Don't struggle with debt, deal with it!

Overdrawn on your bank account? Maxed out on the credit card? Over-extended on the loan, worried about the mortgage? You're not alone. Britons are wallowing in a sea of debt, and increasing numbers are drowning! The latest Government figures, published in May, show that individual bankruptcies were up 24.5% on last year, at 10,091. Several lenders, including Barclaycard, HSBC, HBOS and the Royal Bank of Scotland, have recently warned about bad consumer debts.

According to Britain's leading debt charity, Consumer Credit Counselling Service (CCCS), debt is beginning to affect a wider spectrum of people, including the better-off. The number of clients estimated to be earning £50,000 a year or more being helped by the CCCS to come to special arrangements with lenders has almost doubled since the first quarter of 2004.

If you are in such deep trouble with debt that you are simply unable to cut back further on spending and reduce your payments, talk to a free debt counselling service such as the CCCS , Citizens Advice or Payplan, that should be able to help you to come to an arrangement with creditors to reschedule your debts. Avoid any organisation that claims it can help you with your debts but charges you a fee for doing so.

However, there are the alternative options. First off, make a list of your debts and what you need to repay immediately. Some debts are "priority" and you must endeavour to meet them in full.

Priority debts include: your mortgage, as your lender can take court action for repossession of your home; rent arrears, as the landlord can evict you if you fail to pay; income tax and VAT, as you can be made bankrupt or imprisoned for non-payment; court fines, as the court can send in bailiffs to repossess your goods if you fail to pay, or have you sent to prison;maintenance, child support or council tax or rates, as once again bailiffs and jail are the penalties for non-payment;fuel debts, because you face disconnection for non-payment, and hire purchase on essential items. Non-priority debts include credit card and store card arrears, catalogue arrears, bank overdrafts and loans, benefits overpayments, hire purchase on non-essential goods, and money borrowed from family or friends.

Next, look at ways you can cut back. It should go without saying that you should be trying to reduce your spending,

You could start by seeing if a change of energy or telephone supplier could save you money. Try Moneyextra's utilities comparison to see if you can get a better deal.

You should also check out whether you can cut your expenditure on home and car insurance, to see if you can get cover more cheaply.

But perhaps the most important thing you can do is manage your debt more efficiently - you may also be able to reduce your monthly repayments on your loans and credit card bills. If you have a mortgage that is being charged on the lender's standard variable rate, you can almost certainly get a better deal by shopping around for a fixed rate or discounted offer.

Credit card debt is some of the most expensive, so if you are not able to pay off your borrowing each month, look for a card that has a low or 0% deal on balance transfers and/or purchases. Remember, however, that this is just a holding operation, and you are going to have to repay the money one day. Meanwhile, stop spending on your credit card!

If you have unsecured loans, see if you can get a better offer elsewhere. But watch out, as there may be expensive penalties for repaying the loan early, which you need to take into account when calculating if you could benefit by switching.

You may be able to consolidate your smaller loans into one larger loan, but this should be done with care. If you have equity in your home, you may be able to increase your mortgage to cover your other debts, and pay the total sum off over the period of the home loan. This could appear to be a cheap way of solving your problem, reducing your monthly outgoings, but it is a dangerous strategy unless you have a lot of equity in your house, as you run the risk of losing your home if you are unable to meet your increased mortgage payments at any time in the future.

You could take out a consolidation loan. This rolls up all your other debts into one larger loan, but the rate of interest may be higher than you had before, and the way that the lender is able to make the deal attractive is to extend the loan period. The lender may also oblige you to take out expensive insurance. This will mean you being saddled with debt for many years, and paying far more in interest than you would have if you had stuck to the original loans.

14 June 2005 © Moneyextra.com

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