Your friend or a relative is very worried about their debts and doesn’t know what to do… you could just tell them to read Debt Camel, but you may want to give some practical help. This article looks at the best ways to do this.
The answer isn’t money
You probably shouldn’t lend or give them money. Certainly not at the beginning until it is clear what they need to do. If they are totally desperate, turn up with food and nappies. The most important thing is for them to get a good picture of their current situation, so they can look at their realistic options. You can help with this:
- by providing coffee, biscuits and sympathy;
- helping them to sort out their paperwork, which is probably in a mess;
- making a list of their debts; and
- being supportive whilst they work through a budget.
It might sound unkind, but in general the less you do and the more your friend does the better. This way they start to feel in control of the problem.
Sort out the paperwork
Getting paperwork in order is the essential first step if your friend is disorganised or overwhelmed. There are lots of ways of approaching this, but I’ve done the following a few times and it works well. Ideally you need some ring binders, a hole punch, a stapler, a highlighter pen, a calculator/ spreadsheet and post-it notes. Try to get on with it as fast as possible, not reading the letters at this point – don’t pull a face if a glance shows it’s not good news… It’s pretty easy and non-threatening, so pass your friend a pile and try to get them involved.
- there may be lots of letters kept in their envelopes, some possibly unopened if your friend has been trying to ignore the problem. Remove letter from envelope and throw the envelope away;
- staple all the sheets of a letter together and punch holes in it, circle the date on the front of the letter with highlighter pen and circle the name of the debt or subject of the letter if it isn’t immediately obvious;
- put each letter into one of the following piles:
- everything to do with loans, credit cards, store cards, catalogues, payday loans etc. These are non priority debts.
- everything to do with essential bills: rent/mortgage, council tax, utilities, car HP etc. Any amounts owing here are priority debts.
- other regular commitments – mobiles, insurance, gym membership, sky/cable, nursery bills etc. It may be possible to cancel some of these to save money.
- any benefit letters – child benefit, child tax credit, housing benefit, council tax support.
- income – work pay slips, P60s, P45s, pensions.
- bank accounts and savings: current account, building society accounts etc
Time for a coffee and a biscuit. Or tea and cake. Or whatever… Each of the piles needs to be sorted into types – divide the debt pile into smaller piles for each debt, the benefits pile into types of benefit etc. If your friend seems very stressed, get them to do the benefits and income plies and you sort the debts. Then each of the smaller piles gets sorted into date order and put into the ring binders. Stick a post-it note on the top letter for each sub pile saying what it is and sticking out a bit (or you could use coloured dividers if you have any). More coffee probably needed!
Make a list of the debts
For each debt you want to know:
- what the amount currently owing is from a statement in the last month or so. If there is only an annual statement for a loan, estimate how much is still to go, there is no need at to get bogged down by having to phone them up and ask at the moment.
- what the monthly repayment is; and
- what the current interest rate is if that is known. A very low rate, e.g. 1.8% on a credit card, is probably a monthly interest rate. Convert it to annual using this calculator.
Ask your friend if they have any amounts owing on rent / mortgage, utilities or council tax – there are priority debts so list those separately. Also any benefits overpayments that are being repaid. Ask your friend if they can think of anything that is missing. There may be a credit card where all the statements are online – get friend to log on and find the current balance. Do they have an overdraft? Any premium bonds? Then add up two debt totals, one for priority debts and one for non priority debts. Gin probably isn’t a good idea at this point, even if it feels as though it is…
Working through a budget
There is a link to a budget calculator and lots of details about this here, which also has notes on common mistakes, such as putting the annual car insurance in as a monthly amount. Don’t put unsecured debt repayments in as an expense – only the mortgage and anything on HP such as the car should go in the expenditure section. Hopefully your friend can get a Statement of Affairs done pretty quickly as a lot of the figures needed are now sitting neatly filed in front of you… Try to make it as realistic as possible – if you know your friend smokes, make sure that is included etc. If your friend seems very stuck, suggest they put some amount in and make a note that it’s a guess. When it’s done, have a look at the Summary figures and see if your friend thinks they look reasonable:
- The unsecured debt repayments (2) and total (4) should be the same as the ones you added up by hand.
- If the Surplus (3) is positive, this is the amount your friend should have left every month after paying the minimums to their debts. If it seems way too large, then perhaps some expenditures are missing from the budget.
- If there is negative money left for debts (1), then this is a crisis as they can’t afford their expenditures – does this feel right, or have they been over-generous with some of the expenses?
What are the possible debt options?
From here there is the quick way of looking at the problem or the slow and methodical one. The quick one is here – in many cases it’s going to get you to the most likely best approach straight away. If it seems simple and your friend thinks that solution sounds good, then they should be looking into that in more detail and get an action plan for what to do next. The slower approach is working through a set of flowcharts here. If your friend seems to be ‘on the borderline’ between two options, or doesn’t like the suggested approach and wants to know if a different one could be possible, then it’s a good idea to take the time to look through them all.
Hopefully you have helped your friend to understand their situation, feel more organised and able to cope. The next steps are going to depend on which debt solution seems the most likely for them.
It’s important that your friend feels they are making the decision about this, even if they ask you to tell them which is best. If they are uncertain, then they should take some debt advice, perhaps phoning National Debtline or perhaps going to Citizens Advice if they were prefer to talk to someone face-to-face. There is more about good sources of advice in different situations here.