Are your finances maxed out?

Most people fall into debt through no fault of their own. The monthly budget can be jogging along quite happily, then boom! It gets knocked off course by a big tax bill, an increase in the mortgage interest rate, or an illness or divorce.

The first step is to acknowledge you have a debt problem and take control of the situation. Tell friends/family members so they can support you.

Get free, independent, specialist advice. Talk to one of the debt advice agencies, such as the National Debtline (0808 808 4000) or the Consumer Credit Counselling Service (0800 138 1111). They offer free advice on the full range of debt remedies (including bankruptcy, County Court administration orders, Individual Voluntary Arrangements). Don't ever pay for debt advice.

Understanding Your Debt Problem

Working out what's gone wrong is crucial in helping resolve debt problems. Research by Callcredit shows that more than 60 per cent of consumers simply don't know how much they owe. Start by making a list of your creditors (mortgage lender, landlord, utility companies, council, Inland Revenue, credit card companies, banks, friends, etc). Speak to them as soon as you can about your financial difficulties and clarify how much you owe. Most companies are sympathetic to people who act quickly and want to come to some agreement.

Michael Coogan, director general of the Council of Mortgage Lenders says: 'Many [lenders] go to exceptional lengths to provide debt counselling, reschedule payments, extend loan terms, or in some circumstances even allow payment breaks.'

Prioritise Your Debts

It's easy to be panicked into paying a debt if you've been sent a threatening letter or court summons. But it's essential to deal with priority debts first - the ones that could lead to you losing your home, being evicted or having your gas or electricity cut off. Non-priority debts include arrears on bank loans, overdrafts, credit cards, catalogues, charge cards and personal debts to friends and family

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Work Out A Budget

Work out how much spare cash you have when all the monthly expenditure has been deducted from the monthly income. Use our 4Homes Money Planner to help.

Take a long hard look at your spending to see if savings can be made. Once you have done this, you can see what money's left over to pay your debts. Don't over stretch yourself. Your creditors will prefer regular small payments to irregular larger payments that you can't sustain.

Debt Facts

1. Britain's personal debt is increasing by £1m every five minutes.
2. 4.8m adults spend more than they earn every month.
3. The average person in the UK now sees over half their monthly take home pay eaten up in debt repayment (35 per cent mortgage, 18 per cent other debts).
4. Citizens Advice deal with 6,600 debt problems a day.
(Source: Call Credit and uSwitch)

Make Debt Management Plans

Your creditors will expect you to draw up a financial statement or debt management plan showing your current financial position in detail. The debt agencies can help you with this. Or follow the guides in Don't get down about debt. Take action - a free leaflet from Credit Action and Which? Managing Your Debt guide by Phillip Inman (£10.99, 01903 828557).

What's On Your Credit File?

The credit reference agencies (Experian, Equifax and CallCredit) hold details of your credit history. Lenders use this information, with their own criteria, to decide whether to lend you money or credit cards. So it's important your credit file is correct. You can find out what information's held for a fixed fee of £2 (for a Statutory Credit Report). Ring 0870 4421211 for a free booklet 'No Credit?'. Steer clear of companies offering to 'repair' your creditworthiness. If there is anything wrong on your file, the credit reference agency is obliged to change it without charge.

Reign In Your Borrowing

*Don't be tempted to borrow more money to pay off existing debts - unless first seeking independent advice. The papers and daytime TV are full of adverts for 'consolidation loans' which allow you to lump several loans (credit cards, overdrafts, etc) into one, often with a top up to release extra cash. But these loan companies either charge fees which are added to the loan; sell secured loans that put your house at risk; or a loan that's so big it quickly becomes unaffordable.

*Avoid doorstep lenders too. Interest rates are generally high (some as much as 900 per cent APR). Look at other options if you really need to borrow such as joining a credit union where interest rates are capped by law. Find your nearest from the Association of British Credit Unions.

If you rely on your overdraft at the end of each month, find out how much it is costing you. Cut back as much as you can, and if you think you're being charged excessive overdraft fees or interest rates, switch account (compare accounts at uSwitch) *Don't withdraw cash on a credit card or use credit card cheques. These are not cost effective ways of borrowing money.

Maximise Your Income

*Consider doing overtime or extra part-time work to boost your earnings.
*Increase your income by letting out a room. Earnings up to £4,250 are tax free! Visit www.direct.gov.uk and type in 'Rent a Room scheme' for details.
*Check you are getting all allowances and benefits you might be eligible for, visit your local Jobcentre Plus or go to www.entitledto.com.
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The views represented in this article are those of the author and not of Channel 4. The purpose of the article is to provide general information only and does not constitute financial, investment, legal or other advice.You should not rely on any information provided in this article and you should always seek out independent professional advice relevant to your own particular circumstances.