Dealing with debt: five things to know

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DEBTS: you've got them and you want rid.

But it's not as easy as that.

We can't Bernard's Watch our finances: rent must be paid, food must be eaten and, no matter what we tell ourselves as we Excel ourselves into a debt guilt driven frenzy on a Sunday night, occasionally lattes must be drunk and fun must be had.

In other words: dealing with debt is tricky and messy. Here are five steps to get started.

1. Assessing the problem

There's a certain school of thought that all debt is bad.

Whenever we talk about vulnerable consumers or an individual who has got themselves into unmanageable debt, it's people from that school that post comments along the lines of: 'shouldn't have borrowed the money in the first place'.

But that's not an idea that, ultimately, stands up to much scrutiny because the 'debt' market is now so broad.

Millions of us take out long-term borrowing to pay for our home, or take out student loans.

Millions more of us borrow in the short-term using credit cards, overdrafts, personal loans or payday loans.

In this environment there are also a whole range of debt problems, some more problematic than others.

Priority debts

Traditionally we'd characterise someone as having problem debt(s) if they were either struggling to pay for the basics like mortgage or rent payments, council tax, utility bills and/or debts or over burdened proportional to income, with a debt, excluding mortgage, larger than their annual income.

Central to both is the concept of priority debts, the borrowing or arrears that must be paid in order to keep your home, possessions and basic utilities.

That typically means:

However, as we've noted, a broader range of products has resulted in a blurring of the line between priority and non-priority debts.

In late 2010, for example, the use of controversial charging orders threatened the homes of many in serious debt, a situation where though the OFT was forced to step in to help protect consumers.

2. Trying to budget is like trying to diet

There's a certain type of advice for people with debts that goes like this:

On a sheet of paper, list all household income in one column on the left. Count wages and any state benefits, pensions or tax credits you may receive. On the right of this draft budget sheet, draw up a list of all regular, essential expenses.

Work out all figures on a monthly basis and subtract your expenses from your income: this is the figure you have to spend on your debt repayments. Now pay it off.

That's great if you run your life like a small business but, like diets, budgets are notoriously hard to formulate in a realistic way that means you'll actually stick to them.

Writing down the cost of every Starbucks muffin you buy is almost as boring as writing down the calories in every Starbucks muffin.

And sooner or later you go: screw it. And you eat seven.

In other words, it's easy to see what we should do but not so easy to do it especially since, as we saw in 1, 'writing down your debts' turns out not to be as simple as it sounds.

Focusing on the best method for repaying debts, increasing income and/or cutting back on expenses is far preferable to beating yourself up every time an attempt doesn't work out.

We've looked at some of the best budgeting methods here and we've also reported on a real world example of method over logic.

3. Advice is for everyone. Taking it is not.

Many people think that their debts are too small/too large/the wrong type to get help but there are about as many debt advice services as there are types of debt.

Help with benefits, tax credit claims, County Court Judgements or other legal action is available through Community Legal Advice, for example, and, as our debt advice guide (available here) shows, there are many options for those facing difficulty making repayments.

StepChange (formerly CCCS) is one of the foremost services offering help for those with 'non-priority' debts, for example.

Debt advice should always be free.

Even debt management companies that charge for consolidation plans shouldn't ever charge for a consultation, see our guide for more on the differences between debt management and debt charities.

Being wary of advice

Speaking of debt management firms, it's worth being aware that the debt advice sector isn't without its bad guys.

Mismanaged debt management firms have been known to take advantage of those in a vulnerable position either for their own gain or out of genuine confusion.

Take all advice with a pinch of salt - and that includes ensuring you make an informed decision for you even if you go to a debt charity.

4. Repayment takes time

On a similar note, be very suspicious of any service which claims to completely wipe a debt or improve a damaged credit history.

As we've written here many claims to write off debt are scams.

Making repayments to get debt free, and stay that way, takes time but it's worth it.

Making it easier

Having said that, there's no reason to struggle under the yoke of repayments when you could be making things a lot easier for yourself.

5. Debt means more than money

Money worries can have very serious psychological and social implications.

As our research into the statistics of how we're managing debt shows, attitudes about debt, like the ones we've discussed above, run very deep.

One study we look at in that guide, for example, found that almost a third of people in debt hide the true extent of their debts from family members. That's a lot of pressure.

Remember that under the Lending Code banks and building societies must offer extra help and support to their most vulnerable customers such as those with mental health problems.

Remember, too, that help and support is available.

National Debtline are on call Monday to Friday 9am-9pm and Saturday 9.30am-1pm on 0808 808 4000 for debt specific help and advice.

National Debtline is just one of the organisations offering free money help, however. Have a look at out full list of debt help services here.

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