Dealing with debt

You're in debt. You can't pay your bills. Gas, electricity, telephone: the list seems endless. You've missed the payments on the house, car, washing machine, furniture, TV, catalogue and credit card. Everything is in an utter mess.

There's no easy way out, you know that already. But you must do something or your debts will get worse. The sooner you face the problem, the easier it will be to solve it.

Act NOW

Tell your creditors (the people you owe money to) as soon as you have problems. Don't ignore letters or demands. If you can, warn creditors if a change in your circumstances will affect your ability to keep to your credit agreement. The earlier they know about any problem, the more sympathetic creditors are likely to be.

Creditors may add the costs of phone calls and written reminders to the interest you are already paying. Sort things out quickly to stop costs piling' up. Follow the action plan. It will help you to see where you stand and give you the information you need to talk to your creditors.

ACTION PLAN

Step 1: How much do you owe?

List all arrears (missed) payments, loans and credit commitments and when they fall due. Some debts can cause more trouble than others. These are priority debts. You must deal with these first.

Priorities

• Rent/mortgage arrears (you could lose your home). Do not simply hand in the keys to the lender and walk away, you will still be liable for the debt.
• Council tax arrears (you could land up in court).
• Fuel debts (you could be cut off).
• Water rates/community water charge (you could be cut off).
• Second mortgage or secured loan (you could lose your home).
• Hire purchase debts (if you've paid less than one third, your goods could be repossessed (without a court order).
• Maintenance payments (via Child Support Agency).
• Court fines (there can be penalties if you do not pay these)

Don't be too alarmed. Generally, these penalties occur only after warnings or court action. But keep your creditors informed.

Step 2: Maximise your income

Find out how much money you have coming in. Work this out on a weekly or monthly basis. Include your take-home pay, any social security benefits and money from other sources.

Are you receiving all the income you're entitled to? Are you paying too much tax? Check your tax code by contacting your local tax office. Check with your local Benefits Agency office or Citizens Advice Bureau whether there are any social security benefits you could claim. If you already receive benefits, check that you are getting your correct entitlement. Are you due a council tax rebate or Housing Benefit? Can you claim credit protection insurance on any of your loans?

Step 3: What do you spend?

Work out your essentials like rent or mortgage, fuel and food, again on a weekly or monthly basis. Don't forget occasional payments like shoe repairs or haircuts. Include items such as video rentals or cigarettes. Also note your present instalment payments on any hire purchase or credit arrangements. Make a budget and stick to it.

Step 4: Still more going out than in?

Nothing left over. If you spend more than your income, can you make savings anywhere. Divide up your essential outgoings from other extra expenses like clothes and repairs. Try to cut down on things like alcohol, cigarettes and eating out. You'll have to make sacrifices. Can you get an extra part-time job for a while? Is there anything you can sell to bring in extra money to pay your debts? Do not sell anything on which you still owe money. You could contact the creditor with a view to returning any items being bought on hire purchase.

Step 5: Talk to your creditors

• Send your creditors a financial statement showing your income and outgoings. Explain your offer to pay off your debt and any steps you are taking to either increase your income or reduce your spending. The aim is to show how much you need to live on and that your offer is fair.
• Don't make an offer you can't afford. A small but regular payment is better than no payment at all, or one that you can't keep up.
• Deal with priority debts first. Concentrate on keeping a roof over your head. You can then decide how much you can give any other creditors you have.
• If your situation is pretty hopeless some companies might stop charging interest payments on loans/credit cards but you must ask them for this. Your payments then go to paying off the original amount borrowed, not the interest.
• If the first person you speak to in the creditor's office is unhelpful, be persistent and go higher up. Make payments to the creditor anyway, even if they say the offer is too low. The company may be a member of a trade association. Look on any headed notepaper received from the company. You can complain to the association if you have not been treated sympathetically. Don't give up.
• Keep copies of all letters you send each company and their replies. Make notes of any phone calls with the dates and the name of the person to whom you spoke.
• You must try to stick to any agreement made about reduced payments. If you have made any arrangements by phone, it is important that you follow this up with a letter stating clearly what has been agreed.

Borrowing again to get out of debt?

You may be tempted by newspaper ads or mailshots offering loans to pay off existing debts (sometimes called consolidation loans). Some of these loan companies offer advice on debt problems. But you have to pay for the advice and they encourage you to take out another loan as the solution to your problems. These loans can be very expensive and you might end up worse off than before. In most cases, the lender will require you to put up your house as security. Fail to pay and you'll lose the roof over your head. Get independent advice first. Being offered further credit is no guarantee that you can afford the repayments. Think very carefully before taking on further loans.

Harassment from creditors

Creditors are entitled to keep reminding you from time to time if you do not pay, as long as they don't resort to improper methods. It is illegal for a lender, or a lender's agent, to keep demanding payment, for example, by phoning you late at night, or too frequently at home or work. Neither should they park a van marked debt collectors' outside your home, nor contact your employer. You can't be prosecuted in the criminal court because you haven't paid your debts. Some lenders, however, might try to make you think you can. If you are being harassed tell your local trading standards department or the police.

Extortionate credit (e.g. loan 'sharks')

If you think your credit charges are sky-high you can take the matter to court. If the court agrees you're being overcharged, the judge can cut your payments or order the lender to repay unreasonable interest charges. But your view of what is extortionate' may not be the same as the court's! For example, if there are high risks involved for the lender, the court may well feel that the charges are reasonable. The fact that interest is higher than average does not necessarily mean it is extortionate. Before taking action, consult your local trading standards department or seek independent legal advice.

Getting advice

If you can't tackle your debt problems yourself, you can get free advice from a Money Advice Centre or Citizens Advice Bureau. If you can't find an advice agency, your local trading standards department may be able to put you in touch with one.

You may be able to get advice from a legal aid solicitor. It won't cost you anything to find out. Look in the phone book for names of solicitors who handle legal aid cases.

If they want to take you to court

Hopefully, by talking to your creditors and following the steps mention above, you will avoid being taken to court. Most creditors don't want to take court action. It's used as a last resort. Don't ignore the court papers. Fill in the forms which you receive with the summons as soon as possible. Send them back to the court or the creditor, as instructed.

You'll be treated fairly. You can only be sent to prison for non-payment of certain debts, such as tax and maintenance payments, and then only if you have the means to pay but choose not to.

Always seek help after receiving a summons.

Citizens Advice Bureaux, law centres, Money Advice Centres and welfare rights services can help you fill in the forms and explain the steps involved. You might be able to obtain legal aid and be legally represented in court. In the small claims court you can have a lay representative (someone to speak for you who isn't a solicitor or lawyer). Some Citizens Advice Bureaux offer this service.