People all over the country are learning the hard way that the good old days of easy credit are over. So what can you do if you find yourself up to your neck in debt? Sean Tyrer from The Debt Advice Team gives his step-by-step guide to tackling the problem

After a sustained period of credit accumulation, Ireland, along with many other countries, is beginning to realise that the nation’s love affair with easy credit is now turning into a debt nightmare for many people. So what can you do if you find yourself with mounting debt? For starters, don’t ignore the problem. When credit commitments turn into debt problems it is vitally important to acknowledge that there is a problem and to take positive action straight away. It is very common for people to adopt the ‘ostrich syndrome’ and stick their head in the sand in hope that the problem will just go away, but the reality is that it won’t. This strategy will simply serve to worsen the problem. So what can you do if you're up to your neck in it? Our step-by-step guide should provide you with some relief.

 

Overdue bills and credit payments need to be dealt with without delay in order to draw a line in the sand and to limit the damage that ignoring the problem can have. The starting point should be to contact your credit providers and make them aware that you are experiencing financial difficulties. Although this may seem daunting to many people it is important to do this for three reasons:
Firstly, you will be demonstrating to your creditors that you are simply being honest and are not trying to avoid your responsibilities;
Secondly, you will be giving your creditors the opportunity to see if they can assist you. Credit card companies and banks have a responsibility to act reasonably and sympathetically when people fall into financial hardship. Letting them know that you are having financial problems and that you will be providing them with information about your repayment abilities should enable them to examine internal options that they may have to assist you;
Thirdly, the process of contacting all of your creditors represents the starting point in terms of dealing with debt problems. As such, it represents the first step to taking the decision to deal with the situation positively and
pro-actively.

Dealing with a multiple debt situation will require the need for you to gain a better understanding of how you spend your money and how to prioritise your household and financial commitments in future.
By putting together an honest and realistic budget plan you will be able to focus more clearly on how and where your household income is being spent. Your creditors will usually need you to send them a copy of your plan as they will want to see a written overview of your cash flow and full financial commitments when considering any debt repayment proposals.
When drawing up your budget plan it is essential to understand which bills should be viewed as priority payments and which bills should not. Examples of priority and non-priority commitments are:

 

Food, housekeeping and basic
clothing costs;
Mortgage or rent payments;
Gas and electricity payments;
Hire urchase vehicle payments;
TV Licence;
Ongoing telephone bills.

 

Unsecured loans;
Credit cards;
Store cards;
Old fuel supply debts from
previous address;
Rent arrears from previous address..

The most commonly used method of working out how to allocate available funds across a budget plan is quite straightforward. Add up all of the monthly income that you will receive. Deduct from this figure the payments that you have allocated to your priority commitments and then share the remaining amount that is left across your non-priority commitments on a pro-rata basis.
Pro-rata simply means spreading your calculated disposable income equally to your non-priority creditors based on the amounts owed to each creditor. For example, if you have worked out that you have s400 left over after you have allocated payments to all of your more important bills, and you have total unsecured debts of s10,000 with five creditors then the creditor with the largest outstanding balance would receive the largest proportionate share of the s400.

 

Having followed steps 1 and 2, you should have a better idea of your monthly cash flow. On top of that, the information in your plan will allow you to have sensible repayment conversations with your creditors based on accurate and demonstratable information. Whilst creditors will typically want to obtain the maximum amount of money they feel you can pay, they should understand that certain accounts take priority over others as your budget plan should clearly demonstrate. They should also be very familiar with the principle of making reduced debt repayment offers to unsecured creditors using pro-rata calculations as this can be clearly argued to be the fairest method of sharing available funds across non-priority creditors. What’s more, this method is typically favoured by the courts.

 

If you have put together a fair and reasonable budget plan that can be sensibly defended if challenged by your creditors then you should be able to politely articulate why you are unable to make full contractual payments towards all of your debts. Creditors do look at budget plans closely, so if you include a figure of s1,000 per month for cigarettes and alcohol, expect your repayment offers to be rejected!

 

Remember your plan should not be designed to enable you to show the least amount of expenditure possible so that your creditors will receive unrealistic repayments offers that you will not be able to sustain. Your budget plan should be put together to reflect a genuine snapshot of your monthly income and expenditure that is based on real living costs and commitments. It makes sense of course to demonstrate that you are not living excessively if you are trying to get creditors to accept reduced payments towards debts and to reduce or freeze any interest accruing on the debts. However, it does not make sense to draw up a budget plan that you will realistically not be able to stick to. Be honest to yourself about your circumstances and areas that you can cut back on but remember that you still have to live and enjoy life also.

 

If your budget plan demonstrates that your repayment offers are fair and reasonable based on the reality of your circumstances, and your creditors are refusing to accept your repayment offers on an agreed review basis, then you may wish to contact a professional debt help organisation such as The Debt Advice Team or MABS who will be able to intervene on your behalf and enter into negotiations with your creditors.These organisations are familiar with the many debt recovery procedures that creditors use and can often better represent an individual suffering from financial problems.
Some services go even further. The Debt Advice Team, for example, work closely with Grant Thornton in respect of clients with substantial financial problems involving personal, property or business-related debts. In such cases the Recovery and Reorganisation team at Grant Thornton can work on a more formal basis with creditors often involving Court Examinerships and other insolvency procedures that can be utilised to deal with complicated multi-creditor and supplier situations.

Write down where and how you spent your cash for one month.
At the end of the month, add your findings to your electronic spending recorded on your current account and credit cards.
To discover what you’re spending on your lifestyle every year, multiply your findings by 12.
Now add in once off expenditure like holidays or insurance.
Compare your net (after-tax) income with your final total
Brace yourself for a shock!
Identify necessary (mortgage, loan repayments, food) and unnecessary (holidays, new car) spending to bring spending more in line with your actual monthly earnings.
Identify how much you can allocate to creditors
Necessary spending should come in below annual after-tax income
Monitor spending, either with a diary or spread-sheet, on a monthly basis.
Share your monthly budget plan with creditors.