Finally I have managed to complete my ebook. After many late nights and weekends I have recorded all of the lessons I learned from working through my own debt problems.

I sincerely hope that this will help other people that are in debt deal with their own problems.

photo credit: Nexeus Fatale

What is a debt spiral?

This is when the interest/repayments on loans reduce your available income so that you have to borrow more and more each month to keep up.  It is a downward path that leads to serious financial problems and even bankruptcy.

Example

A family has a monthly income of 2000.  Their monthly essential outgoings total 1500 so they have 500 each month to spend on non-essentials or to save.

They decide that they just must have a new car, the monthly cost is 300.  They now have 200 each month to spend/save.

As they are working really hard, they feel that they deserve a holiday and put the 4,000 cost on a credit card.  Monthly repayments are 200.  They now have nothing left to spend each month.

But people can’t live without their little luxuries so they eat out and go to theme parks with their children and increase their credit card debt to 8,000 over the next year.  New credit card repayment is 400 and they are now running a monthly deficit of 200.

If nothing is done about this situation the debt will grow more and more quickly as it compounds up/is added to.  This process will only stop if the family realize that they need to take action or they are refused further credit.  In the latter case the door to bankruptcy is open!

Be on Your Guard

The point of this post is to realize that the start of the debt spiral won’t seem like a problem at all.  In fact it could seem like a really great day.  You’ve rewarded yourself for all your hard work with a new car.  That foreign holiday you’ve always dreamt of is now a reality.

If you are tempted to put luxuries/treats on credit then consider this thought:

“If you can’t afford the lifestyle you want now then how are you going to be able to afford it when you have extra credit bills to pay”?

Taking on credit when you don’t need to is stealing from your future.  Consider the following rule:

“The only way to become wealthy is to spend less than you earn and invest the difference”

You should be able to clearly see that doing the opposite (spending more than you earn and borrowing the difference) is a certain way to being poorer in the future.  Always ask yourself if you really need something before you buy it.  Never buy large purchases on an impulse especially if they are going to be bought on credit.

3 years on and I have resolved my debt crisis.  I am looking forward to the future and am remarkably still married.  The process of working through my debt crisis  wasn’t easy, but the tough decisions I took then are starting to pay off now.

What is your debt story?  Write a reply here, you might find that just writing it down helps you to come to terms with it/see what needs to be done to fix it.

Good luck!

I’m In Debt – What Should I Do?

The first thing you need to do is work out how much debt you have.  Gather together all of your credit agreements and credit card statements and write down a list (or put it in Excel) of all your outstanding debts, with the current balance (if you know it) and the monthly repayments.

Next get your bank statements and write down a full budget of all of your regular monthly expenses (this is the easier part) and try and identify as much of your other spending as you can (food, entertainment, clothes, gadgets etc).

From the bank statement or recent pay advice get your total income from all sources (including benefits/second jobs etc.)

What Next?

Take a look at your budget and compare your total outgoings with your income – is there money left over that you could use to pay off your debts or is there a deficit that is being funded by increasing debt?  Start thinking about how you could reduce your expenses.

That’s it for now.  In a future post I will explain more about changing your budget and spending habits and what solutions you should be considering for your debt problem.

Debt Fraud Prosecution – How Likely Is It?

In the UK, prosecution for debt fraud is only likely in the most extreme of cases (e.g. applying under someone else’s name or saying that you earned 100,000pa when you actually earned 5,000).  Even some quite extreme cases don’t come to court.  Therefore if a debt collection agency is threatening you with a fraud prosecution they are almost certainly lying.

Ignore the threats and concentrate on working towards a solution to your debt problem.

Debt Charge – Stopping or Reducing

If this is happening to you then you need to take action to regain control of the situation.  People that you owe money to will often stop adding penalty charges/interest to your account if they can see that you are taking steps to resolve the situation.  One of the best ways to do this is to engage the services of a reputable debt management company.  In the UK one of the best ones is the Payplan Partnership (I have personal experience of using them).  They can control the process of negotiating with your creditors and can set you up in either a debt management plan or an individual voluntary arrangement.  If you are in an IVA then adding a debt charge to your account is not allowed.

Debt Can be Positive

Debt can help you make large purchases like homes or cars that would be difficult or impossible to save up for.

Debt can help you through times when your income is reduced, because of losing your job or taking time to study for qualifications.

Debt Can be Negative

Debt can tempt you to spend money on things that you do not really need.

Debt reduces your future income and will eventually make you poorer.

Chronic debt problems can harm your health and damage your relationships.

Conclusion

Like a lot of things in life debt can be a useful thing if used properly.  However if you let it get out of hand it can be a destructive force that will affect your life for years.

Go Debt – What is Your Current Financial Situation

You need to write down all of your debts so that you have a full picture of how much you owe.  Also, you will need to do a family budget to show all of your income and costs.  This will show how much (if anything) you can afford to pay towards your debt.  If you can comfortably pay all your bills and your debt repayments then you don’t have a huge problem – just keep making the payments or even increase them and your debt will be gone eventually.  If you don’t have enough to pay all of your repayments then you should think about seeking help from a qualified debt advisor to help you sort out your problems.  Possible solutions would include bankruptcy or a debt management plan.

Go Debt – And Stay Away

You need to carefully consider what it was that got you into debt in the first place and what you can do to stop it happening again.  if you don’t do this you will find the same mistakes repeating themselves.

Catalogue Debt – What to do if You Have a Problem

If you are having difficulty making your catalogue payments, or if they are making it hard for you to pay other essential bills then you have a catalogue debt problem.  Make sure that you are not giving your catalogue debts higher priority than they deserve – possibly because you see a representative of the catalogue company on a regular basis.  Your priority should be to pay for essential items like mortgage/rent, food, council tax etc before paying any unsecured debt (which is what catalogue debt is).

Get advice from the Citizen’s Advice Bureau who will be able to help you with making a budget and dealing with your creditors.

Debt Fees – Are They Legal?

If you want to know whether the debt fees that have been added to your account are legal then in the first instance refer back to your original credit agreement.  This should contain details of the fees and charges that the creditor can add to your account in the event of you missing/being late with payments.  If legal/collection action is being taken then there are usually rules on a country-by-country (or state-by-state) basis laying down what you can be charged for collection visits or court time.

Debt Fees – How to Stop Them

The only way to stop debt fees, penalties, and interest being added to your account is by negotiation with your creditors.  You can do this yourself but you will find it a very difficult process.  It is much better to contact a reputable debt management company or charitable organisation to do this for you.  In the UK I suggest:

The Citizens Advice Bureau – with offices in most major towns/cities – find their number in the book.

The Consumer Credit Counseling Service (CCCS) – A charity that helps people with debt problems.

The Payplan Partnership - The premier debt management company in the UK – can provide advice on your situation leading to either a debt management plan or an individual voluntary arrangement.