The pandemic has been hard – not just mentally, physically and emotionally, but also financially. For many, the cost of the pandemic has taken a toll and there are enticing adverts on TV or social media suggesting little-known ways of becoming debt free, or advertising “government backed” debt schemes. But when looking for help, how can you pick out the right options?
There are many established ways of managing debt. Some are based on legislation, others are simply good, sound debt management practices that have become the norm over the years. If you’re worried about debt, take a deep breath and address your concerns as early as possible. If you earn less than your debt, or if you need a loan or your overdraft to get you to payday, then it’s time to be proactive.
If you find it difficult to know where to start, here are our step-by-step recommendations:
Assess your debts
Put them into “Priority” and “Non-Priority” categories. A priority debt is one where the creditor has increased powers to enforce the debt against you. Rent or mortgage payments are priority debts because you can lose your home. Utility bills (i.e. gas, electricity, water) are another, because ultimately those companies can apply to court to disconnect you. Other priority debts include court fines, council tax, TV licence, Income Tax, National Insurance, VAT, as well as hire purchases or loans for essential household items (e.g. a car).
Non-priority debts are, broadly, everything else. The most obvious examples are store card or credit card debt.
Work out a suitable budget
It might sound obvious but it’s important to realistically appreciate what your income and expenditure is, partly so that you can manage your personal life but also to explore if there is anything left over to offer your creditors. Try and create routines, such as a meal planner and stick to the shopping list to try and make it easier to monitor your essential spending.
Boost your income
Explore if there are any ways that your income can be increased. You may be eligible for tax credits, universal credit or other benefits. Explore if you qualify for a charitable grant – the charity Turn2Us can give you a list of things you might be eligible for. Go back to basics – can you save money by swapping energy suppliers, or broadband and TV packages?
Create a financial statement
This is a summary of your income and expenditure and is key to discussions with creditors. People frequently tend to recognise their regular spends, such as their travel costs to work, food or utility bills, but overlook sporadic spends. These are things like prescription charges, a dentist visit, replacing clothing, home repairs, or, if you have children, the costs of a school uniform. You should factor in all such things. If you’ve never created a financial statement before, then free specialist advice is available through a variety of charitable and government organisations.
Buy yourself time
If you need to time to take stock or seek specialist help with the steps above, you can ask your creditors for time. There are template letters available from charities and other organisations. Until recently his relied on your creditor’s goodwill – but not anymore.
The law changed in May with the introduction of The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 – also known more simply as “Breathing Space”.
If you qualify, you can apply for breathing space. Only recognised debt advisors can make this application, so you’ll need to talk to one first. If granted, any creditors named in your application can’t pursue you for your eligible debts, or charge you interest on them, for 60 days. They’re also not allowed to make any contact with you, unless it’s about any other, ineligible debts that you may also have.
For example, a mortgage is not an eligible debt for breathing space, but any historical mortgage arrears are. So, if you have mortgage arrears listed in the application, the mortgage company cannot discuss those, or any charges or interest linked to them. But they can still contact you about continuing the mortgage payments that you are still expected to make.
The regulations also introduced a new Mental Health Crisis Breathing Space. This allows for the same respite as above, but if you’re eligible due to your poor mental health, the breathing space lasts for the length of your mental health crisis treatment, plus 30 days. As well as recognised debt advisors, a wider group of people can make the application for you, including approved mental health professionals, your carer, or certain other professionals.
Breathing space gives you a legal period to take stock of your situation and seek out specialist debt advice before exploring the most appropriate remedy for you. You should still try and make payments on debts that are not covered under the scheme.
Once you have had time to take advice, offer a solution to your creditors. The most practical approach is to attempt to renegotiate the level of repayments to something more affordable. Offer your financial statement as evidence that you’re making a reasonable proposal. Whatever is agreed should be backed up in writing to create a paper trail of your efforts to take responsibility of managing your debt. Take control and confirm your understanding of the negotiated payments; don’t wait for your creditors to write to you.
If your creditors are not willing to negotiate then consider if you are eligible for a Debt Management Plan. This is where you make one payment to a third party such as a charity, who then distributes the money among your creditors on a pro rata basis.
If this offer isn’t accepted, then a more formal remedy may be appropriate, such as an administration order, a debt relief order, an individual voluntary arrangement (IVA) or bankruptcy. Other possible non-formal options can include equity release or consolidating debts into one debt. Each has its own advantages and disadvantages, which you should weigh up very carefully. You can read more about these options next time in Part 2 of our article.
Every person’s circumstances are unique, so it’s important to get specialist advice before making any final decisions. There are a number of charities and government bodies that offer information and help, and it’s a good idea to explore their services first before paying a company advertising the offer of debt help.
They key charities and organisations offering free assistance are:
National Debtline: https://www.nationaldebtline.org/
Money Advice Service: https://www.moneyadviceservice.org.uk/en/categories/taking-control-of-debt
Citizens Advice: https://www.citizensadvice.org.uk/
Turn2US: https://www.turn2us.org.uk/ (for checking benefit eligibility and to search for a charitable grant)