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Money, tax and benefits
Ways out of debt
If you're struggling with debts, they may seem impossible to manage. However, there are ways to get out of debt, no matter how bad the situation seems. And there's plenty of free advice available to help you.
Facing up to your debt problem
Almost everyone owes money - bills are a fact of life. But sometimes you may find you're swamped with debts and can't see a way of paying them all. The worst thing you can do is to ignore the problem - it won't just go away.
Making the most of your money
If you're in debt, work out a realistic personal budget so you know where your money's going and how much you can afford to pay those you owe money to.
If you work out that you don't have enough to pay off your debts, look at ways of cutting your costs and increasing your income.
Cutting your costs
You can look at your expenses to see where you can make savings.
You could also try shopping around to reduce bills or think about selling non-essential items that you own (for example, a second car).
Increasing your income
You may be in debt because you're not receiving all the money you're entitled to.
For example, it's advisable to:
- make sure you're not paying too much tax
- check whether you're entitled to tax credits
- ensure you're receiving the benefits you're entitled to
- make sure that any family and friends living with you are paying enough towards household expenses
- think about renting out a spare room to a lodger
- check whether your mortgage payments are covered by insurance
Consolidating your debts
If you're thinking about taking out a single loan to pay off all your existing debts, make sure you're not simply taking on more debt. Check that the terms of the loan - interest rates and length of the loan, for example - aren't too harsh. Be very careful about taking out a loan secured on your house as it will put your home at risk.
It's always advisable to seek independent advice before taking out any kind of loan.
Coming to arrangements with creditors
Once you've sorted out your personal budget, you can start to make arrangements with your creditors (people you owe money to) about how much to pay. There are several options:
Informal arrangements
If you know you can't pay all your debts, its important prioritise your debts and to write to your creditors to see if you can agree on a repayment timetable.
An informal arrangement isn't legally binding, so your creditors could ignore it later and ask you to pay in full. See 'Where to get help and advice' below to find out where to get free, expert advice.
Debt management companies (DMCs)
DMCs offer help if you're in debt (they usually only deal with non-priority debts - see the link 'Find out more about non-priority debts' below). They negotiate with your creditors on your behalf in order to reduce the payments you are making overall. You then make one payment to the DMC which distributes it to the creditors.
Some DMCs are paid commission by creditors. However, most charge a fee, so you may have less money from your available income to settle your debts.
Many organisations, such as the National Debtline, offer free debt management plans, so there is no need to use a commercial service. See 'Where to get free help and advice' below for contact details.
Independent Voluntary Arrangements (IVAs)
If you can't work out an informal arrangement, you can apply to court for an IVA, where you formally agree to pay part, or all, of your debts over a period of time (typically five years). You'll need an insolvency practitioner to set up the agreement, and 75 per cent (by value of your debts) of your creditors must agree to it. Bear in mind that IVAs take several months to organise, and you may have to pay a large administration fee.
Administration orders
If one or more of your creditors has obtained a court judgement against you, the county court could make an administration order telling you to make regular payments to the court, which it will pass on to your creditors.
An order will only be issued if you have enough regular income to meet the repayments and your total debts are less than £5,000. Repayments can be as little as £5 per month if that is all you can afford. You can apply for an order to be changed if you have difficulty keeping up the payments.
Budgeting
When you're declared bankrupt, an administrator uses your assets (property and possessions) to pay off your creditors.
Bankruptcy is a serious matter - you'll have to give up possessions of value and the interest in your home. However, you might not have to become bankrupt just because you're in debt - you can try to make arrangements with your creditors instead.
Where to get help and advice
Many organisations offer free, independent advice, including the CAB, National Debtline and the Consumer Credit Counselling Service (CCCS).
Citizens Advice Bureau (CAB)
Your local CAB is a good starting point for free advice. They provide free information and advice on legal, financial and other problems. You can find your local CAB in the phone book or on the CAB website.
National Debtline
National Debtline offers free, confidential and independent help over the phone for people in England, Scotland and Wales. You can call their helpline on 0808 8084 000 between 9.00 am and 9.00 pm from Monday to Friday and from 9.30 am to 1.00 pm on Saturdays (24 hour voicemail). You can also email them.
Consumer Credit Counselling Service (CCCS)
The CCCS has a helpline providing free and impartial advice to people with debt problems. You can call their helpline on 0800 1381 111 between 8.00 am and 8.00 pm from Monday to Friday. You can also write to them.
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