Escape from the clutches of debt

If you are one of the many British consumers who have got deeply into debt, you probably know that there are a number of options available if it ever becomes unmanageable. Bankruptcy is, fortunately, only for the most intractable cases, while the relatively new - and heavily advertised - "Individual Voluntary Arrangement" (IVA) is a kind of half-way house that typically allows property owners to keep their homes.

IVAs are not pain-free, however - for one thing, they leave a heavy black mark on your credit rating, while the company that administers the arrangement charges a sizable fee, reducing the amount that your creditors receive. So if you want to plan your own escape from the burden of debt, how should you go about it?

The first step, experts agree, is to recognise the problem. Banks consider customers to be in financial difficulty when income is insufficient to cover reasonable living expenses and meet financial commitments as they become due, according to the Banking Code. If this applies to you, immediate action is needed.

Most importantly, this means getting in contact with your creditors as soon as you realise that there is a problem. Under the Banking Code, financial institutions are obliged to deal with difficulties "sympathetically and positively", so the sooner you let them know, the more chance they have of preventing things getting worse.

"The key thing is to face up to it," says Malcolm Hurlston, the co-founder of the Consumer Credit Counselling Service, a debt advice charity. "When you start to go into arrears, your lenders' main worry is that you have disappeared, so it's very important to stay in touch - otherwise they will spend a lot of money trying to find you."

Although mortgage lending is not covered by the Banking Code, most lenders apply similar principles. "People are afraid of contacting their mortgage provider out of fear that they will move straight to repossession. This is not the case," says Rachel Snow of the Building Societies Association. "Problems are often down to temporary circumstances that can be seen through. So always contact your lender before you start missing payments." Yorkshire Building Society, for example, allows interest-only payments for a concessionary period, usually of three to six months. This means that you pay less than your normal monthly amount, which includes a capital component. The society also allows switches to alternative loans - another possible means of reducing your monthly payment - but only if your arrears do not exceed two months.

Intelligent Finance, part of Halifax, says it deals with each case individually. "If the customer shows a genuine desire to deal with the problem, we will work with them to do this," says Heather Scott from the bank. "This could include reducing repayments for a short period or allowing a 'payment holiday'. There are no hard and fast rules, but legal action over a mortgage is a last resort."

For more advice on mortgage arrears, a report from the Building Societies Association and Shelter, the housing charity, is available at www.bsa.org.uk/docs/publications/mutualadvice.pdf.

If your debt problems have been caused by a change of circumstances such as unemployment or ill health, check whether you have any insurance that may help, such as mortgage payment protection, or payment protection insurance for unsecured loans. You could also be entitled to state benefits, which sometimes include paying mortgage interest, so check with the Department for Work & Pensions or Citizens Advice.

Problems with unsecured loans, including unmanageable overdrafts and credit card balances, should also be brought to the lender's attention as early as possible. You can ask creditors to freeze interest and charges or to accept a repayment schedule that is affordable under your new circumstances. This can be done over the phone or in writing; if you wish, you can download template letters from the National Debtline website (www.nationaldebtline.co.uk).

Those with deep-seated problems spanning multiple creditors may want to enlist the help of one of the debt charities. The assistance they offer ranges from a quick telephone call to give advice, through provision of a self-help guide (for example, National Debtline's is available at www.nationaldebtline.co.uk/england_wales/pdf/self_help_pack/full_pack.pdf or www.nationaldebtline.co.uk/scotland/pdf/self_help_pack/full_pack.pdf for Scotland) to drawing up a budget and then a repayment plan on your behalf and negotiating its acceptance with creditors.

National Debtline is geared towards providing help over the phone, while Citizens Advice offers a large network of advice bureaux where you can talk to a counsellor face to face. The CCCS, meanwhile, provides a telephone service but also offers a comprehensive online tool called Debt Remedy (www.cccs.co.uk). This web-based questionnaire takes you through a detailed audit of your finances and then produces an analysis and a list of recommendations. Debt Remedy, which took two years to develop and is believed to be the only example of its type in the world, has the additional benefit of being anonymous. The charity also offers advice on the use of budgeting to avoid debt problems at www.cccs.co.uk/budget/budget.aspx.

A Citizens Advise Bureau may be your best port of call if you have problems ranging across secured and unsecured borrowing and utility companies, if you face legal action or if you are unable to pay anything to your creditors. "We can represent you in court and help you to claim state benefits as well as in drawing up financial statements and negotiating with creditors," says Moira Haynes of Citizens Advice.

The CCCS is more geared to helping those who may have large debts (the average is £30,000) but also have enough income to make significant repayments. "After we have understood your finances following a telephone conversation or the use of Debt Remedy, we can draw up a statement of your financial position and assess how much of your income you can put towards paying off your debts," says Mr Hurlston. "We use the criterion of 'stickability' - rather than setting unrealistic goals of maximising your repayments, we calculate a sum we believe the client can stick to, after allowing for 'priority' spending such as utility bills and mortgages or rent.

"We then work out how much of this total repayment would go to each creditor and make offers to lenders accordingly. These offers are usually accepted straight away - lenders have come to trust our methods and this way they avoid the further costs involved in scrutinising each client's finances themselves. We collect the total agreed from the client every month and pay each creditor - by BACS transfer, which reduces their costs and is another factor in their willingness to agree to our proposals."

Borrowers who use this service from the CCCS typically pay off 80 per cent of their debts, at an average rate of £230 a month. Although the arrangements are not legally binding, lenders agree to charge no further interest, while borrowers are expected not to take on any further debts.

"Consolidation loans are generally a bad idea as they either are secured on your house or charge a higher rate of interest than your existing borrowing. So unless you change your spending habits - if you carry on using your credit cards, say - you could end up with the same debt but with the chance of losing your home into the bargain," says Mr Hurlston.

"Most of our clients end up paying off the agreed sums, although some pay their debts off sooner - through us or directly - if their circumstances improve."