If you’re being taken to court over an unpaid loan to a bank or credit union, what should you do?

The short answer is to face it head on. Whether you took out the loan to buy a car, to pay for your wedding or revamp the kitchen, lower wages, unemployment and just trying to keep the roof over your head could mean you’re having trouble paying it back.

But if envelopes with demand letters are mounting or there’s a court date on the cards, it’s still not too late to act.

"It's important for people in arrears on a personal loan to engage as best they can with the lender to reschedule payments and avoid legal proceedings altogether," says senior policy analyst with the Free Legal Advice Centre (Flac), Paul Joyce.

Head of the government-funded Money Advice and Budgeting Service (Mabs), Michael Culloty agrees. "By engaging with the lender, even if it does go to court, it's good to have a paper trail to show that you're a 'can't payer', not a 'won't payer'.

To counter the power imbalance, Culloty advises engaging with your creditor in writing rather than by phone.

A sample letter on the Mabs website shows exactly how to do it. Using this template, you can inform your creditor that you are experiencing financial difficulties but are trying to resolve them. It advises that you’ll be in contact again, once you’ve assessed your financial situation, with a proposal. It also asks that any action being taken to recover the debt be put on hold and that interest and other charges being added to the account be suspended until you can do so.

Assessing your financial situation is about figuring out how much it costs for you or your family to live. By cataloguing your spend on everything from food to toiletries, utilities to insurance over a number of weeks, factoring in seasonal hikes in heat and light, you can gauge how much you need to survive and what if anything is left over.

Budgeting
"People put down notional figures but they shouldn't do that because you could do yourself an injustice," says Culloty. Expenditure on social life and savings should also be included, he warns, because if your budget is too tight, it will fracture.

A useful tool is the minimum income standard calculator on misc.ie. Created by the Vincentian Partnership and Mabs, the calculator shows the income people need to buy the goods and services that experts agree are the minimum essential for everyone in Ireland.

From these calculations, you can then complete a financial statement, itemising your weekly income and expenditure, your net income, priority debts and secondary debts. Finally, a copy of this statement, along with a letter outlining what you can afford to pay should be sent to your creditor.

The statement might demonstrate that you can pay a little or perhaps nothing at all. “Increasingly, we are offering creditors nil offers,” says Culloty. “Because you have to protect the roof over your head, provide nutritious food for you and your family, pay for your light and your heat, those are your priorities.”

If you can pay something, the bank doesn’t necessarily have to accept your offer. But if the case proceeds to court, coming with evidence of your sincere efforts to engage can act in your favour. “In our experience, judges are very sympathetic to persons in difficulty and sometimes they will look at the bank and ask, ‘why are you here?’”

In the case of an instalment order hearing, where the debtor doesn’t have any property assets but has some income, the lender is seeking for the debt to be paid in instalments over time.

“If you are served with an examination of means form and given a date for an instalment order hearing, it’s absolutely critical to send in details of your financial circumstances in advance and make absolutely sure you show up to the hearing,” says Paul Joyce of Flac. “Because if you don’t, an order could be made in your absence for an amount you can’t afford. The whole objective of the exercise is to determine what’s affordable, so engagement is really crucial.”

There is also the possibility of an execution order, where goods can be seized for resale to meet the terms of the order. A judgement against a property of the debtor is another method of enforcement, but for those of limited means, an instalment order is the most common.

Insolvency legislation
Michael Culloty thinks that the new personal insolvency legislation, the Personal Insolvency Bill 2012, and the Insolvency Service of Ireland that it has created, will strengthen an individual's negotiating position with lenders. Under its provisions, individuals can obtain a Debt Relief Notice (DRN) to allow for the write-off of debt up to €20,000, subject to a three-year supervision period.

“I think creditors will be more amenable to reaching affordable and sustainable payment plans because otherwise, if you have no income and no assets for example, you can get up to €20,000 wiped out. And creditors won’t want to do that.”

The Insolvency Service of Ireland (ISI) has said it will start accepting applications from people in debt, through approved personal insolvency practitioners and financial advisors, by the middle of August. In the meantime those in debt should not bury their heads in the sand.

“If definitely pays to engage,” says Michael Culloty. “People should not ignore legal letters. Agreement can be reached on the steps of the court but the thing is to engage. If your confidence level is low, if you have literacy or numeracy difficulties, if you are depressed and you feel you really can’t engage with any energy, we are there to help and support you.

“If you are frightened of opening those envelopes, come to us and we’ll help you to open them.”

The Mabs helpline is 0761 07 2000, Monday to Friday from 9am to 8pm, or see mabs.ie. Contact the Free Legal Advice Centre at 1890 350 250 or flac.ie.