Paying off your debt

Maybe you can't pay your bills and the list of debt seems endless. You've missed the payments on the house, car, washing machine, furniture, TV, and credit card. How do you get back on track?

There’s no easy way out when you feel like debt is piling up on top of you, but the sooner you face the problem, the better. Nobody likes to lose money, but by paying off your debts early, you’ll also be reducing stress and looking after your mental health.

How much do you owe?

The first step is to work out how much you owe. List details of all arrears (missed) payments, loans and credit commitments, and when they need to be paid. Some debts can cause more trouble than others. We’ll call these priority debts. Confused? Read our article on types of credit here.

Priority debts

Priority debts can have more serious consequences if you don’t pay them. They won’t necessarily be the biggest amounts, or debts with the highest interest rates, but if you don’t pay them you could face things like having your energy cut off, or losing your car.

Priority debts include:

• Rent/mortgage arrears
• Council tax arrears
• Fuel debts
• Water rates/community water charge
• Second mortgage or secured loan
• Hire purchase debts (if you’ve paid less than one third, your goods could be repossessed without a court order)
• Maintenance payments, such as Child Support
• Court fines
• Income Tax or VAT arrears

Non-priority debts

These carry less urgency than priority debts, but are still important to pay. If you are unable to pay them right now then it’s important to contact your lenders to explain why you can’t. Try to work out a repayment plan to avoid further action, such as repossession of your items.

Non-priority debts include:

• Benefits overpayments
• Credit debts, such as overdrafts, loans, hire purchase/finance, credit cards and catalogues
• Money borrowed from friends or family

Try to keep your creditors informed of your circumstances. Any money you have left over after paying your expenses and priority creditors is called your ‘available income’. You can then use this to pay off your non-priority creditors.

Watch our video for tips on paying off your debt:

Maximise your income

Work out how much money you have coming in; see our article on making a budget for help. Try to make a budget and stick to it. Do this on a weekly or monthly basis and include your take-home pay, any social security benefits and money from other sources. List your essential costs and don’t forget occasional payments like shoe repairs, haircuts, and so on.

If you spend more than your income, can you make savings anywhere? Divide up your essential outgoings from other extra expenses like clothes and repairs. Try to cut down on things like alcohol, cigarettes and eating out.

You’ll have to make sacrifices:

• Can you get an extra part-time job for a while?
• Is there anything you can sell to bring in extra money to pay your debts?

Be careful not to sell anything on which you still owe money. Instead you could contact the creditor with a view to returning any items that were bought on hire purchase.

I have no money to spare, what should I do?

It’s worrying if you have no money left after all your bills and expenses, particularly if you can’t afford all of your outgoings. If you find yourself in this situation, there’s lots of help to get your finances back on track:

Review your budget

If you have more money going out than coming in, then it’s useful to review your full budget, and see if there’s anything you can cut back on. You can even switch expenses like insurances or gas and electricity bills to see if you can reduce the cost. It always a good idea to do this with TV, broadband and phone contracts too.

Speak to the lenders

If you have existing debts and might struggle to pay these, then this is the time to speak to the lenders. See if there’s any agreements you can work out. Some credit card providers might even be able to change your interest rates too, if you ask. However, you might also want to speak to a free debt advice provider such as StepChange, PayPlan, National Debtline or Christians Against Poverty. They can help you understand all your expenses and support your conversations with lenders.

Move debt around

Depending on your circumstances, you might also be able to reduce the cost of your debt by moving things around. For example getting a zero or low interest balance transfer card, or consolidating debt. Before you do this it’s important to make sure you can afford any repayments, before you enter into a new credit agreement.

Get free debt advice

If you’re situation is more serious then a free debt advice provider can help decide if you need any formal or informal repayment plans, such as a debt management plan or an individual voluntary arrangement.

In some circumstances, bankruptcy may be considered as a last resort. Using a debt advice provider will help you understand what this means and how it works. You should always get advice before making decisions.

Benefits and tax

Make sure you’re receiving all the income you’re entitled to. For example, check whether you’re paying too much tax. You can check your tax code by contacting your local tax office.

Check with your local Benefits Agency office or Citizens Advice whether there are any social security benefits you could claim, such as Tax Credits. Find out more about tax credits.

If you already receive benefits, check that you are getting your correct entitlement. You could be due a council tax rebate or additional benefits. You might also be able to claim credit protection insurance on some of your loans.

Getting advice

If you can’t tackle your debt problems yourself, you can get free advice from a Money Advice Centre or Citizens Advice. If you can’t find an advice agency, your local trading standards department may be able to put you in touch with one. You may also be able to get advice from a legal aid solicitor.

Thanks to Citizens Advice and Experian for their help with this article.