No house or savings, but ?34,000 debt

Lorraine, 34, finds her debts are stopping her from making a fresh start:

'When I separated from my husband four years ago, I was left with debt problems as I had taken out a number of loans at his request to help his business. His credit status was so bad he was unable to borrow any more money in his own name.

When we separated I took a further loan of £15,000 to buy him out of the matrimonial home. But there were so many debts that I had to sell the property two years later to pay off as much as I could and try to get back on my feet. Since then I have been living in rented accommodation.

I still have a lot of debt. The £15,000 loan costs me £325 per month and will be cleared in 2008. Then there are three other outstanding bank loans for £9,000, £3,000 and £5,000 taken out for my husband. I am ashamed to say I defaulted on the first and since I moved I have heard nothing from the lenders. The bank which provided the £3,000 loan agreed I should repay it when I could and the last one I am now paying off at just £15 a month.

My credit status has become seriously affected and although I recently qualified as a solicitor and have a reasonable income of £40,000 per annum, I find myself unable to pay off all my debts given the high cost of my rent (£975 a month) and other expenses.

The three-bedroom house I am renting is conveniently situated near my seven-year-old son's school. My husband contributes £400 a month towards his upkeep.

I would really like to buy my own property. I feel that if I had a mortgage the monthly repayments would be less than my rent, which would free up some funds to pay off my debts. However, with my adverse credit rating will I be able to get a competitive mortgage or indeed any at all?

My other worries are that I have no savings or pension.'

All you can do is knuckle down and pay up

There is no quick and easy solution to your problems. You must get on top of your existing debts. It is going to be a struggle but the sooner you start, the quicker you will be able to put the past behind you. Fortunately, you have a good salary and a steady job to help you.

The first thing to do is contact the provider of the loan on which you defaulted. Otherwise you will never get a mortgage and one day that lender could find you and you will probably be in a much more difficult situation.

Geeta Varma, senior counsellor at the Consumer Credit Counselling Service (CCCS), says: 'Not keeping in touch with lenders is never a good idea and ignoring it does not make it go away. Lenders and specialised debt collection agencies tend to employ fairly sophisticated tracing techniques to catch up with "moved away" debts, and the costs often get added to the debts, increasing the overall amount owed.

'Debts are rarely written off when attempts to contact the debtor have failed, and this always results in the debtor's credit rating being adversely affected. It is always better to keep in contact with creditors so they can see the debt is being acknowledged; silence makes them assume the debtor is wilfully avoiding payment.'

Bearing in mind your profession, the sooner you contact the lender the better, otherwise you could also have problems with your employers. In some firms, it would not be considered appropriate for solicitors with adverse credit records to handle clients' funds.

When you get in touch with your lenders and explain the situation, the chances are they will allow you to make low, nominal payments as you are already doing with one of your lenders. These are termed 'goodwill' or 'token' payments. They show that you are making an effort to meet your commitments even though you are unable to meet the full cost of your repayments.

If you are reluctant to deal with your creditors directly, you could seek the help of the CCCS which provides free, confidential debt advice and is recognised by most lenders. Their advisers can help you negotiate affordable repayments and also assist with compiling a full financial statement that will support a request for reduced payments.

Naturally, the more you can repay each month the sooner you will be rid of these debts and can move on. Think of all the ways you can reduce your outgoings to free up extra money to boost your repayments. Try cutting back on your shopping bills, for example, by setting yourself a strict monthly budget and buying cheaper brands. As you have a spare room, why not take in a lodger (with the consent of your landlord, of course) to help towards the rent.

Obtaining a mortgage in your current situation will be extremely difficult, says Elliot Nathan, product development manager at Charcol, the independent mortgage advisers. Potential lenders will check your credit history, so there is no point in trying to hide your debt problems.

Having no savings is also a major stumbling block. Nathan says: 'Even so-called sub-prime lenders, who are prepared to lend to people who have had credit problems in the past, will normally require at least a 5 per cent deposit.' Then there is the disadvantage with sub-prime lenders that you would have to pay an uncompetitive rate of interest.

In fact, Nathan says you would probably be no better off financially buying a property than paying rent. He calculates that even if you were able to borrow say 3.5 times your income, ie £140,000, the monthly cost of a repayment mortgage would be about £1,000, which is more than you are currently paying in rent. Then there are the other costs associated with property purchase such as stamp duty, legal costs and valuation fees. Nathan argues: 'I feel that buying a property now might actually make Lorraine's situation worse.'

So there is nothing for it but to knuckle down, pay off your debts and start saving for a deposit. But Varma of the CCCS points out: 'Rebuilding a credit rating takes time, but is achievable by making regular payments to creditors. The more regular payments made, the better the credit file will look and future lenders checking an applicant's credit rating will pay more attention to the recent payment activity. Most 'out of date' information held on credit reference agency files is eventually replaced by more recent data, making it possible to re-establish a good rating.'

You will then be able to approach an ordinary high street lender for a mortgage.

Lorraine's to-do list

1. Contact the lenders you have lost touch with immediately and work out a repayment plan.

2. If you are reluctant to deal directly with them, ask the Consumer Credit Counselling Service (0800 138 1111) for help.

3. Look for ways of cutting back on your outgoings so you can pay off your debts more quickly.

4. Consider taking in a lodger.

5. Once you have cleared your debts, start saving for a deposit.

6. Be disciplined and patient.

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