Debt Counselling

The problem with any debt is not so much the amount that is borrowed, but whether you have a manageable plan of repayment. One of the biggest dangers whatever your age is letting credit-card spending run away with you. It is all too easy to spend, spend, spend, while paying off just the minimum each month, which can easily result in a card debt of thousands and no way to pay it off.

You may have a debt problem if any of these apply:
• You are running up an overdraft or credit-card debt just to pay for essential spending on, for example, food or rent
• You pay off just the minimum on credit- or store-card bills each month and would find it hard to pay off any extra
• You are taking out new loans or credit in order to pay off existing debts
• You have given up opening your post because you can’t face more bills
• You are already behind with one or more loan or credit repayment
• You are behind with your rent or fuel bills or, if you have one, your mortgage.

Don’t ignore growing debts – tackle them sooner than later.

What happens if you run up debts?
If you miss the odd credit or store-card repayment, not much will happen. There will usually be a penalty charge and, of course, your debt won’t have got any smaller. But if you persistently miss credit-card repayments, you will soon run into more serious problems and run the risk of being blacklisted for credit. The same is true of missed loan repayments and unpaid bills for fuel and rent. The precise consequences depend on the type of debt concerned.
Some debts are ‘priority debts’. This means that the person to whom you owe money (the ‘creditor’) has the legal right to take serious steps to recover his or her money.
Other types of debts are usually non-priority debts, because all the lender can do is take you to court. The court will assess what you need to live on and usually order that any surplus id divided between your creditors to pay off gradually all that you owe. This arrangement is called a ‘county court judgement’ or CCJ.
If your debts are very severe, you may be declared bankrupt. In that case, things you own are sold and, for a time – usually one year (three years before 1 April 2004) – trustees control your money to ensure that your creditors get back as much as possible of the money they are owed. However, you will be allowed to keep possessions that are considered necessities, such as clothes and basic household equipment.
Having a CCJ or being declared bankrupt will affect your creditworthiness, and make it harder in future for you to get normal credit – for example, a credit card, mortgage or other loan, or quarterly bill arrangement for the phone or fuel (since this involves credit because you use the service in advance of paying). Some lenders will still lend to you if you have a bad credit record, but you have to pay a much higher interest rate and often a hefty arrangement fee, which may just exacerbate your debt problems.

What to do if you have a debt problem
The most important step is to admit that you have a problem. The longer you deny the problem, the worse it will become and the more difficult it will be to sort out.
Once you’ve recognised the problem, here are the steps you should take:

Don’t borrow any more – for example, cut up your credit cards and store cards, and if you have a full current account, switch instead to a basic bank account that does not let you run up an overdraft.

Work out your budget (in other words, what you have coming in each week or month and what you spend). Cut out all unnecessary spending. Can you increase your income, for example by working more hours or claiming state benefits? Work out how much you can afford each week or month to pay off your debts.

Prioritise your debts. You’ll need to concentrate on paying off priority debts first. Anything left over can be put towards clearing the non-priority debts. Allocate money to non-priority debts according to the amount you owe. For example, if you have one debt of £1,000 and another of £2,000, put one-third of the money towards paying off the first debt and two-thirds towards paying off the second.

Contact your creditors straightaway. To each one, explain the problem and how you intend to pay off your debt. With non-priority creditors, offer to pay off the debt bit by bit, even if it’s only £1 a week. Most creditors know this is exactly what a court would order, so they have little to gain by taking you to court. Deal with your creditors in writing. That way, you’re less likely to be pressurised into agreeing to higher payments than you can afford. You’ll also have a record of what has been agreed. If you do deal by phone or face to face, take notes of what has been said and agreed.

If you owe money to the bank that operates your main account, you will probably need to open a new account. If not, the bank will automatically set money coming into your account against what you owe the bank, leaving you unable to implement your plans to repay other creditors. In the past, it was nigh impossible to open a new bank account if you already had a debt problem. However, these days, the major banks all offer basic bank accounts, most of which are available even of your credit standing is not good.

Don’t struggle alone. There are lots of organisations that can help you to sort out debt problems.

Drawing up a budget
Be realistic about the money you will need to cover essential spending such as food and clothing; otherwise, you risk calculating debt repayments that you can’t maintain.

Who to contact if you have a debt problem
The following organisations offer free help and advice with debt problems, or can put you in touch with other bodies that do. If you are a student, your student union will usually be able to put you in touch with a money adviser. Help may include, for example, working out a budget, negotiating with creditors, and assisting with state benefit claims.

• Citizens Advice Bureau
• National Debtline
• Community Legal Service
• Consumer Credit Counselling Service (CCCS)
website: www.cccs.co.uk

Who not to contact
You’d think that commercial businesses would not be interested in you when you have no money. Think again! There are all sorts of companies out there which have devised ways to profit from your debts.
Debt-management companies do not make loans, but offer to act as a bridge between you and your creditors. You pay a single monthly sum to the debt-management company, which then passes on part to each creditor, having negotiated with the creditor on your behalf. Sounds good, but unfortunately these companies have developed a reputation for bad service and high charges. Often, they fail to negotiate with all your creditors, ignoring the all-important priority debts. Typically, the whole of your first month’s payment will be taken in fees and also, say, 15 per cent of each subsequent payment. To crown it all, you do not need the help of these companies because you can get debt advice and help completely free from the organisations listed above.
Once you have had debt problems, you are likely to have a poor credit record, with the result that you will be turned down for credit or be charged extra. Credit-repair agencies offer – for a fee – to clean up your credit record. Again, you do not need these companies. Anything legal that they can do for you, you can easily do for yourself. You can get a copy of your record from a credit-reference agency for a small fee; the information you get back will tell you what to do to correct any error on your file. There is no legal way to erase correct information from your file.

You need to know exactly where you stand

Financial difficulties cannot be resolved by guesswork. So before you make contact with your creditors you will need to prepare two lists.

1. A Budget summarising your income and living expenses

2. A list of creditors and amounts owed

Both lists must be as accurate as possible. You will also need to keep updating them as circumstances change, including details of the payments you agree with individual creditors.

Full details about how to prepare your Budget Summary and List of Creditors can be found in this guide. But first you need to appreciate the difference between priority and non-priority debts.

SOME DEBTS NEED TO BE GIVEN PRIORITY

Some debts carry more severe penalties than others which mean that they must be dealt with first. Priority is NOT determined by the size of the debt or by the period or the amount of the arrears. It is determined by the ACTION that creditors can take to recover the amount owed.

A priority debt is one where you risk:

• Loss of your home

• Loss of goods and services

• Imprisonment

Here’s a list of priority debts and the legal consequences of non-payment:

Bailiffs can seize possessions to the value of the amount you owe plus costs
Imprisonment only applies if you wilfully refuse to pay.

OTHER DEBTS NEED INDIVIDUAL CONSIDERATION

It is not possible to treat all debts as priority. However, the list above is only a guide. Other debts may need to be treated as priority, depending on the circumstances – as these two examples show:

Example 1

Hire Purchase (HP) used to buy a car needed for work

Normally HP is treated as non-priority. However, you should treat it as a priority debt if it si for an essential item. In the case of a car needed for work, it would not be possible to earn money without the car so the debt should be treated as a priority.

NB: HP creditors can repossess the goods without obtaining a court order if less than a third of the total has been paid.

Example 2

Money Borrowed from an unlicensed lender (loan shark)

Debts are not legally enforceable if the lender is unlicensed. However, local circumstances may make you want to treat a Loan Shark debt as one of your priorities.

• Always complete and return court documents within the specified time

• Make an affordable offer to the court if you agree that you owe the debt

• Always attend if there is a court hearing