When Debt Turns To Despair - 11/09/2008

When Debt Turns To Despair - 11/09/2008As the credit crunch deepens in the UK, here is a really good, sympathetically written article on dealing with serious debt.

Sell your home & rent it back?

An interesting article at The Fool here A dangerous way to get out of debt, with some interesting responses from various people, including some of those in the 'industry'.

A serious point is raised by Anthony Lyons of the firm UK Repossession Angels which is that for some people it is the last resort and that there is a place in the market for ethically run firms that provide this service.

Another issue he doesn't raise is what happens when the housing market does start to decline and these firms end up paying more for peoples' houses than they are worth. The firms have a built in margin of 15% or more, but what happens if the house values fall below this? Do the firms sell up quick, evicting their tenants as they go? Or do they hang on and hope to earn their income from continued rents?

In conclusion I tend to agree that there are major pitfalls with this way of getting out of debt and its only a very last resort other than just letting your bank or building society repossess your home.

Credit cards - can help you reduce your debt

Now a lot of people get into debt through over use of credit or store cards. I know, it's happened to me. It's all too easy to spend more than you earn and think "oh yes I'll just pay it off next month."

So, some people can only cope with this by cutting up their cards and only dealing in cash. Fair enough, if that's what works for you, that's what works.

However, what you mustn't do, is to keep paying the full, maximum, credit card interest rate. Either go to your bank & get a loan to pay off the cards or, better still, apply for a low or zero interest deal. Yes, you'll have to pay a transfer fee, but it will be a one-off percentage around 2.5%, rather than paying that monthly. For more detail on the best credit card deals see Martin's Money Saving Expert website.

Oh and if you do get a card that has a 0% rate on balance transfers don't use the card to buy stuff if the purchase rate is not 0% as you will be paying interest on the purchases from now until you pay the balance off. Put the card away in a safe place to make sure you don't use it.

A friend in (times of) need is a friend indeed.

One of the most helpful things for someone struggling against debts is a friend you can talk to and get advice from. Just someone who can monitor your progress, give you a bit of support, and confirm with you that you are doing the right thing.

It doesn't need to be a very close friend or partner, but it does need to be someone you can put your confidence in and a bit of trust.

It might be difficult admitting to someone that you are struggling, but remember that to err is human. Everyone makes mistakes. Once you have found a friend who is prepared to give you a bit of support, you will find it easier to deal with your debt and you will also find it harder to run up more debts as you will know that your friend will find out eventually. You never know, one day you might be able to return the favour.

If you really can't think of someone to talk to, try your local Citizens Advice Bureau. You may need to make an appointment, but they do have trained advisors who can help you. And they won't be taking any money off you - the advice is free.

IVA - the easy way out?

If you have significant debt, you may be considering an IVA, and these have had some publicity in the media as an 'easy way out' with stories of young yuppies running up huge credit card bills and then getting them wiped off and starting out again.

It doesn't work that way unfortunately, an IVA (stands for Individual Voluntary Arrangement) is a form of bankruptcy and should only be entered into in the same manner (i.e. very seriously). Use all other means to reduce or repay your debts first before considering this method. For a free and trustworthy guide to IVAs see The Money Saving Expert's Guide to IVAs.

Remember, if you have smaller debts, you can make your own agreements directly with your creditors. You can even ask for the interest to be frozen or the rate to be reduced to help you pay off the debt. Negotiate with them, they will always prefer that you are communicating with them and attempting to pay something rather than nothing.

Consolidate your debts - think twice

You may have seen those ads on TV where people make a quick phone call and all of a sudden everything is all smiles. It's so simple, so quick, and the ideal solution?

Just bear in mind that those companies make a lot of money out of their customers. They charge very high rates of interest over very long periods of time. You are not infact getting out of debt, but getting further in debt. These companies are often the toughest when it comes to re-negotiating payment and they are very experienced in collecting unpaid payments. Whilst not quite loan sharks, they are not far removed.

If you do feel that combining multiple debts into one is going to simplify things for you - please talk to your own bank or building society first - again, go to them with your budget information and negotiate a better deal for yourself. Make sure you know the interest rate (APR) of each loan or credit card you have and don't take out another loan with a higher rate - there's no point!

How to budget - do your own Gordon

A 'budget' sounds like it might be complicated. Half a penny on income tax - five percent more on petrol - inheritance tax - stamp duty - eeeeeeeeeeeek! SCARY!

Well your own personal budget shouldn't be scary. All it is is a list of money coming in (should be easy for most people with just the one job or benefit payment)! and then a list of everything you have to pay out. Be honest and realistic with yourself. List things like rent or mortgage payments, gas, electric and water bills. Regular payments such as car loans and insurance premiums. Include a realistic amount for things like weekly shopping, any social activities you have etc. Try and list everything accurately - use old bills & bank statements etc. to help you.

Now, hopefully, your incoming money should be more than what you spend. If not you've got more serious problems that we'll offer advice for later. But needless to say if you're spending loads on luxury items like designer shoes or lap dancing clubs, you may need to cut down or ration yourself...;)

So now you have done your budget, you can work out how much you can afford to pay. Use the information you have when talking to creditors. It will help you show them you are not just refusing to pay, but you are willing to pay the most you can.

If you have several bills or commitments you are struggling to pay, prioritize them in order of importance. Think of the impact they would have on your life if you didn't pay them. For example, your mortgage payment (if you have one) is probably high on the list. Deal with the high priority ones first, but don't delay - get in touch with your bank or other creditors NOW!