If you find yourself with unmanageable levels of debt, it can be hard to see a way out – but no debt problem is permanent. It may take some time and some sacrifices, but there is always a way out.
The main thing is to do something. The longer you leave debt unresolved, the worse it can get. We’re here to guide you through some of the options available to get yourself out of debt.
If you are concerned about your levels of debt, a valuable starting point is to establish exactly how much debt you have and whether or not you are in a debt crisis. This will then largely dictate your next steps.
You are most likely in a debt crisis if you’re struggling to pay your basic outgoings, such as your mortgage or rent, or your debts are bigger than your annual take home salary after tax. Either of these scenarios mean that you are in serious financial difficulty, and could lead to dire outcomes like losing your home.
But before we go into how to clear your debt entirely, let’s take a look at the first steps you can take to start getting your debt levels under control.
If you are in a serious amount of debt, then you likely are (or were) spending beyond your means. Spending beyond your means could lead to more borrowing to cover the gap between your income and your spending – which in turn could lead to a debt spiral. Where you can, it’s a good idea to start budgeting and reducing your outgoings so that you minimise the risk of taking on more debt.
If you are in a situation where you have multiple debts, then it is best to prioritise which need to be dealt with first. These can be classed in three different ways:
You may not want to let go of your emergency fund, but the reality is that whatever interest you may be earning on your savings, it will be less that what you are being charged on your outstanding debt. So, if you do have anything put away, consider using this towards getting yourself debt free.
That said, it is often considered wise to keep at least some amount of ready cash available. An amount of £1,000 or £2,000 could help keep you from borrowing more if an emergency like an unexpected auto repair arises. It’s usually best to pay your debt emergencies and priority debts before worrying about setting aside this cash. But you may consider doing this before working down your non-priority debts (that is, overpaying your minimum payment, as you should continue making your minimum payments if at all feasible).
If you are in a situation where you are being bogged down by high interest rates, you might be able to get yourself a better deal. First things first, though, consider checking your credit score as this will dictate what options are available to you. Then you can consider the following:
There may be options available to you that you might not yet have considered. Firstly, check if there are any government schemes available to you that could help. For example, there is a scheme that helps people who are in mortgage arrears. Additionally, check if you are entitled to any state benefits.
Another option is to look at what interest charges and fees you may have been charged through your borrowing and see if there are any that can be reclaimed. For example, if you have been charged unfairly by your bank for going beyond your overdraft limit, you may be able to reclaim some of the fees.
Finally, look for any grants that you may qualify for. Some utility providers have these in place for customers who find themselves in large arrears.
Before we go into the options for clearing your debt, it is best to make clear that if you are in a debt crisis, the advisable course of action is to take advantage of a non-profit debt counselling service. Here you will get advice tailored to your personal situation.
The options below are the different ways available to clear debt that may be suggested by your debt counsellor. As the options are slightly different in Scotland and Northern Ireland, what follows is based on what is available in England and Wales.
A debt management plan, or DMP, allows you to pay back your debt at an affordable rate. Under the plan, you will make one monthly payment to your DMP provider. This option is suitable for things like credit card debts, store card debts, overdrafts and personal loans.
A debt relief order, or DRO, will freeze your debts for a year and then write them off completely if your financial circumstances remain unchanged. It is suitable for those who are on a low income and have few assets.
Another option is to apply to the County Court for an administration order, or AO. Under an AO, you would agree to make regular monthly payments to the court, who would then distribute the money to your creditors. This suits those who owe under £5,000, can afford to make regular repayments and have at least two debts – one of which must be a County Court Judgement.
An individual voluntary arrangement, or IVA, is a legally binding agreement made with your creditors. It allows you to pay back what you can afford over a set period of time, which is usually between five and six years. Anything that hasn’t been paid off by the end of the term will be written off. An IVA suits those who are in need of protection from their creditors, but own assets such as a house or a car that they don’t want to lose. Therefore it is a solution that works for those that have some spare income each month or lump sum to make repayments to creditors, and who want to avoid bankruptcy.
With bankruptcy, everything you can prove you owe will be written off entirely. However, if you own any assets, such as a house or car, these will be taken to pay off your debts. Bankruptcy can often be seen as a last resort. It suits those cannot see a way to pay off existing debts, who don’t have many belongings of value and whose situation is unlikely to improve.
If you are in a serious situation with your debt levels, then the most sensible course of action is to find a non-profit debt counselling service.
A debt advisor will treat everything you say in confidence, suggest ways of dealing with debt that you may not know about and help you to check if there are any benefits or entitlements available to you.
When you are in arrears, you may find that your original creditor will appoint a debt collection agency.
Debt collection agencies are different to bailiffs. Firstly, they have no special legal powers – unlike bailiffs who have the legal right to visit your property and remove goods to sell in order to pay off your debts. Instead, debt collectors are only able to do everything that your original creditor would have done.
There are two ways that a debt collection agency will be appointed by your original creditor. Either the agency will buy your debt from the creditor for a reduced amount and become its legal owner, or the original creditor will still own the debt and use the agency to collect it from you.
Debt collection agencies are likely to contact you either by phone or by letter. In some cases, they could send a debt collector to you home. Along with chasing you for payment, they can also take court action if you do not pay.
There are many consequences to finding yourself with unmanageable levels of debt – some of them are tangible and some are emotional.
In terms of the practical consequences of debt, in the worst-case scenario you could be looking at court actions against you and the possibility of having your home and belongings repossessed. However, if you take action and seek advice, there is likely to be a solution available to you that will prevent this from happening.
Debt can affect all aspects of your financial life. If you have a poor credit score as a result of having high levels of debt, having previously had an IVA or having been declared bankrupt, this could prevent you from getting a mortgage in the future or make it very hard to be accepted for a regular credit card.
There is also the emotional aspect of finding yourself in debt. Those who are struggling with unmanageable levels of debt are more likely to experience poor mental health.
When it comes to debt, taking action is always better than doing nothing. It might not be easy and it might not be resolved instantly, but there is almost always a solution that can be found.