Are you drowning in debt? Don't despair

Whatever financial hell you may be in, there is a way out
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The Independent Online

Another shaky week in the financial markets ended in meltdown yesterday, after the confirmation came that Britain is now in its first recession in 17 years. Although a recession is not official until a country has recorded two successive quarters of negative economic growth, yesterday's news that Britain's economy shrank by 0.5 per cent in the third quarter of the year, after standing still in the second quarter, was confirmation enough for all but the most pedantic of statisticians.

For most people, the statistical proof was hardly necessary. With food, energy and mortgage costs rising, most families have been feeling worse off over the past few months – and increasing numbers of people are now facing losing their jobs as well, as companies try and cut costs to survive the downturn.

For many people, one of the biggest problems has been managing the debts which they have built up over the past few years. With mortgage and loan rates having risen – in spite of cuts in the Bank of England base rate – increasing numbers of people are now struggling to meet their monthly repayments, and are concerned that they may be facing repossession or a visit from the bailiffs.

Although the natural instinct at times like these can be to bury your head in the sand, those who seek help at the earliest opportunity are the ones who will avoid the worst consequences. This week, the Government announced a new set of initiatives to ensure that lenders go easy on customers who have hit hard times – and there's often plenty you can do before you need to accept losing your home or your possessions. Here, we take a look at some of the solutions.

Maximise your income

If you're struggling to meet repayments on your loans and mortgage each month, the first step is to make a detailed budget listing on your income and outgoings for the month. Although it might not make life much fun, you may need to cut out any spending on non-essentials – such as cable TV, new clothes or even luxury foods – while you get back on top of your finances. If you haven't looked into switching your energy or phone supplier recently, you may find you can save money on your bills. Visit a comparison site such as to see if you could make any savings here.

If you've still got equity in your property, you could try to raise some extra cash by remortgaging – or you could sell up and move to a cheaper neighbourhood.

Be careful where you make your cuts, however. Getting rid of your home insurance, for example, might save you a few pounds a month, but you could be left without a property if your home burnt down or there was a natural disaster. Buildings insurance is also usually compulsory if you have a mortgage.

Tom Howard of the Consumer Credit Counselling Service ( says that once you have looked at whether you can make any savings, the next thing you should do is to see if you can increase your income. Are there any opportunities to work overtime in your job, or could you take on a second job? Could you rent a spare room in your house, or sell some possessions?

Contact your lenders

If you think it's only a short-term money problem that you're suffering from, the next step to take is to talk to your lender. This week, the Government announced new rules which force mortgage lenders to go further to helping those customers who are having financial difficulties.

Although lenders always retain the right to repossess your house if you default on your mortgage payments, they now have to prove to the court that they have exhausted every other option before they will be granted a repossession order.

Even if you do not have a flexible mortgage which allows you to take payment holidays on your loan, your mortgage lender may well be willing to give you a month or two off making a repayment, if you can convince them that you'll then be back on track. The best outcome for them is that you get through your difficulties and pay off your loan in full – so it's in their interests to help you.

Seek professional advice

If you don't have any luck straightening out your problems alone, then there are a number of debt agencies and advice charities who will be willing to help. However, make sure you pick the right one.

Citizens Advice is a national charity which provides free debt advice at their branches across the country. For a more personalised service, try the Consumer Credit Counselling Service, which can not only provide generic advice, but can also help you set up a debt management plan, or even an Individual Voluntary Agreement (see below).

The CCCS has a free helpline (0800 138 1111) or, if you prefer to keep an extra level of distance between yourself and the adviser, you can contact professionals via their website,

Tom Howard of the CCCS says that the first thing an adviser will do for people who are struggling, is to draw up a debt management plan. They do this by calculating how much income you have left after all your non-debt-related costs each month, and then allocating the surplus proportionately to each of your creditors (prioritising any secured debt, such as your mortgage).

The CCCS will then contact your lenders and ask if they are willing to accept this smaller payment each month. The plans usually aim to pay off the individual's unsecured lending within five years. "Generally, creditors do accept our debt management plans," says Howard, "because we're helping them to get their money back."

If the customer goes on to pay all their debts, the CCCS will then receive commission – usually around 10 per cent – from the lender. But the consumer will pay nothing for the service.

Get an IVA

If there's little or no money left once your essential bills are paid each month – before you've even thought about paying any of your debts – then you may need to consider more drastic action. The less severe option is to take out an Individual Voluntary Arrangement (IVA), whereby you try to persuade your lenders to write off a proportion of your debt.

There are lots of companies that will offer to put an IVA together for you, but all of them will charge you. The CCCS, which is a charity, offers the cheapest IVAs, but will still charge a fee.

Having looked at your individual situation, your adviser will come up with what they believe to be a manageable sum for you to pay each month, and will approach your lenders with a view to asking them to write down a proportion of your debt. If 75 per cent of your lenders – by value – agree to the plan, then it becomes legally binding.

The advantage of an IVA is that it prevents you having to declare yourself bankrupt, and may provide a way for you to keep certain the family home or car.

The last resort: Declaring yourself bankrupt

If your debts are so serious that lenders won't agree to an IVA, you may have to declare yourself bankrupt.

The advantage of bankruptcy is that once it has been discharged, you'll emerge completely debt-free. All your remaining assets will be sold off and the money given to your creditors. But any shortfall will simply be written off (although it is possible that you may have to make additional payments to your creditors for up to three years after the bankruptcy order).

The major disadvantage, however, is that once you've been bankrupt, it will remain on your records for six years, and it will be very difficult for you to get credit during that period. The knock-on effects can be serious – as you'll also find it much harder to find somewhere to live, because landlords may be unwilling to let their property to someone who has been declared bankrupt. You'll also be excluded from working in certain professions, such as law and accountancy.

You'll also have to suffer the humiliation of your bankruptcy being announced in the local paper.

This isn't done to simply name and shame you. It's actually done to alert any other creditors.

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