DIY Debt management

You could be surprised at how much you can actually achieve without the professional help of a debt management company. Many people have negotiated reduced payments with their creditors, sometimes even getting them to freeze interest and charges on their accounts. If you have decided to 'do-it-yourself', the following article will help you do this successfully.

1. Make a list of your debts

The very first thing you need to do if you are considering negotiating with your creditors is to make a list of your debts. You need to find out exactly who you owe money to and how much each of these creditors is owed.

Once you have done this, you need to work out which ones to deal with first. These are called ‘priority debts’. For example:

• Mortgage or rent
• Gas, electricity and water
• Council tax
• Income tax

These are priority debts because the consequences of not paying them are far more serious than your ‘non-priority debts'. For instance, by not paying your mortgage your home could be repossessed. If you do not pay your utility rates (gas, electricity & water), these can be disconnected. If you do not pay your council tax, a court can send bailiffs to take your belongings to the value of the amount owed. You can even be sent to prison if you do not pay your income tax.

Far less serious than these are ‘non-priority debts’. Some examples are:

• Credit cards
• Store cards
• Personal loans

You cannot be sent to prison for not paying your non-priority debts, though your creditors can still take action if you do not pay. They could take you to court, where you can be ordered to pay. Failing this, your creditors can then get a court order which allows them to send bailiffs round to take your belongings away.

2. Work out what you can afford to pay

Once you have made your list of debts, you need to work out how much money you earn and how much of this money is left over after paying all your essentials. This can be used to pay your non-priority debts.

When working out how much you earn, try to include everything:

• Your wage
• Benefits or tax credits
• Any other form of income

Then work out your expenses:

• Mortgage or rent
• Housekeeping (Food, cleaning materials, toiletries, pet food)
• Council tax
• Gas, electricity and water
• Buildings and contents insurance
• Travel expenses (Public transport, fuel, tax, insurance, servicing and MOT)
• TV license
• Childcare
• Clothing
• Any other essentials such as medical expenses

Once you have deducted your expenses from your income, you will be able to see how much money you have left over to pay your non-priority debts.

3. Sort out your priority debts

If your financial position allows you to keep on top of your priority debt repayments, you will not need to contact them and you can just focus on negotiating with your non-priority debt creditors.

If you are struggling to meet your priority debt payments, however, before you do anything else, make sure these creditors are all aware of your circumstances. Write to them and explain your situation, including the measures you are taking to resolve it. Keep copies of any correspondence.

Negotiate arrangements to pay back your debts. This could involve reduced payments for a period of time. As long as the creditors are aware of your situation and you are demonstrating a willingness to pay back what you owe, you should be able to negotiate successfully. For more information read our ‘Negotiating with Creditors’ article.

4. Sort out your non-priority debts

Once you have your priority debts sorted out and made sure you have enough money to cover all other essential costs, you will need to make arrangements with your non-priority debt creditors. Any money you have left over after deducting your essentials is called your ‘available income’.

Using the list of debts that you made earlier, work out how much you can offer each creditor, based on the amount owed. The following is an example of a system used by the courts in determining a fair amount to offer each creditor.

Example:

First, you need to multiply your individual debts by your monthly available income, which in this example is £200.

Say, for example, you owe £10,000 to Creditor A. You would multiply this by £200.

10,000 x 200 = 2,000,000.

You then need to divide this by the total amount of debt you owe. In this example you owe £10,000 to Creditor A and £5,000 to Creditor B. So, your total amount of debt is £15,000.

2,000,000 / 15,000 = 133

So, out of your £200 available income, you would offer Creditor A £133 a month.

As mentioned, you also owe £5,000 to Creditor B. Using the same method:

5,000 x 200 = 1,000,000

Now divide that amount by your total amount of debt:

1,000,000 / 15,000 = 66

So, out of your £200 available income, you would offer Creditor B £66.

This system is not limited to just calculating payments to two creditors so you can use this method, regardless of how many creditors you owe money to.

5. Contact your creditors

Now you know how much you can offer each creditor, it’s time to get in contact with them. You will need to send them, not just your offer, but a list of all your other creditors and the amounts you are offering so they can see how you have worked out your budget. Again, remember to keep copies of all correspondence.

For detailed help in dealing with creditors read out article ‘Negotiating with Creditors’.

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Remember, DIY Debt Help is a completely free, impartial service. Although the information on this website is provided by industry experts, it should never replace the advice of a debt adviser who understands your individual circumstances.

What is DIY debt?

DIY debt, or Do-It-Yourself debt, is a means of regaining control of your finances without the need of a professional company.

While much can be said of professional help, sometimes you can achieve the desired result with just a little planning, forethought and determination.

Find out more about DIY debt here >>