Some debt advisors state that the total amount of debt accrued per month in credit cards, loans, mail order catalogs etc., should not exceed any more than 36% of our gross monthly incomes.  This is the maximum target level a mortgage lender will allow while assessing a potential borrower.

What is the best next step to take?

The secret to using debt to your advantage is to make sure that you buy assets which will increase in value.  For example, a mortgage will allow you to live in a nice home with the hope of making a profit from it in the future.  A student loan will allow you to study for a good job which will bring you many financial rewards.

Instead of using credit for profitable purchases like the above, most people use their cards to purchase everyday items which decrease in value the moment that they are bought, for example, food or clothes.  If you do have to revert to your credit card for these goods, you should pay your total balance in full to avoid interest charges.

A credit card should never be used to finance a holiday as a holiday does not appreciate in value.  Add to this a card with a high interest rate and you are dabbling with bad debt.  An ideal debt to income ratio should not rise above 20% of an annual income when calculating personal loans, credit cards, utility bills etc.  Figures that rise above this mark are likely to turn creditors away, even if payments are maintained.

Debt Counselling

Informal arrangement – You could consider writing to all your creditors to see if you can reach a compromise. Include a timetable of when you will repay them.

Individual voluntary arrangement – This is a formal version of the previously described arrangement. You would need to apply to the court with the help of an authorised insolvency practitioner. He or she would supervise the arrangement and pay your creditors in line with the accepted proposals

Administration orders – If one or more of your creditors has a court judgement against you and if your total debts are £5,000 or less, the county court could make an administration order. Under the administration order, you make regular payments to the court, which will then pay your creditors. While you are paying the administration order, your creditors can’t take any further action against you to get their money, without asking the court first. Also, you will not have to pay any interest on your debts. You will have to pay a fee for an administration order, but this will be added to the money you already owe and not charged separately.

IVA
An IVA is the most common way to avoid bankruptcy. If you have assets that you would otherwise lose by going into bankruptcy an IVA can offer a level of protection.

Debt Management Plans
Talk to your creditors directly. If your creditor knows that you are really struggling to meet your repayments they may well suggest a more manageable course of action. After all, if you go bankrupt they lose everything.

Re-mortgage
If you are home owner your property is under threat if you go into bankruptcy. If you are in a position where you have regular income coming in but cannot meet your financial commitments this could be a good alternative.

Debt Relief Order

These were introduced in April 2009 as a way for people with limited assets to declare personal insolvency without declaring Bankruptcy.

1. Bring your own lunch instead of buying sandwiches. This will fatten your wallet and thin your waist. Shop sandwiches are often unhealthy and always more expensive. Try keeping an empty water bottle with you that you can fill up from the tap to avoid paying a pound for mineral water.
2. If you a big coffee addict try keeping sachets of instant coffee with you at work. Microground instant coffee can be almost as nice as the real deal and certainly its cheaper than Starbucks.
3. Walk or cycle to work, or into town if you are going shopping. This way you can save heaps of money from bus fares and parking machines.
4. If you are a big texter try signing up to online services which offer free text messages to UK mobiles. This will save you money on texts and its much easier to write a message on a proper keyboard.
5. If you need to send somebody a card, try making one. Use a funny picture from a family holiday, or draw one of your own. People will appreciate the homemade touch and you can save the money from the card to get them a better present or send it first class!

Most of the time we can save money with just a little bit of effort and if done regularly enough this can make an impact! You don’t have to stop leaving tips for the waiter in restaurants to save money on a daily basis!

I have seen in the past, with firsthand experience, how debt can affect families. My Dad suffered greatly with debt when he was in his mid-forties and he almost had his house reclaimed due to a mortgage he really couldn’t afford to pay off. He eventually shared his problems with the rest of us, and we were able to help him.

It increased family tensions, and I would not wish to put my family through similar circumstances which is why I think honestly is essential in any relationship.

I have, of course, had debt problems and sharing them with my partner really relieves the weight that the debt carries. If I had them bottled up I would not know how to cope.

1. An IVA. These were introduced by the Government as a way of debt management without resorting to the complex legal process of Bankruptcy. You negotiate a percentage with creditors of how much you can pay back, and if they agree you may end up paying significantly less than before. It’s not an easy option however, so you should seek advice.

2. Debt Consolidation. Instead of paying the huge interest and fees on separate credit, store cards and loans, these firms can give you one loan which means one payment. Although these are advertised heavily on TV, they are rarely suitable as they mean a very long term commitment.

3. Remortgaging. If you have equity in your home, remortgaging can be an easy way of getting some extra cash at a low rate. It does mean however that the length of your mortgage will increase and again, it’s not for everyone. It could be a risky option, given the ups and downs of the mortgage market.

There are many things that you can do to get you started.

• How about looking at the interest rates on credit cards. Is it possible to switch these over to something that is 0% and stop you wasting money on just paying off the interest which can take years to clear off the balance?

• Earning more money is also a good way to chuck some extra money at the debts to get them paid off quicker. How about extra shifts, a second job or even selling unwanted items on the internet. It can be hard work but remember your aim – to be debt free. It can help setting yourself a goal and give yourself something to work towards.

• Something that is definitely worthwhile doing is drawing up a list of all your incomes and out goings. This way you can pin point areas which may need a bit of work and help to save any money which you can throw at the debt. A budget for food etc can stop any wastage. Also it is a good idea to work out which debts need the most attention, these are usually the ones with the high interest.

I’m very flattered for the email, but would like to recommend anyone with debt problems to seek professional advice. I’d like to offer you this response, however, which is my personal view.

I would never lie to my partner about debt, as sooner or later he would find out anyway. We share the post, share the bills and share the cost – so lying wouldn’t solve anything. However, it is more of an issue when we lie to our families about how we feel about the debt. Many of us cover the situation up by claiming the debt is manageable or you have it ”all worked out”. In reality, we’re hurting deep down and anxious to find a way of gaining money we haven’t got. Covering such problems up really doesn’t help, as those who care for you cannot help you if they aren’t aware of your troubles. There is a potential for strained family relationships when your debts force you to borrow money from those around you, even though you’re not sure when or if you can pay them back on time. Therefore, debt can harm family relationships if the problem is covered up or hidden.

I hope my perspective has been helpful, and if you do have debt problems, I can’t stress enough, seeking debt advice and communnicating about your debt is the best way forward. I’ve found these debt FAQs really helpful for answering some of my common questions about debt solutions.

It seems our post in July about Debt and relationships has sparked a few conversations! Here’s another guest post this week from someone who was inspired to write in after reading a post from another.

I would never lie about anything to a partner, as I believe that a relationship should be based on honesty. Fortunately, I was brought up with the attitude that debt is something to be avoided. Sadly, with today’s attitude of instant gratification, debt threatens the relationships of many couples, especially if both partners are not jointly responsible for getting into the situation.

A former partner, however, did have a habit of spending in secret, as they knew that I would be upset to know they were wasting such large amounts when we could not afford it. Finding the credit card bills, and knowing that these had to be paid for, caused numerous arguments, as I was concerned that our budget could not cover this expenditure.

Concealing financial problems is understandable, but secrets have a way of emerging, and a partner may well be more upset if the facts are kept from them. Anyone in debt would be well advised to be honest about it; of course the initial response may be anger, but they may find that the partner is more understanding than they expected, and will work with them to find a solution to the problem.

Websites like MoneySavingExpert.com can be invaluable in helping you to face the truth and start to take steps to turn your finances around, as well as having many members in the same position who can support and advise you on what to do next. The very first thing to do is to draw up a statement of your assets, where you detail your income and every single expenditure each month – not just your mortgage and bills, but things like money you put aside to pay your TV licence, or for holidays and treats etc. Once you have a realistic statement you are in a better position to see where you can make savings and see what spare cash you have each month to put towards reducing your debts.

Speaking to advisors at the Citizens Advice Bureau can also be very useful, as is the Consumer Credit Counselling Service (cccs.co.uk), who can give the best advice on bankruptcy, IVAs (Individual Voluntary Arrangement) and Debt Management Plans and help you to contact your creditors to arrangement affordable payment plans if necessary.

It takes time, effort and a whole lot of commitment, but the hard work is well worth it when you can finally see the light at the end of your debt tunnel.