Debts & Loans

The credit crisis of 2008 is leaving many people facing the recession of 2009 with debt.

Dealing with debt can be off putting and often it can seem easier to put your head in the sand. But with bankruptcies and repossessions set to rise in 2009, early action is the best way forward.

"We have seen a significant increase in people seeking help with debts, mainly problems with banks, credit cards, and bills," explains Tunde Abiola, at the debt charity Debt Doctors Foundation UK.

"We are seeing varied people; professionals, key workers and the unemployed, who are having trouble with loan sharks."

Her first advice for anyone dealing with debt is to act now.

"Nip the problem in the bud, have a financial health check, set a budget and prioritise your spending."

Dealing with debt

"First of all people have to prepare a budget – boring but true. Only with a budget can you know much money you have," explains Francis Walker at debt charity the Consumer Credit Counselling Service.

There are online options for setting a budget such as the FSA budget calculator, that can help.

"To sort out debt problems it is important to pay off more expensive debts first. With credit cards, it is a good idea to pay off more than the minimum each month."

If you are in difficulties with debts, seek help from a third party such as a debt counselling charity.

"With one debt you may as well go to the lender. But with multiple debts - which most people with debt problems have – you should go to a third party as they can take a rounded view."

She explained even with mortgage arrears – where people are told to speak to their lender first – without help of a third party people could end up with a new repayment method they cannot afford, which would then have to be unpicked again.

A debt charity can help to look at your budget and expenses, such as utility bills, council tax, household expenses, and then see what is left to cover debts.

"Something that is also helpful is to keep a money diary," advises Ms Walker.

"We have all gone to the cash machine and a day later said 'Where has the cash gone?'.

"It often helps to cut spending painlessly as you see that £2.30 on a coffee at Starbucks or £5 on lunch at Marks & Spencer."

For those not wanting to jot down, what charity Credit Action offers a free Spendometer that can be downloaded to a mobile phone.

Take ownership of debt

Christine Thompson-Wells, psychologist and author of 39 Steps & 39 Days to Debt Recovery, explains people now need to take more ownership of their money and their debts.

She explains as people use cards more than cash they are becoming disconnected from their spending, while heavy use of credit cards is making people disconnected from their debts.

"Cards are taking over cash and people are losing ownership of money," she says.

"I had one client who brought in a ream of credit cards and explained he was worth £50,000 of credit. But it is debt.

"Credit cards were introduced in the 1960s, but they should not have been called credit cards, they should be debt cards."

She adds: "People need to instil a sense of ownership in money

"With cards there is very little ownership. People see spending on cards as not spending money."

Ms Thompson-Wells explained some people have an almost childish nature to money

"With spending you get instant gratification. People need to work on building the feeling of saving and savings to get what they want."

Her method involves setting yourself a mental contract to get rid of debt – writing down everything you owe and tackling each debt in turn.

"Until you write down debts and pay them back, you are making the credit card company richer. Cut up your cards to minimise your use of them."

After debt

A key to dealing debt now is also avoiding future debts.

Ms Abiola explains: "The only people who seem to be triumphing in at the moment are those who were sensible in the first place."

Ms Walker said: "You should pay off debts before starting to save. Debts are going to cost more than any interest on savings, particularly at the moment.

"Once you have cleared debts, think about savings and plan to have enough to keep you going for six months."

After dealing with debts, Ms Thompson-Wells advises people to build for the future.

"Have a plan B, a second job, and have a plan C or plan D. Build your skill base," Ms Thompson-Wells

"A better future is not going to drop in your lap. Have a plan, stick to it and commit to it."

Golden rules for dealing with debt

Golden rules for dealing with debt from National Debtline

-  Don’t ignore the problem.
It won’t go away and the longer you leave it, the worse it gets.
-  Don’t borrow money to pay off your debts without thinking carefully.
Get advice first. If you own your home, this kind of borrowing could lead to you losing your home.
-  If you have lost your job, or are off work because of illness, check whether your payments are covered by payment protection insurance. Check your credit agreement.
-  Check you are claiming all the benefits and tax credits you can.
-  Work out a personal budget.
-  Get in touch with your creditors straight away and explain your difficulties.
Go and see them, or phone or write to them.
-  Make sure you tackle your priority debts first – for example, debts which could mean losing your home or having your gas or electricity cut off.
-  Contact everyone you owe money to. If you make arrangements to pay some creditors but not others, you could run into difficulties again.
-  If the first person you speak to is unhelpful, ask to speak to somebody more senior who may be able to agree to what you want.
-  Don’t give up trying to reach an agreement even if creditors are difficult.
-  Always go to court hearings.

Take a copy of your personal budget with you.

Don’t think that going to the county court makes you a criminal; it’s not that kind of court. They will not send you to prison and there is no jury.
Always keep copies of any letters or court forms you send or receive.