Don’t turn a post-Christmas debt dilemma into a disaster!

The Motley Fool cautions distressed debtors to tread carefully before turning to debt management companies.

This year a huge number of people will consider contacting debt advisers to help solve their post-Christmas money problems. According to Grant Thornton, almost 30,000 people are set to become insolvent in the first three months of 2007. The business advisory firm also predicts that 10,000 people may go bankrupt or enter Individual Voluntary Arrangements (IVAs) before April.

David Kuo, Head of Personal Finance at Fool.co.uk, says: “Not all distressed debtors are alike. Consequently people who are worried about their debt burden should identify what type of debtor they are first.

“Some people can meet their regular outgoings and can even cope with their monthly debt repayments, but they want to be free of debt faster. In these instances it may be prudent to reduce interest payments with a 0% card or one of the many lifetime low-rate deals.

“If you can meet your regular outgoings but you can’t fulfill all your credit repayments then consider freezing the interest on your debts. Alternatively, consider negotiating lower repayments on your credit commitments. In both cases, debt-advice firms can help organise this for you.

“However, if you have debts and you can’t even meet your basic outgoings with your regular income then clearly you need professional help. Additionally, if your debt burden is too overwhelming then you may benefit from entering an IVA or becoming bankrupt.

“It is unfortunate that many distressed debtors may fall into the hands of professional debt-management firms, which will profit from their problems. The situation is not helped by reports that the stigma of bankruptcy is being reduced as it becomes more common. The Bank of England reckons that almost a quarter of the population now know someone who has become bankrupt.

“Many people can avoid a calamitous bankruptcy if they heed warning signs early. For instance, if you find that you regularly spend next month’s pay cheque before it has even arrived then cutting your outgoings and boosting your income is the first simple step you can take to pep up your financial health.”