Five steps to dealing with your debts
When you are trying to deal with debts it can be hard to know where to start. This means many people end up burying their head in the sand, which allows their problems to worsen.
So, to help prevent your debts spiralling out of control, Moneywise debtwizard Mike Thomas has put together a five-point plan.
This is aimed at those who have low to moderate debt with numerous unsecured creditors.
1. Find out what you owe and to whom
Take your credit cards, loans and bank overdrafts and make a separate list for each of the following:
- those in your name only
- those in your partner's name only (if applicable)
- those in joint names (if applicable)
2. Establish if the loans are secured
Secured loans include mortgages, loans on a property and hire purchases such as those on a vehicle, these are priority debts. Also identify other priority creditors such as utilities and council tax.
Remember if you don't pay secured creditors then you may lose the security (your house for example) and if you don't pay priority creditors such as your electricity or gas provider then you might lose the services they provide. Make a separate list of your unsecured creditors.
3. Work out your disposable income
This is the amount you have available to pay unsecured creditors - credit and store cards and personal loans for example - after you have paid the secured ones in full.
To calculate your disposable income you will first need to work out the total family income including pensions, benefits, family allowance and tax credits. Then list all your outgoings, including those to secured creditors.
Once you have subtracted this amount from your income you will see exactly what your disposable income is and what you can truly afford to pay toward your debts.
This will help you assess your options when it comes to dealing with your creditors.
4. Work out how much your assets are worth
Now you need to work out what assets you own. This could be your house, even if you have a mortgage on the property. The difference between the remaining mortgage and the estimated value of your house is known as equity, and this is an asset. If the home is jointly owned, however, then the other named person may well be entitled to half the equity.
For example, if your mortgage debt with your partner stands at £80,000 and your house is valued at around £140,000, then there is equity of £60,000. Once this is divided between you both, you would each have a share worth £30,000.
5. Get in touch with your creditors
If you fail to make payments to your creditors and don't communicate with them, you will be regarded as someone who won't pay rather than can't pay. This leaves your creditors little option but to take legal action against you to recover their losses.
So contact your lenders, who will request the information detailed in steps one to four, and who can then make a decision on how best to help you.
Above all, be realistic and accept there is a problem, which will only go away if something is done about it. If you feel you can't deal with it on your own, the Moneywise support team has a list of agencies you could consider.