How deep is your debt?

By at home

Debt is rising in Britain, so much so that the amount owed adds up to £17,000 for every man, woman and child in Britain. It is all too easy to get into trouble but, by doing the right thing, you can get out of the red.

Is it a sign of things to come – bankruptcies are at an 11-year high and there were 8,524 of them in the first quarter of this 2004, an increase of 23 per cent on the same quarter in 2003? And consumer debt in the UK is over a trillion pounds – or to put it in a more understandable form – £17,000 of debt for every man, woman and child in the UK. And the number of bankruptcies is expected to rise as interest rate rises bite. Charles Turner, director of business recovery services at PricewaterhouseCoopers, said: "The introduction of the new bankruptcy regime, perceived by many as a softer option, is likely to result in a continued growth in personal insolvencies, particularly coupled with recent hikes in interest rates."

So how do we deal with all this debt? High debt is like being in water above your head. It doesn’t take a genius to tell you that it is much easier to get into debt than it is to get out but you can get out.

The recovery process involves discipline, self-control, and self-denial – words that people in debt always hear in their most extreme meanings. It is these all-or-nothing, black-or-white interpretations that form a hindrance to getting and staying out of debt. People either completely ignore their bills or they feel completely overwhelmed and helpless.

Rest assured, as difficult as getting out of debt may be, there is a wide expanse between being an Epicurean, whose attitude is live for today and don’t worry about tomorrow, and having to become a monk who has sworn off all worldly possessions.

What you cannot succumb to is inaction. A more realistic view and approach are clearly needed. You have to see the total picture of your financial situation in order to formulate a way out. This means looking realistically at what the numbers – i.e. the money that flows through your hands – tell you about your spending and your indebtedness.

First work out your debt, what is owed where and how much it is costing you. Next look at your spending, list all your income and your must pay bills. Next work out what percentage of your total income is your total debt. (Do this calculation by dividing your total outstanding debt balances by your total income.) If your total consumer debt exceeds 30 per cent of your annual income, you should be worried and begin to take action immediately. A recent survey reported that many people in the UK carry debts equal to 120 per cent of their income. This means that it would take almost a year and a quarter to pay off your debts if you could allocate all of your take home income to them.

You need to work out how often your expenditure outstripped income and bear in mind that you should try to keep 15 per cent of your monthly income untouched.

Getting out of debt is more than just a game of getting the numbers to balance. It is also a matter of getting yourself in balance – especially those desires that got you into this situation in the first place.

Let’s be honest. Yes, the credit and store offers that come through the post are tempting. So, too are the banks’ offers of low-interest loans, and the debt consolidation/debt management companies who promise easy, nearly pain-free repayments. Offers are one thing; accepting them is another. If you accepted the offers, then you are a victim of your own actions, not those of the bank, credit card companies, the loan companies, or other entities you may want to blame.

You have done this to yourself. This is the first confession.

The second issue you need to tackle is why? Why do you have such a problem with controlling your spending and handling your debts? For most of us the problem arises from one of three sources. And an inability to understand simple maths is rarely one of them, although it is a common excuse.

The three causes are: a sense of entitlement; an inability to distinguish between one’s needs and wants; and a desire to have a materially perfect life now, this instant.

One way to get yourself out of this mindset is to ask yourself what have you done in your day-to-day life that has been exceptional and therefore worthy of special praise or treatment? If the honest answer is nothing, then you’re spending money as a misleading form of therapy.

To take control you must be aware of the emotions that have driven you to overspend. The temptation to spend, spend, spend, is there for all of us but it is only by recognising it, knowing the situations that stimulate it, and having a way to control it that we can control our spending.

In short you have to learn how to stop yourself.

The time has come to formulate your own action plan. When your financial situation is difficult do something practical about it – don’t buy lottery tickets and cross your fingers.

Reduce your interest costs, if you can, by transferring your debts to a lower rate. This way you will not only lower the payments that you have to make every month, but you will save hundreds, even thousands of pounds of interest every year.

Remember to be disciplined! Cut up the old store cards/credit cards and cancel the accounts once their outstanding balances have been transferred.

Prioritise the order in which you will pay off your debts and determine the amount of money you will need each month to achieve this and cut your spending to make money available to reduce your debts.

Next negotiate with your creditors. If you cannot arrange a way of transferring your debts (perhaps because you’ve damaged your credit rating), or you just don’t have enough money to pay the bills and, at the same time, live on the minimum budget you’ve established, then it is time to negotiate with your creditors. There are two things you can try to do:

Ask them to freeze the interest charges on your account – i.e. to temporarily stop charging you interest on your outstanding balances, and ask them to lower your minimum payment to make them more affordable given your income and expenses.

By doing both of these, you assure that the payments you make will be totally allocated to paying off your outstanding balances.

If you have been missing payments regularly, repeatedly evading your creditors’ phone calls, or promising to make payments and then failing to do so, then expect no sympathy from your creditors. Your own actions have made you seem untrustworthy. Your words and promises have no credibility.

However, if you have been making the minimum payments on time and have not been evasive about your situation, some creditors will give you an opportunity to stabilise the situation and get back on your feet. Just don’t be afraid to ask for help.

You may find yourself in a debt situation that is just so bad that you just don’t know what to do. You are stuck, unable to see any practical solution. So you choose to do nothing, which is the worse thing you can do. Remember: when your head is in the sand there’s still a lot of you exposed. Get some help.

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