Debt can knock at any door Print E-mail
Written by Jonquil Lowe, 2008   
Money problems can hit even the most prudent household. Jonquil Lowe looks at how to get your finances back on track and who can help.

Borrowing is a feature of modern life. It helps us buy our homes, finance study, purchase cars and acquire many other items.

Much has been made of UK consumers having debts of over £1.4 trillion, but this needs to be set in perspective against the estimated £6.5 trillion of property and other assets they also hold. In general, borrowing helps the economy to work efficiently and households to achieve the standard of living they want. Yet borrowing that is manageable one day can easily become a problem the next.

There are many triggers for debt problems, such as relationship breakdown, redundancy, business failure, illness, soaring food, petrol and utility bills, a rise in mortgage payments as a cheap deal comes to an end, or a major expense. Debt is not just a financial issue; it can also cause stress that affects your health and relationships.

Retirement causes problems

Gloucester residents Roger and Janet retired last year and suddenly found that they could no longer keep up repayments to their creditors because of reduced income.

As well as owing £10,000 to six different creditors, they still have to pay a small amount every month because of the shortfall in their mortgage when their home was repossessed a few years ago. They now live in rented accommodation.

Roger has started working part-time in a local DIY store and they found they could claim help towards their rent and council tax. These state benefits combined with Roger's earnings mean that the couple can cover all their living costs and have £400 left to pay off their creditors, which will leave them debt-free in just over two years.

Budgeting helps

Alison is a 41-year-old mother of four. Since separating from her partner, she has found it hard to make ends meet and turned to credit to plug the gap. With debts over £24,000, costing her £500 a month, she sought help from a debt counsellor.

Her income from a part-time job, together with child support and tax credits, gives her take-home pay of just over £2,000 per month. The counsellor showed her how to manage her money better through drawing up a monthly budget to take care of the essentials and making allowances for quarterly and annual bills.

Alison now has enough money for the family to live on and to repay her creditors. As her counsellor says: "Sometimes it is difficult for people with busy lives to spare time to assess their financial position properly. Often some simple budgeting tips are all they need to sort themselves out."

Case studies supplied by Consumer Credit Counselling Service. Names have been changed to protect confidentiality.

Getting help

You don't need to struggle with debt problems on your own. There are a number of independent organisations that offer free advice and help, including Citizens Advice, Consumer Credit Counselling Service (CCCS), National Debtline and PayPlan.

There are also many commercial organisations that offer limited free advice but are not independent. In most cases, you will quickly be channelled into a remedy that usually earns high fees for the company concerned. There is no need to pay high fees - use one of the independent organisations instead

Recognising the problem
National Debtline's first golden rule for dealing with debts is: "Don't ignore the problem: it won't go away and the longer you leave it, the worse it gets." But often there is no single moment when you know that your borrowing has got out of hand.

A good way to check whether you have a problem is to take the Financial Services Authority's Debt Test (www.moneymadeclear.fsa.gov.uk/tools).

This is a completely confidential online tool. You don't give your name, address or any other details that could identify you. The Debt Test asks about any credit cards, mortgage and other debts, how you manage the repayments, your family circumstances, income and savings.

Based on the information you give, it indicates whether you should be worrying about your debts and suggests what to do if you are having problems.

Warning signs that suggest you are running into problems include: missing a credit card, gas, electricity or other regular bill payment; taking out a new loan or credit card simply to pay existing debts; borrowing to pay for rent, food and other day-to-day spending; leaving post unopened because you are afraid of the bills you might find.

Debt facts

  • Average household debt including mortgages: £57,050.
  • Average outstanding mortgage: £100,990.
  • Unsecured debt (mainly credit cards and personal loans) as a percentage of average household income: 24 per cent.
  • Average debt of people aged 40 and over getting help from CCCS: £32,000-33,000.
  • Number of people going to Citizens Advice with a debt problem in 2006-7: 1.7 million.

Sources: Credit Action Debt Facts and Figures April 2008; CCCS Statistical Yearbook 2007; Citizens Advice Enquiry Statistics.

Solving the problem

Independent advisers approach debt problems in a systematic way. If you are sorting out your own debts, you can use the same approach:

  • If you are being threatened with the loss of your home, disconnection or bailiffs, get help immediately from one of the independent advice organisations.
  • Make sure you are getting all the income you can e.g. are you entitled to state benefits, can you claim on any insurance, can you claim back any tax?
  • Draw up a budget so you know exactly where your money is going.
  • Divide spending into essential and non-essential to work out what you can put towards paying off your debts.
  • Divide your debts into priority and non-priority. Priority debts are ones where the consequences of non-payment are severe e.g mortgage or rent because you may lose your home, fuel bills because you could be cut off, and council tax or TV licence because you could be sent to prison.
  • Work out a strategy for paying off your debts (see Table 1), putting the priority debts first.
  • Negotiate with your creditors, talking first to the ones to whom you owe the priority debts. Try to get them to accept your strategy and to freeze any interest and penalties while you pay off what you owe.

There is a useful self-help pack on the National Debtline website to help you through the process. But, if you owe a large amount, you are strongly advised to get help from one of the independent organisations.

Table 1. Main strategies for clearing debts.

Useful contacts

Citizens Advice
For local branch, see phone book or website
www.citizensadvice.org.uk, www.adviceguide.org.uk

Consumer Credit Counselling Services (CCCS)
Freephone: 0800 138 1111, www.cccs.co.uk

Financial Services Authority
For debt tool, visit www.moneymadeclear.fsa.gov.uk/tools

National Debtline
Freephone: 0808 808 4000, www.nationaldebtline.co.uk

Payplan
Freephone: 0800 917 7823, www.payplan.com

Jonquil Lowe is a freelance financial journalist, researcher and author.
 
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