T The number of people with money worries has skyrocketed in the past 12 months, according to debt help site StepChange. His research found that 45% of UK adults have struggled to keep up with household bills and loan repayments in recent months, up from 30% a year ago and 15% in March 2020. So if debts become a problem for you , what can be done about it?
Recognize the problem
Another study by StepChange found that 55% of its customers had waited more than a year before seeking help with their debt. Sue Anderson, spokesperson for StepChange, says: "Many people have waited and suffered in silence. Trying to use other coping mechanisms before contacting us."
There are different reasons for delays – but stigma is still a real problem. Research from the Financial Conduct Authority (FCA) shows that 42% of people who had financial problems and ignored attempts by their lenders to contact them about missed payments had done so out of shame.
As soon as you realize you may be in trouble, you should act
Misconceptions about how people get into problem debt persist – and many people who get into trouble worry that others think the problem is the result of poor money management. In fact, StepChange says the vast majority of its customers have run into financial trouble because of a life change that has led to a sudden drop in their income: redundancy, death or illness can all have a serious impact, of course – and more recently, rising energy, food and fuel bills have left people struggling.
Whatever the reason, Anderson says, "As soon as you realize you might be in trouble, you should act."
Set your priorities clearly
Identify your priority debts (where the consequences of default may be very severe, such as z. B. Rent or mortgage arrears, energy bills, council tax and fines) and make sure you tackle these first.
"Every business out there is aware of the current economic situation and is determined to do everything in its power to help customers," says James Jones, head of consumer affairs at credit reporting agency Experian. "First and foremost, it's important to talk to relevant creditors or service providers."
The cost of living crisis has brought a shift to the areas of debt that cause the most stress. Citizens Advice says that tax arrears were the most common form of debt before the pandemic, followed by loan, store and credit card debt. Now energy debt is the biggest cause for concern. Contacting organizations you owe money to may mean you can negotiate a cheaper way to catch up on late payments.
Your energy supplier is responsible for helping you find a solution – but if you don't come forward and try to negotiate it, you could be threatened with termination of your service.
If you are having trouble paying credit card debt, the card provider may agree to give you a break from repayments or pay a reduced rate.
If you have problems making a mortgage payment, the lender may offer a number of options, including a payment break, a temporary reduction in monthly repayments, or adding your defaulted payments to your mortgage balance.
Different creditors may propose different solutions – and the options depend on your own circumstances and the extent of the problem.
There is no set management process – next steps depend on your situation. "If you're a little worried about things getting out of control, you may need to work out your budget and give you some tips on how to manage things," Anderson says. "Or it may be that we need to discuss a selection of particular debt solutions that we think may be suitable for your circumstances."
There are a number of options. A debt management plan is an informal agreement between borrower and lender that allows you to organise repayments on your non-priority debts (including credit cards and loans, but not things like mortgages or rent) in a way you can afford.
An Individual Voluntary Arrangement (IVA) is a legally binding agreement that commits you to a long-term plan. Others include debt forgiveness and bankruptcies. Each has its own tangle of specifics, advantages and disadvantages, and a counselor will help you unravel them and see which option, if any, fits your needs.
Choose a reputable service
Beware of commercial debt management companies that try to profit from those with debt problems. "The worst culprits are the predatory lead generators and bankruptcy providers," Anderson says. "There are many of them online with very similar names to the real counseling services.
"They may not go through the same kind of process that we would go through, which is this very thorough process of looking at the client's circumstances, what might serve them best out of the whole range of solutions, and putting their interests at the center," Anderson says. "The fact is that there are certain debt solutions that are more lucrative for an advisor to set up, but are not suitable for everyone."
The IVA is a particular hotspot, says Anderson. These need to be set up by an insolvency practitioner (who charges a fee), but you don't need a debt management company to act as a paid intermediary. An IVA, says Citizens Advice, is "an expensive option and a long-term commitment". It may suit some people, but it won't suit everyone; A reputable advice service will tell you if there's a better solution for your situation.
Trying to hide the problem will not help your credit score
FCA research showed that two in five people (40%) who were experiencing financial problems believed (incorrectly) that talking to a debt adviser would have a negative impact on their credit file. "This is one factor that is not helpful," Anderson says. "People feel that taking action to manage their debt could hurt their credit score, but that's not the case."
Conversations with debt counseling services won't appear on your credit report, although any debt solutions you take will show for six years. But then so do defaults. "Your current account and credit card providers, any car loans, a mortgage, many household bills, cell phones, TVs, broadband accounts, gas, electricity, water – although they don't all share information universally, especially many of these providers the big ones do," says Jones. "So if you're missing payments, your credit score is likely already on a downward trend. The sooner you find a solution that moves you forward, the sooner your credit score can recover."