Your friend or a relative is very worried about their debts and doesn’t know what to do… they may be overwhelmed by the size of their problem or they are scared of finding out how big it is.
This article looks at the best ways to give some practical help in this situation.
The answer usually 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 desperate, turn up with some bags of 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 tea, biscuits and sympathy;
- helping them to sort out the letters and bills they have, which is probably in a mess;
- making a list of their debts; and
- being supportive whilst they work through a budget.
It may sound unkind but the less you do and the more your friend does the better. This way they start to feel in control of the problem.
It’s important that your friend feels they are making the decision about this, even if they want you to tell them which is best and help them make any phone calls.
Sort out the paperwork
Getting paperwork in order is the essential first step if your friend is overwhelmed.
There are lots of ways of approaching this, but I’ve done the following a few times and it works well.
The first thing is to open any unopened mail. If there are lots of opened letters that have been put back in the envelope take them out. Bin the envelopes and bin any general enclosures with the letters. Staple the sheets of a letter together, circle the date on the front of the letter and circle the name of the bill/debt/benefit if it isn’t obvious;
Try to get on with it as fast as possible, don’t read the letters at this point. Don’t pull a face if a glance shows it’s not good news… Keep it easy and non-threatening, pass your friend some envelopes and try to get them involved.
Then put each letter into piles:
- everything to do with essential bills: rent/mortgage, council tax, utilities, car HP etc. Any amounts owing here are priority debts.
- other regular bills – mobiles, insurance, gym membership, sky/cable, nursery bills etc. It may be possible later to cancel some of these to save money. But at the moment all you are doing is sorting the papers out.
- any benefit letters – child benefit, child tax credit, housing benefit, council tax support.
- income – work payslips, P60s, P45s, pensions.
- bank accounts and savings: current account, building society accounts etc.
- everything to do with loans, credit cards, store cards, catalogues, payday loans etc. These are non-priority debts.
Time for more tea and another biscuit.
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 piles and you sort the debts. Then each of the smaller piles gets sorted into date order and put into the ring binders. More tea probably needed or even a short break!
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, at the moment don’t get bogged down by having to phone the creditor up for the exact amount.
- what the monthly repayment is; and
- what the current interest rate is. A very low rate, e.g. 1.8% on a credit card, is probably a monthly interest rate so convert it to annual using this calculator.
Ask your friend if they have any amounts owing on rent/mortgage, utilities or council tax – these 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 – can your friend log on and find the current balance? Do they have an overdraft?
If your friend says there are other debts but they haven’t heard from them since they moved or they can’t remember what happened, suggest looking at their detailed credit records.
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 good budget calculator here. It will prompt for all sorts of expenses it is easy to overlook. It also does all the conversions, changing weekly, fortnightly, annual incomes or expenses all into monthly so they can be added up.
Try to make it as realistic as possible – if you know your friend smokes, make sure that is included etc. She may want to stop, but at the moment just put down what she is spending on cigarettes at the moment.
Bank statements and credit card statements can help. 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. If it suggests your friend should have money left over every month, and they don’t, then where is it going?
There may be many ways you can see that your friend could improve their budget. Even small things can add up to a lot, but it’s probably better for your friend to look at the big picture – how much money she has to pay the bills and debts and how large they are – rather than get bogged down with downgrading her Sky account and switching her electricity supplier.
The possible debt options & next steps
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 what her many problems is.
If your friend has problems with priority debts such as rent arrears or council tax, problems with bailiffs or letters from a court, they need urgent debt advice. There is more about good sources of advice in different situations here.
You have helped her get organised and have a first cut at a budget which is going to make it easier for her to talk to a debt adviser. Sitting with her while she makes the phone call could be a great support.
If her problem seems to be too little income to manage at all, let alone pay debts, then is she getting all the benefits she is entitled to? There is a good calculator here: Turn2us.
If she is having problems with Universal Credit, other benefits, high deductions from benefits, her local Citizens Advice can help.
Nasty letters and texts about a debt may have been the reason your friend asked for help. But if she has priority debts or benefits issues, there are usually more important to deal with first.
But if her main problems are loans, credit cards, catalogues etc, look at this at-a-glance diagram for possible debt solutions. It is simplistic but often it’s going to get you to the most likely best approach straight away.
If it seems clear 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.
If they are uncertain, then they should take some debt advice. For people that like the phone, talk to National Debtline . Or go to their local Citizens Advice if they prefer to talk to someone face-to-face.