After taking the key decision not to ignore your debts, the second most important thing is to categorise your debts into two types. This will help you get a grasp of what’s urgent and what’s not urgent.
But remember, please read all five of these rules before making a decision to pay off a debt.
That is not always the best solution – financial experts advise clients to come up with a plan for all creditors, not just one, before picking up the phone or writing. Whether they accept it or not is a different issues.
But the very best advice is to have a plan worked out before you contact your creditor – whether it’s the ESB or a bank. Later on, there are some tips on what to say when you do get in contact with your creditors.
There are two types of debts – secured and unsecured. The first are known as priority debts, the second as secondary debts which are less important to pay back immediately.
If you have been made redundant and have a lump sum, carefully consider what you are going to do before dipping into the nest egg to pay off debts. Link to Redundancy and lump sums?
Make a list of all your debts and divide them into priority (secured) debts and secondary (unsecured debts).
Priority debts
- Mortgage
- Rent arrears
- Fines
- Utility payments – gas and electricity
- Car hire purchase
These are priority because your home may be at risk or your electricity or gas could be disconnected if you fall behind.
The car lease is included here because you can lose your car if you fall behind on monthly payments - you legally don’t own the vehicle until the last payment is received.
Don't panic
Don’t panic however about your mortgage debt – wait until you have gone through all five stages of this debt management plan before decided what you’re going to do.
In December 2010. the Central Bank made it virtually impossible for banks and building societies to force people out of their homes, so don’t rush into anything. Here's the story if you want to read more
Remember the idea here is to come up with an overall plan for all your debts, not just your mortgage.
Secondary debts
These are debts that are not secured on anything you own – for example your house, land or a car. It means the creditor has no extra powers to remove you from your home or to seize goods.
These creditors are usually the ones that shout loudest about your debt and threaten you with debt collection agencies, black-listing etc. Credit card companies are among them. Again the rule is don't panic. Work out a plan of action for all your debts before making an arrangement with them.
If you are nervous about what to do when they call. Tell them this: "I have difficulties at the moment with my payments and can I come back to you when I have a revised financial plan." All Irish banks are bound by a new code of conduct to negotiate with you, so don't be afraid of saying this. You can also ask them to freeze your interest payments until you come back to them with a revised plan of action. There is more help in this section of the RTE money site on all of these points - see the related links on the right hand side of this article.
However you should remember creditors can go to court to seek repayments, another reason not to ignore any debts in the long term.
So remember they are called 'secondary' debts for a reason and don't let yourself be bullied into a panic decision to pay off, say a credit card, when you might be able to, for example, negotiate not paying the interest at all. (We will get to this in a later section)
Remember this when you get your umpteenth letter. You can negotiate with them, ask them to freeze interest payments etc. But when you are in serious debt what you should do is to come up with an overall plan for ALL creditors before lifting the phone to anyone of them. This can be achieved with the help of this guide.
The main non-secured debts you will have include:
- Bank overdraft
- Credit cards debts
- Department store debts
- Credit Union loans
- Personal debts to friend and family
- Personal loans with finance companies
