The British are in greater debt than ever before. If you're feeling out of your depth when it comes to finance, follow our guide to getting out of debt and staying out - or at least keeping it to a minimum.
As individuals, and as a nation, we in Britain reached record levels of borrowing in 2008. The total personal debt at the end of October 2008 was £1,455bn, a rise of 4.7 per cent on the same time in 2007. Most of this (£1,220bn) was secured on property: the average mortgage debt for the 11.7m British homeowners was £103,903.
The consultancy KPMG estimates that 411 people per day will be declared bankrupt or insolvent in 2009, with around 160 properties being repossessed each day. Citizens Advice Bureaux say the number of people coming to them with debt problems rose by 40 per cent during 2008.
A prime cause of these higher numbers was the sustained increase in British property prices between 1997 and 2007, which encouraged people to borrow against the value of their homes.
There are many basic things that can help you to regain control of your finances and start to get out of debt. The first is to admit you have a problem and to seek help. If you ignore the problem or fail to reply to correspondence, it will make things worse.
Here are some practical things to bear in mind:
Call an agency for free specialist advice
The Consumer Credit Counselling Service (CCCS) helpline can be called on 0800 138 1111 and is open from Monday to Friday, 8am to 8pm. Alternatively you can contact your local Citizens Advice Bureau.
It may also be important to contact other professionals to get help for problems related to debt, such as family, health or emotional issues.
Prioritise your debts
Certain kinds of debt need to be treated in different ways, because the penalties for non-payment are different.
Priority debts - the failure to pay these could result in a loss of goods through bailiffs or imprisonment. They include mortgages and loans secured on your home. If you don't repay these according to the terms on which you borrowed them, you could lose your home.
Secondary debts include credit card repayments, personal unsecured loans, bank loans and loans from family and friends. Non-payment of these kinds of debt may end up with a County Court Judgement against you, which could affect your credit rating and make it harder for you to borrow in the future.
It is important to make payments on priority debts before payments are made on secondary debts, although for personal reasons you could decide to make some debts an exception (such as loans from friends or family), even though payments are not legally enforceable.
Should you consolidate?
Because different kinds of debt attract different interest rates, it is generally a good idea to consolidate your debts into the form of loan paying the least interest. Usually this will be your mortgage.
Consolidation will probably mean that you pay off the loan over a longer period, and you need to pay attention to the terms and conditions of the loan, such as early redemption penalties and variable interest rates.
Credit cards often carry high rates of interest, so you should pay these off as soon as possible, so long as this does not threaten payment of priority debts.
Creating a budget
Make a list of all your actual and prospective outgoings and income, either on a weekly or monthly basis, so that you can get a realistic picture of what your budget should be.
Contact the relevant department to find out whether you are entitled to any of these payments, or call your local Citizens Advice Bureau.
Taking all of these into consideration, calculate a budget that covers all of your expenditure and leaves you with surplus money to repay your debts over a realistic timeframe (say, five years). Think about where you could feasibly cut back on spending.
Contacting your creditors
Write to each of your priority creditors to ask them to confirm the amount you owe them, including any arrears and penalty charges. Explain that you are in difficulties and say why. Put in the letter that you are trying to resolve your situation and will send them a financial statement, with an offer of payment.
Keep copies of all the correspondence you send and receive, and make sure than any verbal agreement made on the phone is put in writing. Make a note of the name of the person that you spoke to.
Once you have the full details of all your debts, send another letter to each creditor, starting with the one nearest to a final sanction (e.g. having your home repossessed).
Explain again that you are facing financial difficulties, state what your debts are and make an offer to pay a certain amount each month or week. You could ask for them to freeze interest payments and other charges, in order to allow you to repay the debt. Ask them to confirm in writing that they accept this offer.
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