Why So Many Are Seeking to Cut Bad Debts
The worst thing you can do if you are in arrears with your debts is to ignore them. Burying your head in the sand will likely get you deeper into trouble. The first thing you should consider is contacting your lender(s) and let them know you are having problems paying your mortgage, loan, or credit card. One thing for sure is that you are not alone, there are millions of others out there who, like you, are in a financial mess. Use this opportunity to take any needed action to cut bad debts, using debt solutions that really work.
Tips to making the most of your money
It is staggering to contemplate the amount of debt that some individuals are in. Current figures show that around 331 people every day of the year will be declared insolvent or bankrupt. There are on average 153 mortgage possession orders being made every day. And on average every new day sees 1,000 people seeking some form of formal debt rescheduling.
Citizens Advice Bureaux are seeing a sharp rise in the number of people in debt seeking their help – around 9,000 new cases every working day in fact. It is reported that around 20,000 mortgage accounts are six months or more in arrears. Over 260,000 are three months behind.
And as unemployment levels remain high, more people are resorting to making purchases using their credit cards, sometimes even paying their existing loans by withdrawing cash to pay the loan repayments. Rather than successfully finding a way to cut bad debts this just results in them being more in debt. In the UK, according to the British Bankers Association, outstanding credit card balances stood at £60 billion in June 2011. Such is our love of plastic that around 24m plastic card purchase transactions are being made each day with a total value of more than £1bn.
Credit cards are often among the most expensive ways of borrowing money. Suppose, for example, that you currently owe £5,000 on your cards, at an interest rate of 18% per annum. By making the minimum 3% payment of £150 and keeping to that amount for the rest of the term, it would take you 47 months to pay it off. Meanwhile, you would have paid interest totalling £1,984, which is much higher than if you had taken out a loan for the same amount at the beginning of the term. This calculation does not take account of course of adding any further purchases on to the credit card.
Whatever you do you should not borrow from one credit card to pay another. If you do that you are just chasing your tail. The interest mounts up, and you dig yourself deeper into debt. Get rid of your credit cards, cut them up, and do not use any credit cards again until at least you are back in a sound financial position. Taking out more credit in order to pay off existing loans is the worst thing you can do. It just becomes a merry-go-round of debt which gets harder to get out from. Our parents and grandparents paid for what they wanted when they had the money to do so, nowadays we live in a buy-now-pay-later society, and we are constantly being tempted to buy things on credit.
People all over Europe are using more credit, as the economic situation remains gloomy. Analysts in the US are becoming ever more concerned as more people turn to credit over cash.
Examine Your Budget to Cut Bad Debts
Sometimes it is as simple as going through your finances, seeing where you can cut down on expenses. Often it is easier to reduce outgoings than it is to increase your incomings. Draw up an action plan to help you balance your budget. Can you agree with your mortgage provider to pay interest repayments only, for a period of time, until your finances are healthier? What about you entertainment costs? Cutting back on socializing by not going out for meals, or to the cinema say, might save you money. Can you save money when shopping, buying cheaper cuts of meat, own label brands, fewer clothes? Do you really need two cars when one would do? When renewing your motor insurance check to see you have the best policy for your circumstances, and check online for the lowest quotes. Is your home now too big for you? Could you downsize, likely making savings on energy bills, council tax etc. Sometimes a few adjustments can result in debt solutions that work.
If you take a good hard look at your finances and still can not balance the books more drastic action might have to be taken by you.
Changes to Housing Benefit
The UK government has outlined changes to the Housing Benefit system, some taking effect from 2013. These changes are likely to push the numbers of those in debt up, as some will have to meet a shortfall between what they can receive in Housing Benefit, and what they have to pay out in rent.
The housing and homelessness charity Shelter discusses these changes and what they could mean for you on their website.
Debt Solutions That Work
When we talk about cutting bad debts, we do not necessarily mean not having anything on credit. If you have a mortgage, or are paying off a loan, then you have a debt. What we are referring to here are debts which are in arrears. And this is where it is essential to work your way through your financial problems, often with the help of the professionals who can give you sound, impartial advice.
Before you panic, you need to stop and think about the types of loans you have, how many creditors you have, and how much is owed. If, for example, you are managing to keep up to date with them, but are struggling to do so, then think about cutting back on your payments with one of them. So, if you have, say, three credit cards and one bank loan, try contacting the bank and asking if they will allow you to reduce your payments to a more manageable level. It does work, depending on how co-operative your bank is. By reducing your payment amounts you’ll be paying over a longer period of time, so you’ll need your bank not to charge additional interest too. If your bank agrees, then you could find you can manage all your loan/credit card repayments more comfortably.
Debt Helplines Can Help to Deal With Bad Debts
For some people, they could cut bad debts within a relatively short time period. You might be going through a temporary downturn in your income, for some reason. A debt management plan could be right for you in certain circumstances. But, it is down to your creditors whether they will accept reduced repayments or freeze interest payments. You could go it alone by contacting all your creditors individually to reach agreement. Or, you could use a debt management company who may charge 10% to 15% of your payments as a fee for their services. You may be charged an initial set-up fee in addition to a monthly fee. The typical fees charged for a debt management plan can work out at around £5,000. Be aware though that the Office of Fair Trading has reported that a number of debt management companies have broken the rules about misleading advertising, giving poor advice, and not telling customers clearly enough about their charges. Some debt management companies have even kept hold of their clients’ money rather than handing it over to the creditors, putting debtors into a deeper financial mess. Once this is discovered it is often too late and the debtor might face County Court Judgements, home repossession, or even be forced into bankruptcy.
Better still is to try to use one of the charitable organizations to act on your behalf, such as Stepchange (formerly Consumer Credit Counselling Service), who can provide a debt management plan free of charge.
Some charities such as Citizens’ Advice Bureaux will contact your creditors and help you to reach an equitable arrangement, if they think there is a good chance it will be accepted by them. Payplan is another organisation which does not charge fees from their clients to arrange a debt management plan. Another highly rated organization which can provide help free is the National Debtline. Their phone number is 0808 808 4000 and their advice is independent and completely confidential. Debt helplines can be an invaluable source of information for many who can’t pay their debts, so take advantage of them.
With a debt repayment programme your credit reference file will still show details of the debt management plan, which could affect your ability to gain credit in the future. Expect organizations offering free help to use different criteria in assessing your situation. Applicants may need, for example, to have a minimum of £5,000 worth of debts, and have at least £100 available income per month after all normal household bills have been paid.
Drastic Action to Cut Bad Debts
In conclusion, to cut bad debts usually comes at a price. The cost may be in terms of cutting back, making do with a lower standard of living, going in to a formal repayment arrangement such as an IVA, or if you have very little means a debt relief order, even in to bankruptcy. You must think very carefully about all the options, seek professional help, and only then can you make an informed decision about how you can realistically cut your bad debts. For the majority of people, there genuinely are debt solutions that work.Some of the debt solution options discussed on this site may only be available if you live in certain parts of the United Kingdom, England and Wales for example. If you reside in Scotland you should look for specific advice, such as the National Debtline for Scotland.
Although there is no guarantee of course, with the right guidance you should find debt solutions that work for you.
The information found on CutBadDebts is provided and intended for informational purposes only. This information does not constitute financial, legal, or other advice of any kind, as not everyone’s personal circumstances are the same. If you are looking for professional advice, you should consult with an independent financial adviser.