Financial Support and Benefits
Debt
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October 2009
Financial Support and Benefits Debt
People get into debt for all kinds of reasons – because they lose their job, illness, or the breakdown of a relationship. It can also be because people sometimes feel pressurised into buying things they don’t need. The way to get out of debt will be different depending on your circumstances, the amount of money you owe and the type of people or companies you owe the money to. Things may seem bad but it is important that you don’t ignore the problem because it will not go away and could get worse. There are positive steps you can take to deal with debt.
Early signs of a debt problem
If you think any of the following statements apply to you it may be that you have a debt problem.
• You have used up your savings to pay bills
• You are falling behind with paying your essential bills, such as rent, electricity or council tax
• You are more than one month behind on your mortgage payments
• You go over your overdraft limit regularly which means that you are charged and have to pay a higher interest rate
• Your credit cards are at their limit and you can only make the minimum payments
• You are paying for regular household bills using credit
• You are borrowing money from friends and family to make ends meet
Once you have realised what the problem is, you need to work out how much money you have coming in and what you spend it on.
The easiest way to do this is to prepare a Personal Budget
Statement. This is useful to show to your creditors (the people you owe money to) when you are trying to sort out your payments. You can find an example of what a Personal Budget should look like in the National Debtline pack “Dealing with Debt” which can be
downloaded from their website or you can get it by phoning 0808 808 4000
Personal budget statement Step 1 – Check your income
This should include income from earnings as well as any benefits you get. Check the ‘Social Security Benefits and Tax Credit’
document on this website to see if there is anything else you can claim.
Step 2 – Work out what you spend
Write down everything you spend your money on each week, or each month. This should include regular bills as well as things that you buy less often. For example, if you pay for your car insurance all in one go once a year, work out what it costs each week or each month and add it to your expenses.
Step 3 – What is left?
When you have made sure you have included all your expenses, work out if there is anything left over. If there is, you should think about using this to reduce the debts. If there is no money left then you may have to do other things to deal with the debts.
Identifying the debts
First of all, are you the person who has to repay the debt? Usually, you don’t have to repay a debt unless you signed the agreement to borrow money, or you are a guarantor for someone else’s debt, which means that you agree to pay the money back if they are
unable to repay the debt themselves. But, both you and your partner are responsible for paying council tax or water charges if you live together.
You must work out how much you owe and who you owe it to. The people you owe money to are known as ‘creditors’. Creditors can be split into two groups – ‘Priority’ and ‘Non-priority’. This is explained in the “Dealing with Debt” self help pack. It is important to make sure that you deal with the priority debts first and then the non-priority debts. If you do not feel that you can deal with this yourself, phone National Debtline or contact your local Citizens Advice Bureau or Independent Advice Service for help (see Local Contacts). They can help you work out how much you can afford to pay and work out which debts have to be paid first.
Ways of dealing with debt
There are four possible ways of dealing with debt problems. The one you choose may depend on the amount you owe and your financial situation.
Self help
You may be able to sort out your debt problem yourself or with the help of one of the agencies that has already been mentioned, such as the Citizens Advice Bureau, National Debtline or the Consumer Credit Counselling Service (CCCS). All of these agencies offer free, impartial and confidential advice – see useful websites for links.
When you know the size of your debt problem you may have to look at your spending and see whether you can reduce it so that you have some money to pay off your debts more quickly. The quicker you pay off the debts, the less it will cost you in interest charges.
The self-help method means that you have to keep to agreements you have made with your creditors and budget to make sure that you do not spend more than you have got. This method is really only possible if your debts are not very high and can be repaid over a reasonably short time.
Debt Management Plans (DMPs)
This means that someone else works with you, and your creditors, to come to an agreement about a plan for repaying the money in a way that you can afford. To pay for this service you make one payment to the Debt Management Company.
If you use a Debt Management Company you might have to pay up to 25% of the monthly payment as a fee, so you are paying them as well as the creditors. You should only think about this way of dealing with debts if you can repay the creditors over a reasonably short time. The longer the plan is in place, the more you will have to pay in interest and charges. Organisations that don’t make a profit, such as CCCS and National Debtline can give you this service free of
charge.
A Debt Management Plan is not a legally binding agreement and your creditors may take further action to get their money back.
Individual Voluntary Arrangements (IVAs)
Unlike DMPs Individual Voluntary Arrangements are legally binding.
A licensed practitioner must set up the contract and 75% of your creditors (by value of what you owe) must agree to the IVA.
The creditors agree to accept smaller payments from you over a fixed period (this is usually five years). No more interest is added to the debts and once you have made the final payment any debt that has still not been paid is written off. IVAs are available for borrowers who have unsecured debts of more than £15,000 (that is, not
including your mortgage) but they must be able to show that they can’t keep up with the repayments they have now.
This way is only suitable for people who have money left over each month after they have paid all their bills (this is usually about £200 each month). If you own your own home you will not have to sell your home to pay the creditors as long as you keep paying the agreed amount. If you do not keep up the payments under the IVA you could be made bankrupt, which may mean that you lose your home.
Bankruptcy
If you have debts that you cannot afford to pay you can declare yourself bankrupt. To do this you need to:
• Make an application to the County Court
• Prepare a financial statement
• Pay a deposit you cannot get back, together with the
application fee and court costs – this must be paid in cash and can cost up to £385.
This is known as a ‘petition’. If the court accepts the petition then you will no longer be responsible for paying off your debts. Creditors cannot take any more action against you and you are discharged after 12 months when all the debts are written off. Certain debts cannot be written off - these include any court fines and student loans.
A record of the bankruptcy stays on your credit rating for six years.
This makes it difficult to get credit in the future. If you own your own home you may have to sell it to pay the creditors. The Official
Receiver can also take any other assets you may have (but not standard household goods).
Before you decide about any of the solutions above, you should get independent advice so that you know about what will happen
depending on the choice you make.
Tips for dealing with debt
Don’t ignore the debts – they will not go away and the longer you leave them the worse things get
Do be realistic about your debts and if you need to, get help to deal with them
Don’t be afraid to ask for help – it is free from National Debtline, Citizens Advice or the Consumer Credit Counselling Service (see useful websites for links)
Do prepare a personal budget so that you can see how much money you have coming in and what you are spending
Don’t forget to check if you qualify for any benefits or tax credits Do use the online benefit calculator EntitledTo to see if you are entitled to claim
Don’t borrow more money to pay off your debts without getting
advice. Consolidation loans or credit cards can be an expensive way to manage your debts.
Do get in touch with your creditors to explain your financial difficulties
Don’t pay a creditor just because they hassle you the most
Do write down how much you owe each creditor. Give priority to the debts that might mean that you could lose your home, be sent to prison or be cut off by suppliers
Don’t offer to pay more than you can afford even when you are under pressure from a creditor.
Do remember that creditors will usually prefer to get smaller amounts paid regularly rather than irregular payments
The Consumer Credit Counselling Service offers free, impartial and realistic advice to people in financial difficulties on their phone helpline, 0800 138 1111
National Debtline gives fact sheets and a self help Debt Pack which you can get by phoning 0808 808 4000
You can get free advice about a range of legal issues such as debt and welfare benefits, by phoning Community Legal Services Direct on 0845 345 4345 or by going to their website.
Citizens Advice can give you practical advice if you go to their website Adviceguide or you can contact your local Citizens Advice Bureau if you need more specialist advice.
The Office of Fair Trading has produced guidelines about the behaviour of debt collectors which you can download from their website.
For information about the role of bailiffs in debt collection you can go to the H.M. Courts Service website. The laws that say what bailiffs are allowed to do to recover a debt are complex and you should contact a Citizens Advice Bureau, Independent Advice Agency or a solicitor if you need more advice.
There is also useful information on the Directgov website. Follow the link to Money, tax and benefits.
Advice agencies in Somerset
The following agencies provide independent advice on a range of topics including, benefits, debt, employment, housing and consumer issues.
Mendip CAB The Amulet 7 Market Place
Shepton Mallet BA4 5AG Phone: 01749 343010
Email: advice@mendipcab.org.uk
Website address: www.mendipcab.org.uk Sedgemoor CAB
The Lions 17 West Quay,
Bridgwater TA6 3HW Phone: 01278 455236
Email: advice@sedgemoorcab@yahoo.co.uk Website address: www.sedgemoorcab.org.uk South Somerset CAB
Petters House, Petters Way Yeovil BA20 1SH Phone: 01935 421167
Email: cab@southsomcab.org.uk Taunton CAB
44 Station Road, Taunton TA1 1NS Phone: 01823 448959
Email: advice@tauntoncab.org.uk
Website address: www.tauntoncab.org.uk West Somerset Advice Bureau
The Lane Centre Market House Lane, Minehead TA24 5NW Phone: 01643 704624
Email: advice@wsab.freserve.co.uk
Website address www.wsab.freeserve.co.uk
