Now tackle that debt hangover

IN THE aftermath of Christmas, most of us look with alarm at our bank balances and promise to stop spending so much. Somehow we gradually haul ourselves back onto the level for another few months - until the next big outlay.

As long as you have a regular income and decent credit record, it is worryingly easy to borrow money. Many of us routinely use credit and loans rather than saving for whatever we want. But if you take on too many debts, or if your income drops, you will slide into potentially serious debt.

How do you know when you are heading for unmanageable debt? The box points out the warning signs. When you have decided to confront the problem, be realistic. If you have simply got into extravagant habits with your credit card, then you need to stop using it. Never take it out with you; ideally, cut it up. Pay off a regular amount each month; if you have several cards, clear the smallest balance first and work upwards. In the meantime, use your bank account for necessary expenses - if you know you'll be overdrawn, make sure you arrange an authorised overdraft, as it is much less expensive than going into the red without permission.

If you feel you need help to manage your debt, you can get free, confidential and impartial advice from your local Citizens' Advice Bureau; alternatively, call National Debtline on 0645 500511. It can be difficult to get hold of but will give advice over the phone, or you can order a free self-help pack via the answer machine.

A debt adviser at your CAB will follow a set procedure that is recognised by most creditors. "We aim to help clients reach an arrangement with creditors, reducing the need for further enforcement action," says Claire Kelly, who runs the Portsmouth Citizens' Advice Bureau's money unit.

The first step in sorting out severe debt is to look at your financial situation as a whole. Treating some debts differently or ignoring them in the hope they will go away will only add to the problem. An adviser will help you look at your budget and suggest ways of increasing income (for instance, through untapped benefit entitlements or tax allowances) as well as giving advice on dealing with the debt.

Debts are divided into priority (such as council tax, where you could be imprisoned for non-payment) and non-priority, such as credit cards and bank loans. "The priority pile comes first; depending on the income available we'll often advise clients to make token payments to non-priority creditors, until the priority debts have been cleared," said Ms Kelly.

Then it is a question of renegotiating terms with creditors. Many credit companies and banks will settle for small repayments and freeze the build- up of interest for six months. Thereafter, their attitude depends on the size of the loan and the likelihood of the situation improving. If there is no indication that things will get better, and you have no assets, creditors may take a pragmatic view and write off the debt.

Above all, remember that you cannot borrow your way out of debt. Avoid panic applications for consolidation loans. Some of the firms offering these deals prey on the vulnerable, charging extortionate interest rates. The irony is that when debtors start defaulting on payments, they can be pushed towards this dodgy end of the market - payment problems will be thrown up in any search and more reputable lenders are likely to consider them too much of a risk.

These days there is much less stigma attached to bankruptcy and it may be the easiest way to clear your obligations and get creditors off your back. After three years (two years if your debts are less than pounds 20,000 and this is your first bankruptcy) the slate is wiped clean and you can make a fresh start.

There could be difficulties in obtaining loans, including mortgages, after you have been bankrupt. If you owe more than pounds 750 to a creditor, it is entitled to start bankruptcy proceedings. Alternatively, you can declare yourself bankrupt; however, it costs pounds 300 to petition for your own personal bankruptcy and some debtors cannot even find that sum.

Do anything you can to stop blotting your credit record copybook, as it can take years to get back on the right track. A court order for non- payment of debt will put a black mark on your references for six years. Work out a strategy for debt reduction. Best of all, do not spend what you cannot afford.

do you have too much debt?

You have a problem if you answer "yes" to any of these questions:

1. Do you only repay the minimum amount on your monthly credit card bills?

2. Does the amount you owe on your cards tend to increase each month?

3. Do payments on loans (not including your mortgage) take up more than 20 per cent of your income?

4. Are you overdrawn most of the month at the bank?

5. Do you dread opening bills, or shove them in a drawer and forget about them until the final demand arrives?