How to reduce your debts
Thousands of families are watching their crippling bills stack up until they face the prospect of ruinous debt but there are steps they can take to reduce the burden, writes Frank Conway
IF you have suffered a pay cut or reduced wages, you may no longer be able to pay all of your bills in full. However, don't give up. It is possible to negotiate lower repayments with your creditors.
With almost 36,500 mortgage holders more than 90 days in arrears on their mortgages, the growing problem of debt is not going away any time soon.
Despite the gloom, people with significant levels of debt still have some power when it comes to managing their finances.
Consumers have choices -- they can negotiate lower repayments with their creditors on their own, or they can employ someone to this for them.
Going it alone and negotiating with creditors will save time, but you will require knowledge, perseverance and skill.
This is because almost all creditors today are doing all they need to survive, which includes collecting as much outstanding debt as possible.
Each credit company has its own debt policy.
Ultimately, creditors are always going to be seeking the maximum possible payment from their customers.
However, creditors do understand the value of assisting customers to manage their finances through difficult times.
Here's how to negotiate lower monthly repayments with your creditors:
Prepare a full and accurate income and expenditure statement
You will always be more likely to get a better deal when you fully prepare with an accurate income and expenditure statement.
Creditors will only work on this basis, and they will scrutinise each and every detail contained within the statement to ensure that they are not being taken advantage of.
For example, if a consumer shows that they smoke too many cigarettes, creditors will (rightly) be reluctant to offer reduced monthly repayments, because they will argue that smoking is a luxury that uses up too much of one's personal finances.
Be precise with a personal income and expenditure statement
A sound income and expenditure statement should only be prepared and submitted after a client has tracked their spending habits for a period of at least two weeks.
It is a good idea to get receipts for everything purchased, even that morning hot-drink, the parking fee or that snack.
Keep all receipts and, when you tot them up after two weeks have passed, you may be surprised by how much you actually spend on treats.
Understand the difference between priority debts and secondary debts
Did you know that debts are sorted by category?
Priority debts, as the name suggests, take priority -- they are more important than other debts. So, what does this mean?
In very simple terms, a priority debt should be paid before a secondary debt.
Why? To explain why, let's look a list of priority debts: a mortgage or mortgage arrears, and rent or rent arrears.
Both of these are extremely important as you could lose your home if you fail to pay them.
Other priority debts include: utility payment plans such as electricity and gas. Remember that you could be disconnected from these services if you fail to pay for them.
Fines and judgments should be treated as priority debts because if you fail to pay them you could face further sanction, including prison.
You may have bought your car through a financing arrangement with the dealer or on a hire-purchase agreement.
If you need your car for work then your car loan is a priority debt. If you lose your car due to non-payment, then you may put your job at risk.
Secondary debts take a lower ranking to priority debts and are generally categorised as debts that are "unsecured".
What this means is they have not been given with any form of security such as a home or a car.
Secondary debts can include the following examples:
- Credit card debts (this is one of the most common types of unsecured or secondary debts).
- Credit union loans.
- Personal loans.
- Bank overdrafts.
- Store card debts.
Secondary debt lenders cannot take your home if you fail to pay, but they can take you to court to force you to make a payment.
Also, it is likely that since they are secondary and "unsecured" they will be aggressive in their collection efforts.
For some people, an increase in telephone calls, letters and perhaps even house visits are some of the tactics secondary debt companies are likely to use to secure a payment, along with court actions.
Submitting an offer of reduced payment to creditors
Any repayment plan where you offer a reduced repayment to your creditors should always be on the basis that it is fair and equitable.
In other words, you should demonstrate, through your personal income and expenditure plan that your household income has decreased.
Then it is important that any offer of a reduced repayment to your creditors is based on what your net disposable income is (this is the income you have left over each month after you have paid all your monthly bills and living expenses).
- Another option open to you is debt management. Under debt management, consumers can arrange to have a third party act on their behalf, but there will be a fee associated with the service.
Consumers can choose to set up their own debt management plan and manage their own repayments with their creditors.
In many cases, such a plan can last from one to five years.
The basic principle of such a plan is it allows consumers to establish financial breathing space while creditors have an agreed monthly repayment for the agreed duration of the plan.
- Always keep your income and expenditure statement up to date and make sure that it is accurate. Do not overstate or understate either your income or your expenses.
If you are prepared to make an honest effort with your creditors, they are likely to be more open to working with you.
- Managing your finances through difficult times is possible. You need: good preparation; knowledge on how creditors operate; tenacity to avoid being forced to make a payment to a lender who operates an aggressive collections regime; and determination to stick to your financial repayment plan.
- Frank Conway is a director of Irish Mortgage Corporation, which has launched a financial advisory service called MoneyCoach. This company offers personal budgeting advice.