Once you have taken stock of your debts, before you look for an affordable loan, the first thing you should do is contact your creditors - that is, all the organisations you owe money to (including the gas, electricity, water and telephone companies). You can do this on your own, or with the help of a debt adviser.
The earlier you write to your creditors explaining that you are in financial difficulty, the more flexible and helpful they are likely to be. If you have already started to receive reminders and/or final demands, do not ignore them - get in touch with the company as soon as possible to explain your situation. Your creditors may charge you some of the costs they incur in chasing arrears, so you risk exacerbating the problem by doing nothing. You are also more likely to face court action.
Negotiating
To most people in serious debt, the very thought of asking their creditors to agree to freeze interest, lower their monthly payment or write off a significant part of it can be extremely daunting. It may surprise you to learn that there are many useful tips and strategies that you can employ in your negotiations with your creditors.
If you are being pressurised by creditors, who are issuing threatening letters and making phone calls demanding money, it is easy to cave in to their demands and offer them everything that they are asking for - even if you have no way of following through with your promises. Do not be bullied into doing so. The first step in the process of negotiation begins with writing a letter to the creditor setting out your position and making promises you can keep.
Writing an effective letter
When you write to your creditors, always include the creditor's name and address, your name and address (and your partner's name if you both signed a joint credit agreement) and your account number. If a creditor has already written to you concerning non-payment, include the creditor's reference number. Attach a copy of your financial statement to show why you cannot pay or to support an offer of reduced payment.
If you have no money with which to make payment, or you are offering only a token sum - for example, you can pay only £1 a month you should:
- give reasons as to why you cannot afford to make the monthly repayment- e.g. you have just lost your job, split up with a partner or had an unexpected fall in income or increase in outgoings
- refer to your budget statement to illustrate why you cannot afford repayment
- explain what you would like the creditor to do - e.g. freeze interest and accept no payments for the next six months, or freeze interest and accept only a token payment
- ask the creditor to send you a paying-in book or standing order form (if you are making an offer of payment).
If you are offering to repay your debt at a reduced amount each month (as calculated in your financial statement), also explain:
- that this is what you would like to do
- how you have calculated the reduced amount
- that you have worked it out on a 'pro-rata basis'
- that you have treated all your creditors in the same way
Don't be tempted to offer more than you think that you can comfortably pay. Your creditor may well agree to reschedule repayments (accept a smaller amount each month, paid over a longer period) or even settle for a much lower amount than you owe if it thinks that your offer is the best that it is likely to get.
Further communication
Once they have read your letter, most creditors will be anxious to get in touch with you to discuss your situation and decide whether or not you have the means to pay them back. It can be very stressful to negotiate with a creditor over the phone because you may feel yourself under pressure to make snap decisions. For this reason it is normally better to continue negotiations by letter, and if your creditor contacts you by phone ask him or her to reply to your letter in writing.
Keeping organised, up-to-date and accurate records of your dealings with creditors is one of the keys to managing your debts effectively. Each time you communicate with a creditor by telephone or in person, write a brief summary of the conversation noting down any pertinent details. You win be able to refer back to the notes that you made if you have a dispute with your creditor at a later date. Add information about payments that you have made, the date that you made them and the reducing balance. This will allow you to see exactly what you owe at any point in time.
Debt management companies and free alternatives
Daunted by the prospect of negotiating with their creditors, some people turn to debt management companies (DMCs) which offer to do this on your behalf, in return for a hefty setup fee and a share of your monthly repayments (typically 15 per cent, plus VAT). As well as removing the hassle of dealing with creditors, these firms also promise to reduce your monthly payments to a sum you can afford. Unfortunately, the performance of many DMCs leaves a lot to be desired. The way they tackle debts often does little to solve their customers' financial difficulties and, in some cases, the fees they charge may even make things worse.
The main problem with debt management companies is that they sometimes ignore priority debts, such as mortgages, rent arrears and utility bills. Customers are left to deal with these themselves, while DMCs tackle non-priority creditors. Their strategy is to reduce monthly outgoings by spreading payments over a longer period and persuading creditors to freeze interest and charges. This may bring temporary relief, where creditors agree, but you are still left liable for the full amount of your original debt. You are also liable for the DMC's own charges, which are often substantial.
A common criticism of debt management companies is that they fail to make a proper assessment of their clients' financial positions. Some also fail to forward payments promptly, damaging their clients' credit ratings and leaving them exposed to high interest rates and charges. A reputable debt consolidation company is often where many people head to, and these can offer excellent solutions for some struggling to pay their debts.
Rather than paying for the services of a debt management company, most people would do better to turn to other sources of help. The Citizens Advice Bureaux (CAB), the Consumer Credit Counselling Service (CCCS) and National Debtline are free services that provide debt advice. Like debt management companies, the CCCS and CAB can negotiate with your creditors to reduce your monthly payments. The National Debtline provides a self help pack that can help you put together a financial statement and a list of creditors. It may then refer you to either the CCCS or PayPlan, another free debt management service. Other money advisors can be located through the Federation of Information Advice Centres.
