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Problem debt rarely goes away if you ignore it
Probably the thing ostriches are famous for is burying their head in the sand, but I’d say people come a close second for doing exactly the same thing. It’s a coping mechanism when things get a little bit too much, but generally, it doesn’t help and just makes things worse in the long run especially with problem debt. Letters and demands are posted through your door; your phone is constantly ringing, so much so, that you’ve given up even answering it.
Based on information reported by The Insolvency Service, there were 24,837 individual insolvencies in England and Wales up to the third quarter of 2014. That’s a lot of people, but I wonder how many could have avoided a formal insolvency procedure? It all comes down to each individual case, but sometimes there are things that can be done to try to avoid bankruptcy or entering an Individual Voluntary Arrangement (“IVA”).
At Lines Henry, we deal with a large number of people who have reached the point of no return so that only a formal insolvency procedure is left as an available option. If you’re struggling with debt, but don’t think you’re at the point of no return, why not complete our income and expenditure form. This will help you put pen to paper to see exactly where your money is being spent. It will also give you a clear indication on you state of your finances as follow:
- In the green – well done! You clearly know how to effectively manage your finances and have a budget that works
- In the amber – you’re clearly doing something right but there are areas for improvement
- In the red – don’t panic! You’d be surprised at how implementing new ideas can make a massive improvement to you finances.
So, you’ve tried the income and expenditure form and your result put you in the amber or red zone. Don’t start to worry straight away. Why not try our tips below to see if you can make a difference to your own finances?
How to recover from the Ostrich Syndrome:
- Stop increasing your debt:
If you are already in debt and are struggling to make payments, the worst thing you can do is obtain more credit. Many people try obtaining new loans to pay off existing debt, and while you will feel some relief at the start of the loan, you will soon realise that obtaining credit to pay for credit just isn’t the way forward. Your finances will spiral out of control and will leave you in a worse position than when you started.
- Curb your spending:
This may be easier said than done, but think about your actual expenditure for the month and write down what you spend, regardless of how small. You will soon identify what you actually spend your money on. Don’t be fooled into thinking that it’s the big purchases that create debt. More often than not it’s the small purchases that mount up – they are less easy to keep track of. A large latte, once a day, 5 times a week is £60 per month. Once you’ve identified where you spend your money, you can spot where you can start to save.
- Categorise your spending:
Split your expenditure between necessities (food, rent/mortgage, ongoing debt repayments), should haves (clothes, gym membership, other activities etc) and wants (cable TV, nights out).
Once you can see what categories you spend your money in, you will find it very easy to reduce spending by cutting back on the “wants” and focussing your money more on the necessities. You will find that as you reduce the payments on the necessities, you will free up spare cash for things you want, clearing your debt as you go.
- Prepare an Income & Expenditure:
At the start of each pay cycle prepare an income and expenditure. Show your income at the top of the sheet and list each outgoing, which you can then deduct from you income total. Remember to include things like lunches at work etc to give a more accurate result.
By creating an income and expenditure form you will see exactly how much money you have left once all your bills and ongoing expenses have been paid. If you are left with a surplus, then this spare cash can be used to start reducing your debt by increasing repayments to consumer debt e.g. credit cards/store cards etc.
If, however, you are showing a deficit then immediate action is required. You need to assess your outgoings and remove any payments that are made to your “want” list (see point 3 above). We all want to spend money on things we want, but realistically, if we are spending more than we are earning, then this type of expenditure needs to be removed. If, once you have done this, you still don’t have enough money, move onto the category “should have”, until you are left with necessities only. It is quite brutal but you must be strict and realistic when categorising your expenditure if you are to succeed in becoming debt free.
- List your creditors:
Creditors are people you owe money to, so things like your credit card, overdraft, store card, loans etc should be included. The information you should concentrate on is:
- The creditors name
- How much you owe
- What the repayments are
- How long is the term (how long is the loan for e.g. 3 years/4 years)
- What the interest rate is
By listing out who you owe money to, including the details above, can help you identify how you can reduce your debt much more effectively, and will show you relatively quickly your current level of debt.
- Wherever possible, start to reduce your debt:
The points above are all aimed at helping you to reduce your debt by identifying key areas of how you can save money to help you to reduce the level of liabilities. Dependent upon the amount you owe, this may not be a quick process but, chances are, will help you to clear your debt at a much quicker level, whilst still maintaining your own finances and without the need of increasing your existing level of credit.
Key ideas to help you do this:
- Consider interest rates:
This is where point 5 comes in useful as it helps to identify which of your debts has the highest interest rate. The idea here is that you maintain minimum payments to all your other creditors, but make additional payments to the bill with the highest interest rate. Once that is paid, you move down to the next highest and so on, until they are all clear.
Pick the lowest:
The other option is to select the one you owe the least amount of money to. The principal is the same as above – whilst maintaining minimum payments to everybody, you make additional payments on the least amount owing. Once paid, you move to the next, until eventually, they will all have been paid in full.
- Keep Going!
Once you reach the point where you realise something has to be done with your finances, the steps detailed above should help you to establish exactly what you spend your money on. This will help you to identify where you can save especially on things you don’t actually need and ultimately help you to reduce your debt at a much quicker rate, without the need for new credit. But it’s like anything new; you need to keep doing it and after a couple of months, it will become second nature and will hopefully form part of your budget and how you manage your finances going forward in life.
I’m in the red:
Now the downside. What if, when you’ve done all the above steps, it reveals that even after you’ve removed your should haves and wants that you still don’t have enough money to pay your consumer debt as well as your normal household bills. The one thing you don’t do is assume the ostrich position. You’ve already done the hard work by working through your finances and reaching the conclusion that actually, something else is needed. Please don’t be tempted to borrow more money. The help this gives you is generally only temporary, as a good majority of people who do this then start to increase the level of consumer debt, by re-using the cleared credit cards.
So what do you do? You need to seek professional help. Here at Lines Henry we deal with numerous individuals who are unable to maintain their ongoing debt and many think only bankruptcy is an option, but that’s not the case. Dependent upon your circumstances, you may be able to propose an Individual Voluntary Arrangement (“IVA”) to your creditors. This means you make an offer of repayment to them, either by way of monthly contributions for 5 years or by equity release or a lump sum payment.
As each case is unique, you really need to discuss your situation with a Licensed Insolvency Practitioner. The initial advice Lines Henry provide is free, and if you are eligible to propose an IVA, our fees are paid direct from your contributions, so there’s no additional charge you need to worry about.
So, if you’ve found yourself completely at a loss and unable to take back control of your finances, don’t delay. Don’t suffer from the ostrich syndrome but instead call Lines Henry today on 0800 012 6649 or from a mobile to 0161 929 1905, where our team of professional experts are waiting to help.