Debt Repayment Plan | Practical Money Skills

Debt has negative connotations of over-spending and poor budgeting, when in fact it could come about due to a strategic choice, redundancy, illness or a change in family circumstances. Debt can affect anyone at any stage of life.

It’s important to deal with debt head-on. The longer you ignore your debts, the worse the situation becomes. Here are some tips for paying off debt:

Make a list of everything you owe
Start by making a list of your debts, including the amounts owed and the institutions or people to whom you owe.

Prioritize your debts
Put your debts in order of importance, bearing in mind that the priority debts aren’t necessarily the biggest ones. They’re things like mortgage repayments, secured loans, rent, utility bills and taxes, where you could lose your home, be disconnected from a service or even go to prison if you don’t pay.

Next look at your unsecured debt. That’s typically things such as credit card and store card payments, bank loans, overdrafts, and money borrowed from family and friends. These debts are still important and may carry higher interest rates. So, they may have greater potential to grow. They aren't priority debts, but they shouldn't be ignored.

Work out a budget
Arrange an accurate weekly or monthly budget. This will show your income, household spending and debts. It may also show where you can save extra money which can go towards the repayment of your debts. Learn more about budgeting.

Once you’ve worked out your budget, you’ll know how much you can realistically put towards paying off your creditors.

Seek advice
Contact an independent, professional organisation or debt charity for advice on the best way to deal with your debts. They help thousands of people every month to manage their debt.

Some debt management companies may negotiate with your creditors on your behalf to reduce the payments you make overall. You make one payment to the company, which redistributes it among your various creditors. Debt management companies may charge a fee for this service. However, various national charities and debt advisory services might offer free debt management plans. Check to see if this is the case in your region.

Arrange a debt repayment plan
There are various options for dealing with debts, ranging from informal agreements you can make with your creditors to more formal arrangements.

Informal agreements involve contacting your creditors by phone, email or letter to let them know about your situation and make an offer to pay the amount you can afford.

For example, you could offer to make temporary payments towards debts, if you’re only able to make a smaller amount than previously agreed for a short time. Or offer to make monthly payments, if you can afford to pay off the amount you owe but can’t pay off your arrears in full.

Support your offer by explaining why you’re currently unable to keep up with full payments. Attach a copy of your budget and a list of your other debts. This helps the creditor see that you’re only spending on essential living costs, and that the offer you’ve made is fair given what you owe other creditors.

Your creditors don’t have to agree to your debt repayment plan. If you can’t afford to pay more than you’ve offered, continue paying what you’ve offered. If you can afford to pay more, you could agree to pay extra. This may help creditors see that you’re working towards paying off your debts. They may be more willing to agree to your repayment plan or stop adding extra charges.

Formal agreements are another way to resolve outstanding debts. There are various options, although not all of them may be suitable for your situation or available in your country. They include:

Administration order – a payment plan managed for you by the courts.
Bankruptcy – a legal process that writes off your unsecured debts but affects your credit record. This may make it more difficult for you to borrow in the future.
Consolidation – taking out a loan to reduce monthly repayments or the number of creditors you have.
Debt management plan – you make one monthly payment based on what you can afford, which is shared among your creditors.
Debt relief order – debts are frozen for 12 months. If your situation hasn’t changed, they’ll be written off.
Insolvency – a legal process declaring that you can’t afford to pay back your debts at the time they are due.

Also consider the following:

Releasing equity – if you're of retirement age, it may be possible to use equity release to access the money tied up in your home to repay debts;
Re-mortgaging – taking out a new mortgage on your home to pay off debt.
Selling assets – release money by selling things of value that you own.