Getting a grip on your debts

12 May 2009

If you feel like your debts are getting out of control, the first step in reining them in is understanding them - if you don`t know which debts are more important, how will you know where to start?

Understanding your different debts

There are two basic kinds of debt:

• priority debts (secured loans, mortgages, utility bills, tax, etc.) and
• non-priority debts (e.g. credit cards, store cards, personal loans & overdrafts).

The term `non-priority` doesn`t mean there`s less of a legal obligation to pay those debts - but it does mean the consequences of not repaying them are less serious than the consequences of not repaying your priority debts.

In other words, you need to put your priority debts first if you`re worried about your ability to service your debts. Start by drawing up a budget, so you can see how much of your monthly income is required to cover your priority debts. Only then will you know how much you can put towards servicing your non-priority debts.

Talking to your creditors

Of course, your non-priority lenders will want to know as soon as you realise you need to make any changes to your payments!

If you realise you can`t continue making your non-priority payments in full, it`s essential you contact them and explain that making lower payments to them is the only way you can afford to keep on top of your priority debts - something which they will understand is essential.

If necessary, they may even consider taking `token` or `nominal` payments (a tiny sum per month - £1, for example) for a while, on the grounds that you`ll get back to paying the full amount as soon as possible.

So you`ll have to explain your finances to them so you can prove that you can`t cut back anywhere. If they can see you`ve done everything in your power to maximise the money you can pay your lenders, they may be willing to negotiate. If, however, they can see that you`re spending more than necessary on non-essential items (fashionable clothes, holidays, dining out…), they`ll probably insist that you cut back on this.

Note: Whatever you do, don`t ignore any letters and phonecalls you receive - lenders are much less likely to make any concessions if they think you`re not cooperating.

Asking for help with your debts

Calculations, negotiations, repayment plans - getting a firm grip on your debts isn`t always easy, and many people decide to ask for professional debt help. A debt management company, for example, can help them go through their finances and draw up a realistic, sustainable repayment plan. (Depending on the debt management organisation, they may also talk to their lenders on their behalf.)

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