A few years ago, when severely in debt, I avoided opening letters from banks and credit card companies. So I couldn’t begin the process of getting out of debt, because I didn’t have a clear picture of my situation.
However, I found that when I bit the bullet and analysed my situation in detail, I felt better! Knowing the facts, no matter how bad, is better than living with a “sword of Damocles” hanging overhead.
If you too have been ignoring those letters, please start opening them now.
Sorting that paperwork
1. Bank statements. Overdraft? How much?
2. Credit card / store card statements
3. Invoices from other creditors
4. Tax correspondence (if self-employed)
5. “Informal” liabilities, e.g. loans from friends / family
When you’ve totalled the debts in categories 1-5, now list the positive side of your “personal balance sheet”, i.e.
6. Estimates of the value of your assets: property; car; cash at bank (if your account’s in the black); shares; insurance policies; money owed to you, including refunds; occupational pension funds [if you’re old enough to consider cashing them in]; anything that could be turned into cash if necessary.
Now prioritise your debts, as follows:
- Priority: “roof-over-your-head” and essential utilities, for example:
- mortgage or rent arrears (you could lose your home)
- other debts secured on your home (same result)
- Council Tax (they can send in the bailiffs)
- gas & electricity (they can cut you off)
- water (though they cannot).
- Non-priority: all other services you need, e.g. car loan; home or mobile phone; credit cards; all other creditors.
Income and expenditure
Now you’ve assessed your liabilities and your assets, you need to evaluate your income and expenditure. It’s a “profit and loss statement” for your life, based on your current spending pattern. Then do another, based on your “survival budget”.
You’ll need a table or spreadsheet: money advisers at your local CAB (Citizens Advice) can provide a form.
Putting it in perspective: “key ratios”
Now analyse your total debt relative to your income; also to your assets. What multiple of your net monthly income is your total debt? What percentage of your net worth? These are what I call your personal “key ratios”.
Now you are in a better position to develop your options and choose the solution that works for you.
A final question: what’s your discretionary income? What’s left after tax and essential expenditure? (Not after your usual expenditure: the answer to that question might be zero, as it was for me)
Whether you think you can repay debts in full or make a partial offer, you’ll need to maximise this “discretionary income”. That’ll involve tough decisions about “needs versus wants”: between what’s essential to your life and what you see as essential to your lifestyle.
The above is an extract from Chapter 5 of my book “Back to the Black: how to become debt-free and stay that way”
Want to know more?
“Back to the Black: how to become debt-free and stay that way”, is now available as a multi-format eBook, to sample (first 20% free) or buy, at Smashwords: http://www.smashwords.com/books/view/22886
It is also in the Kindle store but only the first 10% is free (sorry: Amazon’s rules, not mine). http://www.amazon.com/dp/B004PLMAQM