Getting into debt is a relatively easy thing to do and most people have debt of some kind. However, getting out of debt is much harder and many people don’t even know where to start when it comes to settling their debt. There are lots of things you can do to make settling your debts a little quicker and easier, but you first have to understand your debt.
What do you owe?
Before you begin trying to settle your debts, you need to figure out exactly how much you owe and to which companies. You need to know if any of your accounts are in default or with debt collection agencies. If they are, then you need to know who actually owns the debt. Some companies use debt collection agencies to collect debt on their behalf while others actually sell the debt on to them, so it is actually the collection company that you owe the money to.
Make a list of all the debts you have, what company they are with, what, if anything you are paying towards them and when your last payment was made. If a debt has been sold to a collection agency, then you should note that as well, and note the dates of default of any debts that have one.
It may seem scary listing all the debt you have, but once you have a clearer picture of what you owe, you will be in a much better place to deal with your debt and perhaps even be able to reduce the amount you owe by quite a bit.
Are your debts enforceable?
If it has been more than five years since you made a payment on a debt and you live in Scotland, or six years in England and Wales, then your debt will be statute barred. This means slightly different things in England and Wales than it does in Scotland, but as long as you have not acknowledged a debt within this time, it cannot be enforced in court. There are plenty of Internet forums such as the Consumer Action Group that you can go to for advice on this; they have lots of guides to help you understand this and many other laws surrounding debt and finance in general.
You should also check all your debts for miss-sold Payment Protection Insurance (PPI) and unlawful penalty charges. You can claim these back and many people have claimed back thousands of pounds in PPI alone. It is not a difficult thing to do yourself, so never pay a company to do this for you. Again, the Consumer Action Group forums have lots of information and advice on how to claim back PPI and charges, and if you get stuck, then you can simply ask for help on the forum and people will advise you.
Paying back debt
Once you have made sure that all your debts are enforceable and you have claimed back any PPI and charges you are entitled to, then it is time to work out how you are going to pay back the debt you owe. If you have some small debts that you could afford to pay off in full, then you may be able to negotiate a settlement for slightly less than the full amount.
Be careful when looking at this option though, as sometimes creditors will mark a default as ‘partly settled’ rather than ‘settled’ if you pay a reduced figure. If your accounts are still active, then there is little chance that you will be offered a discount on the balance, but it is still worth paying debts in full if you can as you will save on interest.
If you are only making the minimum payments to debts such as credit cards, then you may be shocked to find out that the amount you are paying might not actually be reducing your balance by very much. This is because credit card companies allocate your payment towards interest first, and if your card has a high interest rate, then your minimum payment may not touch the actual balance of the card at all.
It is worth even paying an extra few pounds above the minimum payment to help bring the balance down faster and therefore save on interest. If you are struggling to make your payments, call or preferably write to the company asking them to freeze interest as a goodwill gesture and commit to paying a set amount each month. Creditors have a responsibility to help you if you are in financial difficulty and most of them will agree to freeze interest, even if only for a period of a few months to allow you to catch up with your payments.
What can you afford
It is important to work out what you can afford to pay to each of your debts before making payment plans with creditors. Don’t leave yourself short of money, for that will only cause you more problems. You need to create a budget and stick to it; include your regular expenses as well as the amounts you are going to pay to each creditor.
By making a budget, you will be able to clearly see how much money you have, as well as how much you are paying to each creditor. It is also useful to note the balances of each account and review your budget every so often to update the balances. This way, you know exactly how much is left to pay on each debt and exactly when you will finish paying.
If you are really struggling to pay your debts, then you should seek advice on what to do from an organisation such as the Citizen’s Advice Bureau. You have options, no matter how bad the situation seems. There are all sorts of debt management plans these days and even bankruptcy is nowhere near as bad as it seems. There really are a lot of options available to you and you really should discuss them with someone who is qualified to advise on such matters.
Being in debt can be scary, especially if you are struggling to make the repayments. However, there are options available for almost every situation. The most important thing is that you don’t hide your head in the sand, the problem will not go away if you ignore it, in fact it will only get worse. Remember that no matter how bad the problem is, there will be a way out. It may take time and effort, but you will get there in the end and you can be debt free.