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.

Debt to Pay – Pay off the Most Expensive First

This method makes logical sense.  You sort your debts into order of the interest rate that they charge and use any additional income that you have to pay off the most expensive debt first.  In this way the money that you pay off your debt saves you the most interest.

Debt to Pay – Pay off the Smallest First

One criticism of the above method is that you might spend a long time paying off an expensive debt and not see very much progress.  This alternative method sorts your debts into order of their size.  You then use as much income as you can to pay off the smallest first.  In this way you will reduce the number of outstanding credit balances that you have at the fastest rate.

Debt to Pay – Calculate it Once and Forget it!

The problem with both of the above methods is that they require a level of self discipline and organization that most people that get into debt just don’t have (I know I didn’t).  My alternative suggestion is to try and work out why you have got into debt and address that issue. Once you have done that, then as long as your debt repayments are reducing your debt and you can afford them – just forget about them and concentrate on enjoying your life and not taking on any more debt!  Your credit balances will be cleared eventually as long as you keep up the payments and don’t take on anything new.

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 Fixers – What Are Your Options?

Doing it yourself – if your debt problem is not very serious then you may be able to sort it out without any help – do a thorough budget, increase your income, and make a plan to pay off your debt.

Getting the help of debt counselors, debt management companies, or looking at debt consolidation.  Debt counselord and debt management companies may be able to help you by negotiating with your creditors, getting interest and fees reduced or frozen.  A debt consolidation loan might enable you to reduce your monthly payments to the point where you can afford to pay off your debt over the long term.

Legal solutions to debt including chapter 7/chapter 13 bankruptcy in the USA (bankruptcy or IVA in the UK) should be considered in only the most serious of cases.  They will have a long-term affect on your life and you should consider other options very carefully before committing to one of these methods.

Conclusion

Take a look round this site for more information on common “debt fixers”! Take as much advice as you can but don’t ignore the problem – it will only get worse.

The good news is that mortgages (being secured debts) are not directly affected by bankruptcy which only applies to unsecured lending (credit cards, personal loans etc.).  As long as you and your partner have the income to pay the monthly mortgage payment then this will continue as normal.

The bad news is that the value of your partner’s equity in the home will probably need to be paid into the bankruptcy to provide funds to pay back your creditors.  In the UK this would always be in the case but in the US there are state-by-state rules on whether your primary residence is exempt from bankruptcy.

In the UK you will be given a period of 12 months from the date that bankruptcy is declared to reach a settlement with the person administering the bankruptcy (either a trustee or the insolvency service).  If no agreement can be reached then a sale will be forced after the 12 month period has passed.

If the value of your home has dropped to below the value of the mortgage then you can buy your partners interest in the home for a notional figure.  This is one of the rare occasions where negative equity is a good thing. 

Credit cards are so common nowadays that it is extremely unusual to meet someone that doesn’t have at least one. If you do meet someone without a credit card it’s a bit like meeting someone that doesn’t drink – you wonder whether they are a very disciplined person or a recovering addict! Following my own debt problems I was until recently in the latter category. I have now been given a credit card (at a very high rate of interest) and this prompted me to consider why I had got into trouble with credit cards in the past. Could it all happen again?

Credit cards are of course a very useful financial tool if used correctly. They can help smooth over temporary variations in your income or expenditure and are just about essential for staying in many hotels. They are however a very expensive way to borrow money on a medium to long-term basis.

So Why do People Borrow on Credit Cards?

If you have available credit on your cards it is very hard not to think of this as money that is yours to spend. People are often helped into this way of thinking by introductory offers that give low or zero interest for a number of months. During this introductory period you can spend without incurring any monthly charges and it really does seem like free money. There is a big shock in store when the low/zero rate period ends – suddenly you will find that your monthly spending budget has been cut by the amount of interest that you have to pay. This can then start you on a debt spiral.

What is a Debt Spiral

A debt spiral starts when you need to borrow money because you don’t have sufficient money to pay for either what you need or have decided that you must have. Unless this imbalance in your income and expenditure is temporary the problem is made worse by having monthly repayments/interest. You therefore need to borrow more and more to keep the same standard of living, with the growth-rate of your debt getting faster and faster. Unless stopped at an early stage this process can very quickly lead to serious debt problems.

How to Avoid Credit Card Debt Problems

If you are ever tempted to overspend on you cards remember that doing so will only make your finances worse in the long term. Try to resist the temptation to buy the latest gadgets or clothes in the knowledge that this will enable you to afford more things eventually. If you already have credit card debts then consider carefully whether a debt consolidation program could help you to reduce your monthly payments.

There is a strong human instinct to simply try and hide when serious and difficult problems are around. Unfortunately this approach may have worked for our ancestors when confronted with hungry predators of some sort, but it is absolutely the worst thing that you can do with a debt problem.

4-Step Plan to Get Help and Clear Your Debt

1. Find a qualified source of free debt advice, either a charity like the Citizens’ Advice Bureau or a respected debt management company, and make an appointment to see them

2. Write down a list of all your debts with outstanding balances. This might be a bit scary, but unless you can see the size of the problem you won’t be able to sort it out.

3. Prepare a detailed and realistic family budget showing all of your income and all of your essential outgoings on a monthly basis. This will show you the size of your debt problem and will help you and your debt advisor in assessing the most suitable form of debt solution. Your debt advisor will help you prepare a budget, but there is no harm in doing some of the work yourself.

4. Research the various different forms of debt solution (Informal Arrangements, Debt Management Plans, Individual Voluntary Arrangements, Full and Final Offers and Bankruptcy) so that you can have an informed discussion with your debt advisor when you meet with them.

Act Now and Start Your Journey to Becoming Debt Free

If you do nothing you will be in the same situation in 6 months time, dreading the phone ringing or another batch of threatening letters. Just imagine how much better you will feel if you have started to take control of the situation and moved that bit of the way down the debt resolution path. All forms of debt relief take some time to complete (a typical IVA can last 5 years), and sometimes that can put people off starting the process, but the longer you delay the more you are delaying the arrival of your debt free life.

I was in the middle of a debt crisis 4 years ago. Things only started to get better when I admitted to myself (and my family) that I had a problem and started to do something about it.

Advantage of Debt Consolidation for Your Debt Problem

The main advantage of debt consolidation is the reduction in your monthly payment for all of your debts. It is very important to prepare a realistic budget to make sure that your new reduced payments on your debt consolidation loan are affordable. Consolidation also makes your total debt situation clearer, i.e. you can’t fool yourself about the true total of all your debts. There is an administrative benefit to having only 1 monthly payment instead of lots of little ones, and if you had got to the stage of defaulting on any payments then the resulting letters and calls should stop when you pay off your account using the money from your debt consolidation loan.

Disadvantages of Debt Consolidation

If you use debt consolidation as a debt solution then you must make sure that you have sorted out the original problems that caused you to get into debt in the first place. If you don’t, you will quickly find that you have a debt consolidation loan AND lots of other debts, which would make consolidating your debt completely pointless and is a path that leads to severe debt problems and possibly bankruptcy.

If you take out a debt consolidation loan secured against your home (and I would usually advise against it) then you are making it much more likely that your home will have to be sold in the future. Unsecured creditors cannot usually force you to sell your home, whereas secured creditors can.

If you do enter a formal debt management solution after debt consolidation you will find that taking on an unsecured consolidation loan over a longer period than the original debts will effectively increase the amount of debt that you have, making it harder to get an IVA agreed with your creditors or extending the period of time that a debt management plan will take to clear your debts. This is because most debt solutions calculate your outstanding debt using the formula – Debt = Monthly Repayments * Number of Repayments left, e.g.

Credit card debt of £1,000 would be considered as £1,000 in an IVA or debt management plan. However if this credit card debt was payed off using an unsecured loan then the debt for IVA purposes would be (for a 7-year loan) 84 x repayment (roughly £22) equals £1,848.

Conclusion

Debt consolidation can be a useful tool on the journey towards a debt-free lifestyle. However you need to be certain that you have the discipline to keep paying the new loan and not create any more debts. If your income does not realistically enable you to pay the cost of your debt consolidation loan then there is little point taking it out. It will make the inevitable process of sorting out your debts properly much harder in the end.

photo credit: David13Or

It is a common situation for one partner in a marriage or relationship to get themselves into serious debt, sometimes without their partner knowing anything about it. So what are the consequences for the partner with no debt problem?

Firstly it is important to remember that your partners debts are not your own. You cannot be made responsible for paying them directly. However there are some implications for the debt-free partner in a relationship with someone in debt crisis:

1. Your credit score. If you live with your partner then most likely the credit reference agencies will have linked your records and your partners. This means that as soon as they start missing payments on their debts your credit rating will be affected. You may find it increasingly difficult to get/keep credit agreements. This situation will get worse as your partners debt crisis gets more severe. If your partner is declared bankrupt then you will be very lucky to get any unsecured credit.

2. Any shared debts. If you have a joint debt like a joint account or a debt that you have signed up for together then you will most likely be “jointly and severally liable” which means that if your partner cannot pay up then the creditor will come after you for the full amount owed (not half of it).

3. If your partner declares themselves bankrupt then any assets that you jointly own like your home will be at risk of being sold (although you will have at least a year after bankruptcy is declared before the house has to be sold) . Only the share of the asset that is owned by your partner will be taken, but in practice this often means that the house has to be sold. There are ways of taking your house out of the equation before your partner declares themselves bankrupt but these do require the debt-free partner to “buy out” their partner using a mortgage in their name or funds from relatives etc.

4. If your partner wants to enter an informal arrangement, debt management plan or IVA then your joint income will be taken into account when calculating how much your partner can afford to pay. The situation is slightly different with bankruptcy in that you cannot be forced to contribute anything towards the bankruptcy from your income. Also, your partner should not say that they pay half of the mortgage/rent etc. and you pay the other half. It is perfectly OK for them to say that they pay ALL of these essential bills and therefore make it less likely that they have an excess that the insolvency service will want to take.

photo credit: milena mihaylova

When people give advice it is usually affected by their own prejudices and interests. Therefore if you are in debt and looking for credit advice and debt help in the UK (or elsewhere), individuals might tell you that you need to struggle to pay off your debt. This could be because they have not knowledge of debt relief procedures or that they resent the idea that people can be relieved of some of their debt.

Any companies that you get advice from will be influenced by the solution that they are selling, and how much money they can make out of it.

Even charitable organizations will be staffed by people who take their own life experience (and their record of success or otherwise with particular debt solutions) into account. It takes a very skilled debt counselor to completely ignore their own experiences and judge a debtors situation objectively.

This is why that I think that it is essential for people in debt to find out as much information about the various solutions (Debt Management Plans, Individual Management Plans, Bankruptcy etc.) as they can. I also strongly recommend that they get help from a qualified adviser. If the debtor has read widely on debt solutions then they are more able to work towards a satisfactory debt solution with their adviser than if they simply rely on the adviser to tell them everything. It is a case of using your debt adviser as a resource to achieve the most suitable debt solution for you rather than surrendering all control over the situation.

In my own personal debt crisis I had decided that a Voluntary Individual Arrangement (IVA) was the best solution for me, even though the debt advice company that I consulted initially suggested an informal arrangement. I persisted asking for my preferred solution and in the end they agreed. This was actually the method I ended up using to become debt free.