Having been in the debt collection business for some years now it never ceases to amaze me how people deal with their debt problems. There seems to be 3 main methods of dealing with debt.
1. Ostrich Approach – Bury your head in the sand and the problems will disappear.
2. Worry Wart Approach – Believe everything the debt collection agencies tell you.
3. Sensible Approach – Deal with your problems.
Generally the people that choose option 1 or 2 will eventually have to opt for option 3 but their costs will be far greater in the long run.
Here I will point out the do’s and don’ts for dealing with your debt problems.
Debt collectors in the UK that work for major financial institutions earn a wage. They can earn a bonus (usually yearly) by exceeding certain targets set for them. Generally these targets are based on the amount they collect and also the number of promises (a promise to pay by a debtor) that have been made versus the number kept. To put it simply, if you promise to pay a Bank £10 per week for 5 weeks and you make every payment on time, that counts as a successfully kept promise against your record and also against the collector who arranged it for you. If you fail to pay on time or pay less than you agreed, the arrangement will fail and the collector will be penalised and your record will be marked.
Rule No. 1 – Don’t make a promise you can’t keep. Many people feel intimidated by debt collectors and therefore feel under pressure to promise to pay more than they can reasonably afford. When this arrangement fails (and it will fail), the Bank will be less likely to help you in future.
Rule No. 2 – Know exactly how much you can afford to pay and then halve it. It is absolutely essential that you work out your budget prior to making an offer. Most people forget to include things like haircuts, clothes purchase and home maintenance in their budgets. These are things that you will have to pay out for during your arrangement with the Bank and therefore will affect how much you can afford to pay. When you have worked out exactly how much you can pay and have halved it, ring the Bank. It is their job to get you to increase your offer. So if you know you can comfortably afford £10 per week, you offer £5 and after some strong negotiation the Bank get you to increase your offer to £7.50, it is a win-win situation. The collector feels they have done a good job by getting you to increase your offer and you are better off. This enables you to pay extra on top of your offer if you want and this will improve your record with the Bank.
Rule No. 3 – If your basic expenditure exceeds your income there is no way you can pay your creditors a fair amount. Get help. Major Banks and Building Societies contribute financially towards certain debt counselling companies. The major one in the UK is CCCS. There are many agencies that will help you, however the majority will take a percentage of the amount you can afford and keep it themselves to cover their costs. With CCCS every penny goes to your creditors, meaning you repay your debt more quickly. Quite often they are also able to suspend charges meaning you owe less. http://www.cccs.co.uk/
Rule No. 4 – Make them an offer. If by chance you come into some money but it is not quite enough to repay all your creditors, offer them a percentage of the total debt as a ‘full and final’ offer. This is a very common way of reducing the amount you owe. Say you owe a Bank £1000. If you can’t pay, they will eventually sell this debt onto a debt collection agency for say 60pence in the pound. Meaning they have already lost £400. Add on to this figure the Bank’s costs for chasing the debt originally and it will probably amount to around £600 lost. Therefore the Bank will be open to offers. Generally the lowest they will go to is 50% of the total debt outstanding. Offers must be made in writing.
Rule No. 5 – Get things in perspective. If you are a worrier then CCCS is the way to go. You can even send them your letters from the creditors chasing you and they will deal with them. Remember that Banks earn billions of pounds of profit each year; the small amount you owe them is a drop in the ocean for them. Banks also allow for a certain amount of loss each year.
Rule No.6 – Cancel as many direct debits and standing orders as you can. If your Bank account is overdrawn the Bank won’t pay these items anyway and will charge you between £20 and £50. The charges are automated. It doesn’t matter if you told the cashier at your local branch that you were having trouble, the charges still apply.
There are some common misconceptions about debt that I will correct here.
1. If I am paying something they can’t take me to court. Absolutely false.
2. I am paying the amount I promised so my credit rating will not be affected. False – your credit report will show that you are in an arrangement with a creditor.
3. I have gone through CCCS so my credit rating will not be affected. False again – your credit report will show that you have sought help for credit problems and is likely to remain on your records for 6 years.
The best thing you can do when you first realise you have debt problems is to speak to the companies involved and ask what their financial difficulty policy is. Some may give you 3 months of reduced payments to assist with short term difficulties and some may offer you longer. They are far more open to helping people if you contact them first. Keep in touch with the companies involved and pay a little extra every time you can, as this will encourage them to help you in future.
Lisa Mills was a debt collector for many years before launching her own business. http://www.newbabygiftboxes.co.uk is a site offering a baby gift box service.