Debt Reduction: Three Steps To Salvation

Step 1 Find out how bad the problem is

This is in some ways the most difficult step to take. It means facing the problem head on - something you have probably been trying to avoid doing for months.

You have to draw up a simple personal budget setting out what income you have and what you are spending it on. There are three reasons for doing this.

First, it tells you how big a problem you have.

Secondly, it helps you check that you are not paying for things which you shouldn't be. Are there items on your credit card which you did not buy? Are the direct debits correct? Is anyone still collecting them when they should have stopped? These mistakes can and do happen and they can be very expensive.

Thirdly, it provides the basis for discussions with the people who are chasing you for payment. Remember that they are dealing with people with money problems all the time. They know they can't get money from people who have none. So they concentrate on people who have some and are spending it on other things (or repaying other debts). You have to convince them that what you are offering to pay them (and you must offer them something) is the absolute maximum you can afford. You also have to convince them that, where you have a number of creditors, they are getting a fair share of what you can afford to repay in total. Showing a personal budget to them is the best way of demonstrating this.

Step 2 What can you cut back on?

Having got the budget in front of you, you must look at it carefully, calmly and above all, honestly.

Try dividing spending into three categories:

1. Spending which is fixed and cannot be reduced. Probably the only three in this category are mortgage interest payments, other loan repayments and council tax. But a working mother is entitled to include creche or child minding costs in this category.
2. Spending on essential items such as food, transport, gas and electricity. Clearly you must spend on these items, but do you need to spend as much as you are doing at present?
3. Non-essentials. This is where you have to be ruthless and make most of the cuts. Above all, this is where you have to be honest with yourself. If things go badly you will have to go through these items with a lender or even a court official and justify why you need to spend on them. You must keep this in mind as you go through them and first justify every item of spending to yourself.

Step 3 Can you increase your income?

`I'm not daft,' you will say, `I tried doing that when I first realised there were problems with paying off the credit card.' Well, perhaps! But did you consider every possibility?

• Increasing overtime working.
• Considering a second job in the evening or at weekends
• Extending a useful hobby like woodworking or painting into a small money making venture by selling some of the best work.

Checking whether you are getting every tax or social benefit to which you are entitled. There is now a system of tax credits for working families and elderly people which enables you to claim extra money through the tax and social security systems. These are in addition to child benefit and basic state pension and have to be claimed separately. Although they are mainly to benefit lower income families, the child tax credit can benefit families with incomes up to £50,000 per annum. The rules for these benefits are too complicated to describe in detail here, but the Citizens Advice Bureaux have excellent expert advisers on the new system and will help people decide whether they may be entitled to extra. These credits can be an important and significant source of extra income. There is also housing benefit, for those in rented accommodation, and help with council tax (of which more later). Think about whether you might be entitled to any of these.