1. Make a list of your debts

The first thing you need to do if you are considering negotiating with your creditors yourself is to make a list of your debts. You need to know exactly who you owe money to and how much each of these creditors is owed.

Once you have made this list, you need to work out which ones to deal with first. These are called ‘priority debts’. For example:

• Mortgage or rent
• Gas, electricity and water
• Council tax
• Income tax

These are priority because the consequences of not paying them are far more serious than your ‘non-priority debts’. By not paying your mortgage your home could be repossessed. If you do not pay your gas, electricity and water rates, these can be disconnected. If you do not pay your council tax, a court can send bailiffs to take your belongings to the value of the amount owed. You can be sent to prison if you do not pay your income tax.

Far less serious are ‘non-priority debts’. Some examples are:

• Credit cards
• Store cards
• Personal loans

You cannot be sent to prison for not paying non-priority debts, though your creditors can still take action if you do not pay. They could take you to court, where you can be ordered to pay. Failing this, your creditors can then get a court order which allows them to send bailiffs round to take your belongings away.

2. Work out what you can afford to pay

Once you have made your list of debts, you need to work out how much money you earn and how much is left over after paying all your essentials. This can be used to pay your non-priority debts.

When working out how much you earn, try to include everything:

• Your wage
• Benefits or tax credits
• Any other form of income

Then work out your expenses:

• Mortgage or rent
• Gas, electricity and water
• Council tax
• Buildings and contents insurance
• Housekeeping (Food, cleaning materials, toiletries, pet food)
• Travel expenses (Public transport, fuel, tax, insurance, servicing and MOT)
• TV license
• Childcare
• Clothing
• Any other essentials such as medical expenses

Once you have deducted your expenses from your income, you will see how much money you have left over to pay your non-priority debts. It may also be worthwhile checking to see if you can make any savings. When you add up all your expenses, it can sometimes be surprising how much you actually spend on things like food and clothing which could be saved.

3. Sort out your priority debts

If your financial position allows you to keep on top of your priority debt repayments, you will not need to contact them and you can just focus on negotiating with your non-priority debt creditors.

If, however, you are struggling to meet your priority debt payments, before you do anything else, make sure your creditors are all aware of your circumstances. Write to them and explain your situation, including the measures you are taking to resolve it. Keep copies of any correspondence.

Negotiate arrangements to pay back what you owe. This may involve reduced payments for a period of time. As long as your creditors are aware of the situation and you are demonstrating a willingness to pay back your debts, you should be able to negotiate successfully. For more information read our ‘Negotiating with Creditors’ article.

4. Sort out your non-priority debts

Once you have sorted out your priority debts and made sure you have enough money to cover all other essentials, you will need to make arrangements with your non-priority debt creditors. Any money you have left over is called your ‘available income’.

Using the list of debts you made earlier, work out how much to offer each creditor based on the amount owed. The following is an example of a system used by the courts in determining a fair amount to offer each creditor.

Example:

First, you need to multiply your individual debts by your monthly available income, which in this example is £100.

Say, for example, you owe £8,000 to Creditor A. You would multiply this by £100.

8,000 x 100 = 800,000.

You then need to divide this by the total amount of debt you owe. In this example you owe £8,000 to Creditor A and £4,000 to Creditor B. So, your total amount of debt is £12,000.

800,000 / 12,000 = 66

So, out of your £100 available income, you would offer Creditor A £66 a month.

As mentioned, you also owe £4,000 to Creditor B. Using the same method:

4,000 x 100 = 400,000

Now divide that amount by your total amount of debt:

400,000 / 12,000 = 33

So, out of your £100 available income, you would offer Creditor B £33.

5. Contact your creditors

Now you know how much you can afford to offer each creditor, it’s time to get in contact with them. You will need to send them a list of all your creditors and the amounts you are offering so they can see how you have worked out your budget. Again, remember to keep copies of all correspondence.

For detailed help in dealing with creditors read out article ‘Negotiating with Creditors’.

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Remember, Advance With Finance is a completely free, impartial service. Although the information on this website is provided by industry experts, it should never replace the advice of a debt adviser who understands your individual circumstances. Please visit our company overview page.

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