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12 steps to solve your debt problems

Millions of people are affected by debt. May 2012 figures from Credit Action show that the average amount owed per UK adult (including mortgages) is £29,722. To put this into context, this is around 122 per cent of average earnings.

And, a recent survey from a leading financial services website found that over a quarter of Britons (27 per cent) with debt have increased their overall amount of non-mortgage borrowing in the last 12 months.

However, if you are in debt it is possible to be proactive and to tackle your debt problems. And, it’s important to take action straight away and not bury your head in the sand. Your problems won’t go away, and they will only get worse if you ignore them.

So, we have put together this invaluable guide to solving your debt problems. Keep reading to learn more.

1. Make a decision to do something

However bad your debt problems may seem, you can do something about it. A survey in 2012 found that over a third of Britons (35 per cent) had managed to reduce their debt in the previous year. So, it is possible to be proactive and to do something about your debt.

Your first step should be to make a conscious decision to tackle the problem. Accepting that a debt problem exists and making the choice to do something about it is the first step to becoming debt free.

2. Stop making the problem worse

Once you have made a decision to tackle your debt problems, it is important that you draw a line in the sand and stop making the problem worse. Don’t borrow any more or take on any more debts.

You should immediately change your spending habits and cut back to essential spending only. There is no point making a decision to tackle your debts and then continuing to spend as you were before. You will only end up in further debt problems at a later date.

As the saying goes – if you’re in a hole, stop digging.

3.List your debts and prioritise them

Sometimes, your debts may not be as frightening as you think. You should sit down and work out exactly what you owe and who your creditors are. You might find that you actually owe less than you thought you did.

You should then prioritise your debts. The most important debts are those which fundamentally affect your security, such as your mortgage or rent arrears or your car loan if your vehicle is essential for work. In addition any taxes, outstanding Council Tax or court fines should be a priority as non-payment of these could land you in prison.

Make paying these debts a priority and use whatever money you have left over towards ‘non-priority’ debts such as credit cards, personal loans and store cards.

4. Pay what you can

While you are in the process of tackling your debt problem it is important to carry on paying what you can to your debts.

Sitting down and working out a monthly budget is a good way to start. List your household income and all your regular outgoings and work out how much disposable income you have each month to pay towards your debts. You can then work out exactly what you can afford.

Making the minimum payment each month should be your aim – even if this isn’t reducing your overall debt very month. It will help you to maintain your credit rating and make it easier to negotiate with your creditors in future.

If you do have any spare income it can be worth paying this off your debt. For example, making more than the minimum payment to your credit card some months will help you to clear your debt more quickly.

And, if you have agreed a reduced payment schedule with your creditors, make sure you stick to this if you can.

5. Seek advice from an expert

There are lots of options for tackling your debts. These range from simple debt consolidation to formal solutions such as debt management, an Individual Voluntary Arrangement or even bankruptcy.

You should get independent advice to help work out which is the best debt solution for you. Organisations such as the Citizens Advice Bureau and the National Debtline can help you get advice. Over 8,500 new debt problems are dealt with by Citizens Advice every working day and so they have lots of experience and expertise in this area.

6. Consider debt consolidation options

If you have lots of unsecured borrowings with several creditors, it may be worth considering debt consolidation. This allows you to take a larger loan (typically on a secured basis) in order to repay all your other debt. You are left with one larger loan, one lender and one affordable monthly repayment.

Debt consolidation can reduce your interest charges, reduce your monthly outgoings and simplify your finances. However, a secured loan will require some equity in your home and you may end up paying back your debts over a longer period.

As it won’t generally affect your credit rating, a debt consolidation loan is often a great place to start when you are trying to tackle your debt.

7. Speak to your creditors

If you’re struggling to pay your debts it is important that you are honest with your creditors. Keeping them in the dark is likely to cause problems and so you should be honest and up front about your situation and what you can afford to pay them.

If you can’t agree a settlement with your creditors, it may pay to use a debt specialist. Debt management plans and other similar arrangements can help you to negotiate reduced repayments with your creditors that are affordable to you.

8. Increase your income

A good way to help pay your debts off is to increase your income and to use this extra money towards your debt. Perhaps you can work extra hours or find a part time job to supplement your income? You may be able to sell unwanted goods on auction sites such as eBay or sell any specialist talents you have such as website design or translation skills.

You may also be able to monetise a hobby that you have, such as selling your artwork or crafts online. And, make sure that you are claiming all the benefits that you are entitled to, including tax credits, housing benefit and child maintenance.

9. Reduce your outgoings

Reducing the amount that you spend every month will leave you with some spare income to direct towards your debts.

For example, consider switching your gas and electricity provider, your mortgage and your mobile phone provider. Be more energy efficient at home and shop around for financial products such as car and home insurance. Use public transport rather than your car and don’t eat out as often.

In addition, you can use coupons and vouchers on your weekly shop as well as buying cheaper ‘own brand’ goods.

10. Accept help

If friends and family want to help you with your debt problems – let them. For example, your relatives may babysit for you to enable you to take a part-time job. Or, your friends may offer to lend you money at a zero interest rate to repay your debts.

Accept help from your loved ones if it helps you to pay more to your debts.

11. Track your progress

If you want to become debt free it is important for you to monitor your progress towards this goal. Make a spreadsheet with your debts and update this on a weekly or monthly basis. This will help you to see that your debt is shrinking and will also motivate you to continue to reduce your debt.

12. Consider formal solutions as a last resort

If you haven’t managed to come to agreements with your creditors, you haven’t been able to agree a debt consolidation loan or you haven’t been available to keep up repayments to your debts then a formal debt solution may be required.

Specialist companies can help you arrange a debt management plan while an insolvency practitioner may be able to help you set up an Individual Voluntary Arrangement. These solutions should be a last resort as they will negatively affect your credit rating and can incur fees and charges from the providers.

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