Bailiffs and even imprisonment|
|CSA/ maintenance orders||Taken from wages/benefits, imprisonment|
|Magistrates fines||Bailiffs and or imprisonment|
|Inland Revenue & VAT||Bailiffs, Bankruptcy and or imprisonment|
|Credit/Store Cards||County Court Judgement|
|Personal Loan (unsecured)||County Court Judgement|
|Bank Loan/Overdraft||County Court Judgement|
|Hire Purchase*||Loss of Goods|
|Credit Sale||County Court Judgement|
|Catalogue**||County Court Judgement|
|Pawn Broker||Keep Pledge|
|Loan Shark***||Not Legally enforceable unless Licensed|
|Loans from Family & Friends***||County Court Judgement|
* If the threatened goods are an essential requirement, ie a washing machine or a car needed for work, such a debt must be treated as a priority. However if you have paid less than one-third of the total owed under the hire purchase agreement the creditor can repossess goods without a court order.
** Catalogue debts may be difficult to enforce as it is not always standard practice to complete a credit agreement, and creditors should be asked to produce a copy of this if proceedings are threatened.
*** Individual circumstances may suggest some other debts be treated as priority, although not legally enforceable, e.g money lent from family, friends or loan sharks. Before you make offers of payment to any creditors you will need to prepare a financial statement covered in step three.
Step 3 Prepare a Financial Statement
It is essential that you take the time to prepare a financial statement to determine your actual finance situation. An example excel spreadsheet can be downloaded from here, and can be adapted to suit your current situation. Your statement needs to be a true reflection of all income received from whatever source and to show where your outgoings are currently going to. When filling out the form either use monthly or if you prefer weekly figures, but ensure you do not mix them and mark clearly on the statement which basis you have used.
- To change weekly figures to monthly multiply by 52 then divide by 12
- To change monthly figures to weekly multiply by 12 then divide by 52
Annual payments such as road tax, TV licence, insurance premiums e.t.c should be divided by 12 to give the monthly amount or by 52 for the weekly figures.
Also allow for irregular, and often unexpected expenditure such as car and house maintenance, repairs and or replacements.
It is very important to take absolutely everything into account, but don’t include payments for arrears or secondary creditors at this stage. Because you need to know your total money available to enable you to make offers to them. You should remember to include in your expenditure statement all items deducted before receipt i.e rent, subscriptions or pension payments. Wages should include any additional bonuses, additional pay or allowances received.
Before completing your statement you should review your income to see if there is any way to increase them and consider your expenditure to assess if any savings can be made.
Your completed financial statement may need to be reviewed on a regular basis to ascertain if any changes have occurred in your income or expenditure. Also to incorporate subsequent agreements for payments to be made to your creditors.
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