4. Debt advice

If you’re worried about loans, credit and debt, and are struggling to keep up with repayments, it can feel like you’ve lost all control of your finances. But you can learn vital money management skills at any stage of life. The earlier you start to tackle the issue, the sooner you’ll be able to look forward to a debt-free future.

a. Tips on paying off loans and credit cards

According to National Debtline, when trying to pay off loans and credit cards it’s important to separate debts into priority and non-priority. After all, you won’t be able to pay off everything at once so you’ve got to use your resources wisely. Priority debts include:

  • Mortgage
  • Rent
  • Council tax
  • Gas and electricity
  • Magistrates' court fines
  • Parking penalty charges
  • Child maintenance
  • Social Fund loans
  • Benefit overpayments
  • Tax credit overpayments
  • Tax debts
  • Hire purchase or conditional sale
  • TV licence

On the other hand, non-priority debts include those where the creditor hasn’t got extra powers to make you pay. For example, if you don’t pay your mortgage – the bank can take your home, hence why it should be treated as a priority. Non-priority debts include:

  • Credit-card debts
  • Personal loans with finance companies
  • Bank and building society loans and overdrafts
  • Charge card
  • Catalogues
  • Personal debts to friends and family
  • Doorstep-collected loans
  • Payday loans
  • Water rates
  • Business debts

Of course, this doesn’t mean you can put off paying these debts for good. But it’s useful to know what to pay first when you’ve got a restricted amount of money.

If you’re having problems paying off debts, it’s worth finding out if you’re getting all the money and support you should be. Use the following from National Debtline as a checklist:

  • Are you entitled to any benefits, tax credits or Universal Credit?
  • Is your employer paying you at least minimum wage?
  • Are you paying too much tax?
  • Are others paying you enough?
  • Can you rent a room out?
  • Can you get an advance, a budgeting loan or help from your local council?
  • Could you cut your energy or water bills?

b. Getting your budget back on track

Even when you’ve carefully planned out a budget, you can go off course. To help get you back on track, think about the following things:

  • Remind yourself why it’s so important. Think about why you started budgeting in the first place. The things that originally motivated you will probably remind you why it’s important to continue.
  • Work out your household expenses. What are you spending your money on? How many standing orders do you have set up? If there’s anything you could do without, cancel it or try and change onto a cheaper tariff. To get your budget back on track, you will have to make some sacrifices.
  • Earn money in other ways. You’ve probably got some quality, hardly-worn clothes or unused gadgets cluttering up your house. Take them to a car boot sale, or sell them online, to earn a bit of extra cash. Similarly, if you’ve got a skill others would be happy to pay for, think about whether you’ve got the time to make some extra money by offering it as a service – cake-making or decorating, for example.
  • Speak to your creditors. If you’re struggling to keep up with your repayments, pick up the phone and explain the situation. Creditors want to get their money back efficiently – it’s in everyone’s interest for repayment plans to be realistic.
  • Tell your friends you’re cutting back on costs. Don’t keep cancelling on your friends without explanation – share with them that you’re trying to spend less. Real friends will happily make cost-saving suggestions for you to spend time together. For example, doing a dinner party at home, rather than heading out.
  • Contact helplines. Free, independent and confidential help is available online or on the phone from charities such as the Citizens Advice Bureau and the National Debtline.

c. How to handle bankruptcy

Bankruptcy can be a way of clearing your debts, but declaring bankruptcy is a serious matter that should only be resorted to if other alternatives have been exhausted. It’s a legal status that typically lasts a year and you'll have to give up possessions of value and the interest in your home.

But bankruptcy isn’t always a choice. The High Court can declare you bankrupt by issuing a bankruptcy order. It will only do this after it's been presented with a bankruptcy petition from one of the following:

  • One or more creditors
  • The debtor
  • The supervisor of, or a person bound by an individual voluntary agreement

How bankruptcy will affect you

However the situation came about, bankruptcy has severe consequences on your life. The courts will appoint an official who can sell your assets to pay off your creditors. It doesn’t include any equipment or household items you need for work or family life, but could include your home. They’ll also look at your income and decide what payments should be made to your creditors, after taking into account necessary expenses. You’re responsible for the following:

  • Giving the official receiver all details of your finances, assets and creditors
  • Looking after your assets and handing them over with the relevant paperwork
  • Telling officials about any new assets or income
  • Stopping the use of credit cards and bank or building society accounts
  • Not obtaining credit over £500 without telling the creditor you’re bankrupt
  • Not making payments direct to your creditors, with a few exceptions such as outstanding child support payments
  • Source: Ni Direct

Alternatives to bankruptcy

Being in debt doesn’t necessarily lead to bankruptcy. If you’re struggling to make repayments, the following could also happen:

  • Informal agreements. You can try and speak to your creditors and agree a repayment timetable that suits both of you.
  • Individual voluntary arrangements. Here, an insolvency practitioner helps you negotiate repayment terms with your creditors.
  • Administration orders. The Enforcement of Judgments Office (EJO) takes control away from you and orders you to make payments, which they then distribute amongst your creditors.
  • Debt relief orders. These are only made if you cannot pay and owe not more than £20,000.

d. Top saving goals

Your first goal should be to have some emergency savings that you could fall back on. But beyond that, people can find it hard to motivate themselves to save – especially when the money could be useful to them day-to-day. However, saving allows you do things you wouldn’t be able to afford otherwise. Pick something that you’d like to do and challenge yourself to save money. Good example goals include:

  • Taking a holiday worry-free
  • Buying a car
  • Having enough money to not worry about maternity or paternity leave

Managing your finances will ease some of life’s stresses and generally help you through big moments in life. If you’re ever struggling, just remember these three golden rules:

  1. Plan for the future. We’re not just talking about having a retirement plan, but not taking on any debts that you won’t be able to afford six months down the line. Always look beyond the current month.
  2. Spend less than you earn. Only by spending less than you get paid will you have the freedom to save.
  3. Be creative. Make your money work harder, and work harder to think of ways to make more money. For example, sell valuable stuff you’ve been hoarding and no longer use, or make use of additional skills you have.