A VAT increase will take effect on the 4th January 2011. As a result the cost of many everyday living expenses will rise. Monthly living costs such as the price of petrol, energy including electricity and gas and adult clothing to name a few will all become 2.5 percent more expensive.

Because VAT affects so many items it is likely that almost everyone’s cost of living will go up. If you are in a Debt Management Plan (DMP) this could cause you significant problems because your ability to continue to pay your monthly payments will be put under pressure.

The affect of a VAT increase if you are already in a DMP

If you are already in a DMP the increase in VAT will push up the cost of your essential living expenses. You are therefore likely to struggle to maintain your monthly payment unless you review your finances.

It is extremely important that you take the time to review your living expenses budget and make sure the figures you have included for each item are still adequate. If they are not, you need to increase the budget accordingly. However increasing your living expenditure budget will reduce the amount you can pay your creditors.

You could consider reducing the amount you pay your creditors each month. However you need to remember they are likely to react badly to this. They may reapply interest and late payment charges to your accounts which will then require further negotiation to be frozen again.

A VAT increase could mean you need to start a Debt Management Plan

It is not just people current in debt management plans who may be affected by the VAT rise. If you are only just managing to make ends meet the increase to everyday
essentials may be enough to push you into a position where you can no longer afford to pay all of your debts.

If you find yourself in this position, you should take advice about your options from an experienced debt advisor as soon as possible. Depending on your situation the solution may simply be a bit of belt tightening and more focus on what is really essential in your expenditure budget.

However if this is not realistic you should avoid borrowing more money  and instead consider a debt management plan. If you are a homeowner this solution can be help as it will help ensure that your mortgage payments are made a priority and maintained so that your home is protected.

Make sure you are prepared for a VAT increase

Very often debt problems start because people do not have a proper understanding of and therefore full control on their monthly expenditure. At a time when incomes are under pressure and the cost of living is increasing a VAT increase in VAT is going to make the cost of living even more expensive.

If you are currently managing your debts with a debt management plan or feel that you are starting to struggle to make your payments, the affect of the VAT increase is likely to be even greater for you.

It is therefore vital that you take the opportunity to review your living expenditure budget and take action if you feel you can no longer afford to maintain the payments you have been making to your creditors.