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Developing a strategy
Once you have completed your personal budget sheet, you can start to concentrate on how to start developing a suitable strategy for dealing with your creditors and getting out of debt. Depending on your circumstances, this could take a matter or weeks or months, or may even take a year or longer.
We strongly advise that you seek professional advice when dealing with your debts, particularly when deciding on which strategies to use and contacting your creditors. You will often find that creditors are more willing to help you, if they know that a professional third party is involved.
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Your overall ‘strategy’ is to get out of debt as quickly and as painlessly as possible, but there are a number of ways in which you can do this. Over the following pages we will guide you through a number of the procedures that can be used to deal with a debt problem.
Depending on your circumstances and the results from your personal budget, some of these procedures may not be suitable for you (such as bankruptcy), however, it is essential that you do follow the first of these procedures, income maximisation, regardless of your situation.
Maximising your income
Your first objective is to ensure that you are getting all of the money that you are entitled to, through a process called ‘income maximisation’. Whether you’re in debt or not, it makes sense that you guarantee that you and your family are getting all of the money that you possibly can into your household.
Income maximisation is more than just increasing your income – it is ensuring that your income cannot be increased any further, e.g. you are getting the maximum amount of income that you are entitled to. In order to do this, you should check the following:
- National Minimum Wage – if you’re employed, then you should check that you are getting at least £3.00 a hour if you are aged 16 or 17 years old, £4.10 an hour if you are aged between 18 and 21, and £4.85 an hour if you are aged 22 or over – this is the minimum hourly wage that the law states that you should receive. If your employer is paying you less than this they are breaking the law.
- Make sure that you’re not paying too much tax – Most people are unaware of how much tax they should be paying, and as a result, some people end up paying more tax than they should without realising – check that you’re paying the correct amount by calculating your tax liability or seeking advice.
- Check your benefit entitlement – Many people are unaware that, based on their circumstances, they are entitled to some financial support from the government. Even if you work, you may still qualify for some form of help, such as the Working Tax Credit. If you’re already claiming some form of benefit, then you should see whether there are any additional benefits or payments that you or your family may also qualify for. You can use our A to Z of benefits to see whether you qualify for each benefit, how much you’ll receive, and how you can claim – please click here for more information (or use the navigation bar, and click on ‘Benefits Advice’).
- Is there any other way of increasing your income – Depending on your circumstances, you may be able to increase your income in a number of different ways, from getting a second job to renting a room out to a lodger. If you have an adult dependent living in your home, are they paying their fair share of the bills?
If, after checking the above points, you find that you are able to increase your income, do so and readjust your budget accordingly. However, you may find that you are unable to increase your income because you are already getting the maximum amount possible – if this is the case, just carry on reading through this guide.
Reduce your expenditure
You should consider whether it is possible to somehow reduce your overall spending. This doesn’t mean cutting back on essential items, such as food or prescriptions, but does mean avoiding any luxury items.
You should also keep an eye out for any money saving offers or promotions on your essential items to reduce your expenditure even further. There are countless ‘buy one, get one free’ or ‘two for the price of three’ offers in supermarkets, or coupons in papers and magazines. Also, check out www.moneysavingexpert.com for hints and tips on getting the best deal when buying.
Of course, this may not be appropriate if you are already spending the bare minimum on your shopping, so don’t sacrifice your health for the sake of your debts – but do be sensible and question whether you really need the ‘quality’ branded cereal rather than the cheaper ‘value’ brand. Any money that you are able to save can then be used to reduce your debts further.
Prepare a financial statement
You should prepare a financial statement to send to your creditors. Similar to your personal budget sheet, a financial statement is a document that shows your financial situation.
Although you can send your personal budget to a creditor, we would strongly recommend that you send a financial statement instead. This is because the financial statement should give a more general illustration of your situation, rather than going into the more detailed aspects of your personal spending habits.
If your creditors can see that you do not have money available to repay them in full, they may realise that it’s not worth taking legal action against you to recover the debt, and may be more willing to accept a less drastic solution, such as freezing interest and suspending your repayments for a period of time, so that you can concentrate on repaying your priority debts.
We strongly recommend that you seek professional advice when completing a financial statement, as this is the form that you will be sending your creditors. An agency such as ourselves our the Citizens Advice Bureau can help you to draw up a financial statement if you have a completed budget – please click here for more information on how to get help.
How to deal with each debt
Once you have either your personal budget sheet or a financial statement ready to send to your creditors, you now need to decide on how you intend to deal with each debt. The results from your personal budget will, to some extent, dictate which options you have available. To work out how to proceed, ask yourself the following questions:
Question 1: Do you have enough money to pay your priority debts?
If you have answered ‘no’, please click here for more information on how to deal with your priority debts. If you have answered ‘yes’, then…
Question 2: Do you have enough money to pay your non-priority debts?
If you have answered ‘no’, please click here for more information on how to deal with your non-priority debts if you have no income available.
If you have answered ‘yes’, please click here for more information on how to deal with your non-priority debts if you do have income available (even if it’s the tiniest amount).
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