MONEY COMMENT
When Debts Turn Nasty

By Cliff D'Arcy
March 16, 2004

Personal debt has exploded in the UK in recent years. Unfortunately, we've become a nation of credit junkies, with around a tenth of all our spending fuelled by debt.

In May 1997, our total personal debt (including mortgages, credit cards, personal loans, overdrafts and so on) hit £500 billion. By this January, it had almost doubled to £945 billion. £171 billion of this total is unsecured credit, which has swelled to an alarming £7,900 per household.

Of course, £7,900 per household is an average figure - and most problem borrowers owe far more than this. In fact, the Financial Services Authority last year calculated that over six million families and individuals were having problems meeting their debt repayments. Those in most difficulty were spending almost a third of their incomes (31%) on repayments.

So, what do you do when you're unable to keep up repayments? Rule One is not to sit back and do nothing, because this always makes the problem far worse. Rule Two is to cut up your plastic, because keeping your flexible friends is too dangerous for all but the most disciplined borrowers!

Next, gather together all your latest statements, bills, receipts and payslips and then create a Statement of Affairs. Creating this list of your earnings, outgoings and debts will help you to establish how much you earn, spend and owe.

Then make a list of the bare essentials you need to get by, including mortgage or rent, council tax, fuel and water bills, groceries, travel expenses, TV licence, telephone, and home and car insurance. These are your priority payments, which you should meet before paying a penny to your creditors.

Once you've established how much is coming in and how much you need to survive, you have an idea of what's left to put towards your debts. Now, take a deep breath and add up all your debts and arrears (it's useful to note the interest rate you're paying on each debt, so you can see which are the most expensive).

(Incidentally, if you have any savings, use them to pay off your debts. It's madness to pay £200 a year in interest on £1,000 of credit card debt, while earning a measly £40 a year at most on £1,000 of savings. All you're doing is losing £160 a year. Please do put aside a small sum for emergencies, but use the bulk of your savings to pay off as much debt as possible.)

If you find that your basic expenses exceed your income, then you have a major problem. Thankfully, most borrowers won't be in this situation, but it most often happens to people on low incomes, such as single parents, the unemployed and people with long-term health problems or disabilities.

If this describes your situation, you should:

• Claim all the state benefits you can: visit free benefits-enquiry website EntitledTo, or call the Benefit Enquiry Line on 0800 88 22 00.
• Cut back on your expenses: there are heaps of budgeting and money-saving articles on the Fool, such as this piece.
• Contact one of these free debt-counselling services: The Consumer Credit Counselling Service - freephone 0800 138 1111 / National Debtline - freephone 0808 808 4000 / Citizens Advice Bureau - check your local Yellow Pages.
• Get help from the Foolish community at our Dealing With Debt and Living Below Your Means discussion boards and visit our Get Out of Debt centre.
• Think about getting a second job or a lodger (you can earn up to £4,250 a year tax free under the Rent-a-Room scheme).
• As a last resort, consider selling up and moving to a cheaper area, or other equally drastic measures.

Just one final comment: steer clear of consolidation loans, especially those advertised on the telly or in the back of newspapers. Your "easy, affordable monthly repayment" will probably be a secured loan, which means that you could lose your home if you don't keep up repayments. This can be a cheap way to borrow money, but it's very risky for problem borrowers, especially those with poor credit histories.

More: Join The Money SAS! | Britain's Bloated Debt Burden | How To Diminish Your Debts.