This first the first Australian Debt Solutions blog post is about how to prepare and Income and Expenditure and present it to your creditors. For this post you will need the following:

A pen

Paper

Calculator

Recent creditor statements

Writing down an Income and Expenditure is a great way of learning how to budget effectively and help regain control of your finances. Firstly, we are going to deal with Income. Write down all your monthly income AFTER tax including any benefits you receive as well as any other income such as rent from a second property or pension plans etc…I will use an example of Mr and Mrs Smith to help you along the way.

Example:

Mr Smith net income 3,000
Mrs Smith net income 1,500
Centrelink benefits 500

Total 4,000

Now, look at your expenditure. If you are experiencing financial difficulties it is likely that you may have been overspending and living beyond your means on a regular basis. Now is the time to be realistic.

In my opinion there are two kind of expenditure. Necessary expenditure and un-necessary expenditure. Mortgages, food and petrol are a simple fact of life, we have to pay them in order to survive. Membership of a gym that costs one hundred dollars a month that you last visited two months ago is not. If you are in debt you have to get real. Look at where you can cut back, is your mobile on the cheapest tariff? Could you save money by changing utility supplier? Do you really need two cars when one would suffice? I’m not suggesting you should forgo all the pleasures in life but you should have a long hard look at where and how you can save some money.

Always include expenditure such as rent, mortgage and any secured loans you have in the way of car HP’s and home loans. Failure to pay these will result in action being taken against you such as repossessions!

Now write down your expenditure underneath where you have written your income like the example below:

Example:

Mr Smith net income 3,000
Mrs Smith net income 1,000
Centrelink benefits 500
Total 3,500

Expenditure:

Rent/Mortgage 1,000
Food 500
Home Insurance 50
Utilities 150
Phone 100
Mobile 100
Car Petrol 250
Car Insurance 50
Childcare 300

Total 2,500

GDI 1,000

You will notice in the example above I have written GDI, this stands for Gross Disposable Income and represents the amount you can offer to your creditors each month. Of course this amount will be different depending on your own personal Income and Expenditure and if at this stage even after cutting back you still do not have any GDI you may wish to consider bankruptcy (a topic which will be discussed later) in the interim you can always proceed to http://www.ausdebtsolutions.net/index_files/bankruptcy.htm for more information.

Assuming that you do have a GDI the next stage is to get your creditor statements and actually see how much you owe. Remember to take interest into account when working how much you owe on loans. Just because you took out a loan for $10,000 and have been paying $200 a month for two years does not mean you owe $5,200. Interest and payment protection add up, if in doubt call the lender and get an exact balance.

You may wish to write them down as in the example below:

Creditor / Balance / Minimum or contractual monthly payment
Card 1 / $5,000 / $400
Card 2 / $10,000 / $800
Card 3 / $6,000 / $480
Card 4/ $8,000 / $640
Loan 1 / $15,000 / $500
Loan 2 / $12,000 / $400

Total / $56,000 / $ 3,220

In the case of the example above it would be impossible for Mr and Mrs Smith to pay their monthly contributions as they only have $1,000 a month GDI. Rather than pay creditors varying amounts (or nothing at all) we are now going to work out a pro-rata payment to each creditor to make a fair offer. Remember any secured loans must be included in your expenditure as they HAVE TO BE PAID the contractual amount each month.

Working out a pro-rata payment is a simple equation and to do so you simply need to know how much one a debt equates to in relation to the total debt. To do this work from the following equation:

Creditor divided by total debt x 100 = percentage of debt

In the case of above and Card 1 from the example above it would work out:

$5,000 divided by $56,000 x 100 = 9% of total debt

Using the above equation work out your percentages like the example below:

Creditor / Balance / Payment / %
Card 1 / $5,000 / $400 / 9
Card 2 / $10,000 / $800 / 18
Card 3 / $6,000 / $480 / 11
Card 4 / $8,000 / $640 / 14
Loan 1 / $15,000 / $500 / 27
Loan 2 / $12,000 / $400 / 21

Total / $56,000 / $3,220 / 100

If your percentages are a little out simply round up or down, you don’t need to be totally bang on. Now we need to do some more working out and refer back to our GDI. In example case of Mr and Mrs Smith they had a GDI of $1,000. In order to work out your pro rata payments to creditors you need to do the following equation:

GDI divided by 100 x creditor percentage = pro rata payment.

In the case of Card 1 above we would get:

$1,000 divided by 100 x 9 = $90 monthly payment.

Repeat the process for all your creditors like the example below:

Creditor / Balance / Payment / % / Po Rata offer ($)
Card 1 / $5,000 / $400 / 9 / 90
Card 2 / $10,000 / $800 / 18 /180
Card 3 / $6,000 / $480 / 11 / 110
Card 4 / $8,000 / $640 / 14 / 140
Loan 1 / $15,000 / $500 / 27 / 270
Loan 2 $12,000 / $400 / 21 / 210
Total / $56,000 / $3,220 / 100% / $1,000

Now, it is likely that the pro rata amount will be well below the actual amount your creditors are asking for each month. The key is to remain strong and resolute, paying one and not the other will get you nowhere.

What to do next!

Draft a letter explaining to your creditors that you are currently experiencing financial difficulties. Do not be afraid to simply state that you have over committed yourselves if this is the case. Using an example like the above show your creditors what you owe and what you are proposing to offer. This is an informal offer and there is no guarantee that it will be accepted by your creditors. However, the point is you are at least showing willing to try and pay your creditors back!

I will cover dealing with creditors in a later post but you must resist the urge to pay one more than you can afford, this will simply cause you more bother going forward. Another thing to avoid is spending anymore on your cards. Think about it, if you are asking them to accept a reduced sum how can you justify it if you have used that card to pay another creditor?
Okay, hopefully this has been of some help. I’m going to explore other topics soon but if you have any queries post a comment or go to http://www.ausdebtsolutions.net/ and I will see what I can do!

Take Care!

Australian Debt Solutions