In Debt and Wannabe Debt Free? First Steps!

kimwp

This thread provides guidance about some good first steps you should take if you are in debt and want to get debt-free.

It doesn’t matter how big or small your debt is, or whether you are comfortably paying your debts and looking for advice on where to cut back further or struggling to cover your basic needs - we are here to help - so please reach out with a post on the forum, wherever you are in your debt journey or the steps below.

kimwp

Step One

The first step in becoming debt-free is to know you can absolutely do this.  Debt can feel overwhelming and like there is no way out, but every debt situation is solvable. This is a non-judgemental forum full of knowledgeable and kind people that have been in similar positions. You can post for some immediate advice and you can turn your post into a diary for ongoing advice and support - it’s a great way to get ongoing support, keep yourself accountable and track your progress.

For some inspiration, you could try reading our debt free roll of honour thread. At the time of posting it here, it had got a little lost in the other threads, but we expect it to become live and kicking now it's pinned at the top.

https://forums.moneysavingexpert.com/discussion/291326/the-debt-free-roll-of-honour

kimwp

Step Two

The second step is understanding your financial situation. This is often referred to as an SOA or Statement of Affairs. Many of the DFW forumites will have the link to an SOA template in their signatures. You can do this on your own or post it (formatting for MSE) and the forumites will help you with it. A good SOA is one that is accurate, as it will allow you to see where you might be able to cut back, where you might need to add more allowance to a spending category for a realistic budget and what path is the most appropriate to address your debt. 

A few tips for getting to an accurate SOA (notes in brackets are useful if posting your SOA on the forum):

• Go through your accounts, ideally for the past year, but a few months plus an understanding of your annual spends will be a good start
• Divide any annual spends by 12 to put them on the SOA (put a note as to whether these are paid annually or monthly)
• (Note if there are any unusual circumstances that are not clear eg a child that stays with you half the time)
• (If you are part of a household, but just posting your individual financial statement, put what proportion of the bills you pay or how the bills are divided - this can help with identifying if something can be done about the bills)
• (If more than one, note how many phones are being paid for)
• (If you put a number for a monthly contribution to your emergency fund, note if you have just started doing this)
• If a debt is on a 0% offer, it is useful to note when the offer period ends
• Continue to track your spend and adjust your SOA to reflect this.

Statement of Affairs (SOA) link: https://www.lemonfool.co.uk/financecalculators/soa.php

kimwp

Step Three

The third step is creating a realistic budget. Nobody is expected to go cold or hungry or without any fun to repay debt and your budget needs to allow for a reasonable standard of living, including repairing or replacing cars or white goods that break. This is particularly important when coming to an arrangement with a creditor, when you will tell them how much you can afford, as you don’t want to leave yourself with less than you need. Note that there are budget allowances for some formal debt solutions, so you may want to revisit this step depending on the outcome of step four.

kimwp

Step Four

The fourth step is deciding on the next steps to take to become debt free. This will depend on whether you can comfortably afford to pay more than your minimum payments or if you are struggling to meet them, but will also depend on other factors including whether you own your home, if some debt solutions will affect your employment, if your income is permanent or likely to increase or reduce in the future. It’s best to post with your specific circumstances to get the best advice. (Though remember not to post any information that could reveal your identity.)

Regardless of the next steps that you choose, the following posts have some useful information which often comes up on the forum:

kimwp

Taking advice from debt charities and companies:

If you take advice from an organisation, be aware that debt companies make money from selling debt solutions so have an incentive to recommend the one that will make them the most money, rather than the one that is best for you. Debt charities do not make money from you if you use their services. Note that the companies have very similar names to the charities.

Note that a debt charity will push you to start paying money to your creditors as soon as possible (before defaulting) as they can't keep you on their books while you do nothing about paying the debt for months. This may not be in your best interests - please see the post about defaults and arrangement to pay markers below.

Legally unenforceable debts:

For information on finding out if your debts are legally unenforceable, please see:

https://forums.moneysavingexpert.com/discussion/6027755/statute-barred-debts-and-the-limitation-act#latest

kimwp

Defaults vs Arrangements to Pay

If you need to reduce your debt payments because you can’t afford them, you should be aware of the difference between defaults and arrangement to pay markers on your credit report.  

If your account defaults (through non payment of the debt), it will show as defaulted on your credit report for six years. If you don't default and instead make an arrangement with your creditor to pay a reduced amount, then you will likely get an arrangement to pay marker, which will stay on your credit history for six years after the debt is paid off. Defaulting can take months, but usually it will take more than those months to pay off the debts and start the clock ticking on the six years for the arrangement to pay markers to drop off your credit report. So, counterintuitively, approaching your creditor to come to an arrangement could penalise you more than simply stopping your payments and ignoring your creditor until the account defaults.  

kimwp

Debt Management Plan - initial steps

A Debt Management Plan (DMP) is an informal arrangement with your creditors to pay them what you can afford towards your debt with them. You can arrange this through a charity or a company (not recommended as they will be taking money that could go towards your debts) or do it yourself. 

It is sensible to open a bank account unconnected with any of the banks that you hold debts with and move your pay and priority bills (mortgage, council tax, etc) to this new account to avoid your bank using your pay to pay your non-priority debts. 

As outlined above, it is best to default on your debts before starting to make payments as part of your DMP due to the impact on your credit report. (Making payments ahead of defaulting will likely be considered an arrangement to pay). Defaulting is done by stopping making any payments, including cancelling your direct debits with your creditors. During the period where your accounts are defaulting, it is likely that your creditors will try to contact you to get you to make payments. While this can feel stressful, this is just them following protocol because they are not allowed to default your accounts without making attempts to help you to not default. You can ask them for all communications to be via email or writing to avoid them calling you. 

During this period of defaulting your accounts, you should use the payments that you would have paid to the debt to build up an emergency fund. This fund will be useful if you have an unexpected expense, for example your washing machine breaks, as you will not have access to credit for a period after your accounts default.

A DMP is only one of many options for someone in debt - please post on the forum to understand the best option for your situation.

kimwp

Converting unsecured debt to secured debt

It can be tempting to add debt to your mortgage because the interest rates are lower, however this is rarely advisable because this increases the risk of losing your home if you cannot make payments. 

kimwp

Hi all, I realised that we don't have a stickie for the first steps in starting to get out of debt. I've made a start on a thread above - please let me know if any edits are needed!

threepenny_bit

Thankyou for posting this - always good to go back and recheck, add a step or redo a step.