Before you go to creditors to negotiate reduced payments per month, you will need to prepare what is known as a financial statement.
This is a list of all your monthly outgoings and all your income. And importantly this will also include a figure showing your disposable income. This is the amount of money left over every month to pay your debts. This should be based on your revised budget.
It will demonstrate to the banks or other creditors that you are working to tackle your debt.
What you are likely to discuss is a reduction in your monthly payments. This will be worked out on a pro-rata basis – that is, each debtor gets a portion of your spare cash a month.
1. Mark the items that do not change every week or month – for example mortgage or rent or car hire-purchase.
2. Now look at the remaining items and see if you can reduce outgoings. Look at, for example, the amount you spend on entertainment – DVDs, cinema, restaurants or takeaways, wine or beer?
Also look at gas and electricity. Is your gas on a timer? Could you reduce it by an hour a day? All of this could save you a significant amount if you added the bill up over a year. Read more about saving energy
3. Examine the other little extras – golf, gym, hair salon appointments. Can they go?
MABS advise clients to leave room for some socialising as long as it is reasonable. Small children should get occasional treats like a trip to the cinema, for example, it says.
Luxuries left in your financial statement will be easily crossed out by creditors, but not always.
Frank Conway, a director of moneycoach.ie, said he had one client who managed to keep his subscription to Sky Sports, because he was able to persuade creditors that he stopped going to the pub and spending money on pints four or five nights a week. In other words, the debtor was showing he was cutting back.
He had another client - a couple - however that were spending over 800 euro a month on cigarettes. He told them they had option but to give up smoking as no creditor would accept a plan with those outgoings.
4. The next step, before you contact your lender or other service providers, is to work out your disposable income. Return to your checklist and work out your revised figure.
5. Work out how much you can pay every week or month in instalments over what period of time and make this proposal.
For the purpose of a financial statement, it doesn’t matter whether the number you arrive at after making cuts is €100 or €300 a month. This is meant to show creditors that you have made an honest and credible appraisal of your financial statement and enter into negotiations on this basis.
6. When you have arrived at your figure, now draw up the list of your secured creditors – go back to the checklist for a reminder and divide your disposable income among them on a pro-rata basis – that is the creditor who is owed 50 per cent of your overall debt gets 50% of what you can pay. The creditor who is owed 10% gets 10% and so on.
7. Lastly, before you pick up the phone or write to your creditors, work out a Plan B. This should be a second financial statement involving deeper cuts to your outgoings. This will enable you to think through the worst possible scenario in case the creditors do not accept Plan A.
RTE has assembled plenty of case studies on debt negotiation to help you audit your finances but we are also interested in hearing your cases.
You can email money@rte.ie. Include your name and telephone number. These won’t be published but are needed for verification.
One case study to get you going involved a professional couple with debts of €40,000.
Their net disposable income was worked out at €316.71 a month and the creditors agreed that they would accept this on a pro rata basis. In other words the creditor that was owed 40 per cent of the couple’s overall debt got 40 per cent of their income a month and so on.
So for example the Ulster Bank which was owed close to €2,000 and was scheduled to get €50 every month. Under the new plan it got just €5.83.
