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Causes and problems of debt
Debt has many different causes but usually comes about because of a change in your circumstances such as:
- the arrival of more than one major bills
- losing a job
- being ill for long periods
- having a baby
- leaving or moving home
- addictions to alcohol, gambling or drugs
- problems with benefits
- poor money management
The problems caused by debt can be life changing. It can lead to:
- relationship problems (fall out with friends, family and partners)
- ill health (stress and depression)
- homelessness
Work out who you owe money
You may have piles of unopened letters and be unsure of who, and how much money you owe. It’s sometimes difficult to accept or realise the complete extent of the problems. Working out who you owe money to can be a daunting task - try to make a list of all the people you owe money (your creditors) and how much you owe. Ask someone you trust to help you or get specialist help from a money adviser or the Citizens Advice Bureau. They will help you to manage your debts and get back in control.
Who to pay first?
Debts have different levels of importance. Some creditors have legal powers to recover money which can mean the loss of something essential, like your house or energy supply. These are known as priority debts.
| Priority debts | Non-priority debts |
|---|---|
| Rent | Catalogue bills |
| Gas and electric | Phone bills |
| TV license | Benefit overpayments |
| Council tax | Water rates |
| Income tax | Credit/store cards |
| Court fines | Loans and overdrafts |
| Maintenance payments | Money borrowed from friends and families |
Work out how much you need to live on
In order to work out how much money you need to live on it is important you draw up a budget. Make a list of all your outgoings or products you buy each week and estimate how much you spend. Then over two weeks keep a diary of where your money goes and compare this with your estimated amounts. If you have over estimated great, this is money you’re saving, but if you have underestimated look to see where you can cut back. The money you are saving you can put towards the priority debts. Other sources of income can help such as a part-time job, overtime or any benefits you may be entitled to receive.
Arrange to pay towards your debts
Now that you know what you can afford, contact your creditors. Start with the priority debts. Explain your situation and begin negotiating affordable repayments. Creditors are more understanding when you explain your situation – it may help to send them a budget sheet so they can see your problem and that you have a serious commitment to repay the debt. A money adviser or specialist help from the Citizens Advice Bureau can help you with this. When these are cleared move on to your non priority debts.
Debt Relief Orders (DRO)
A Debt Relief Order (DRO) is an order you can apply for if you can't afford to pay off your debts and is cheaper than going bankrupt. You can apply for a DRO if you are on a low income and have debts under £15,000.
Individual Voluntary Arrangement (IVA)
If you have more than £15,000 worth of debt, an Individual Voluntary Arrangements (IVA) is one solution to getting out of debt. An IVA is a legal agreement which works as an alternative to bankruptcy.
Useful websites
Advice Guide
The Advice Guide website is the main public information service of Citizens Advice, providing information on your rights - including benefits, debt, Debt Relief Orders and Individual Voluntary Agreements.
What About Money
Impartial financial advice for young adults.
Money Made Clear
Impartial consumer information from the Consumer Financial Education Body.
Which?
Which? campaign to get a fairer deal for all consumers and publish expert, unbiased information to help you make the right choice, whatever you're buying.
Directgov
Website of the UK government for its citizens, providing information and online services for the public all in one place. Has a useful section on money, tax and benefits.
Citizens Advice Bureau
Offers free confidential advice to help you budget and look at ways of managing your money.
Money Saving Expert
The website is about finding the best deals out there and provides tips on how to save money on everything and anything.
HM Revenue and Customs
Provides targeted financial support to families and individuals.
iva.net
Provides resources and advice on IVA.
Online tools
Cut-back Calculator
Can help you see where you can save money on items that you buy regularly.
Loan Calculator
Can help you decide whether you can afford the repayments, and help you compare different loans.
Mortgage Calculator
Can help you estimate the size of mortgage you can afford at a particular interest rate.
Budget Calculator
This simple budget calculator will help you work out how much money you have available each month.
Debt Test
Can help you to find out how likely you are to have problems with your borrowing over the next year or so.
Credit Card Repayment Calculator
Use this handy repayment calculator to work out when you're likely to pay off your credit card bill and how much more quickly you could pay it off by making a higher monthly repayment.
Student Finance Calculator
Studying full-time? Enter your details for an estimate of how much you'll get.
Student Tax Checker
Think you've overpaid tax and are due a repayment? You can use this checker to find out.
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