How to get out of debt

Being in debt is never easy. The prospect of getting out of debt can feel impossible, and those in debt often report feeling alone or helpless. But it’s important to know that there are options out there for you, and people to support you along the way. That’s where we come in.

We’ve compiled a list of just some of the options available to people in your position who are asking…

How can I get out of debt?

1. Finding the right debt solution

There are a number of schemes available for those in debt, with the aim of making things more manageable for those who need it. We do go into greater detail on UK Debt Solutions on our website if you want to find out more.

The main schemes in the UK are:

• IVAs

An IVA is a debt solution that’s available to people who qualify in England, Wales and Northern Ireland. It aims at helping you on your way to becoming debt-free, by offering an affordable monthly payment that covers all unsecured debts in one go. It also involves your creditors freezing all interest and charges for the duration. After 5 years, any remaining debt is written off by your creditors and you’re given a fresh financial slate.

• Trust Deeds

A Trust Deed, or Protected Trust Deed, is a solution that’s similar to an IVA for residents in Scotland. This scheme consists of consumers agreeing to make an affordable monthly payment to their debts, in return for a percentage to be written off by their creditors after a certain length of time – usually 4 years in Scotland, instead of 5. A Trust Deed becomes a ‘Protected’ one if the majority of your creditors agree to the terms.

• Debt Management Plan

A DMP is another way for you to get out of debt and consists of you making affordable payments to your creditors. It’s not always guaranteed that your interest and charges will be frozen but means that your monthly outgoings are manageable until your debt is paid off in full. Read more about Debt Management Plans.

• Bankruptcy and Debt Relief Orders

Both of these solutions involve your debt being written off after a certain amount of time. The qualifying criteria for both of these vary, and in the case of Bankruptcy being debt-free is often at the cost of your assets and other possessions being sold – therefore, this is not the first choice for many people and not a decision to be taken lightly.

2. Increase payments

This option may seem unreasonable, and we know not everybody has extra cash to pay more towards their debts than they already are. Minimum payments on credit cards exist to make things more affordable for consumers, but what many don’t realise is that only making these payments puts you at risk of falling into what’s called ‘persistent debt.’ This is because these payments only cover the interest that is being added by your creditors, so your actual debt level remains the same.

By increasing your monthly payments slightly to stretch beyond the minimum payments required from your creditor, you will be able to contribute to your actual loan, not just the interest and other charges – so over time, you will gradually begin to see your debt amount fall until you are debt free.

3. Pay bills on time

This is a simple one, but by not paying bills on time your creditors will continue to add more charges, so even if you do pay the bill eventually, your total remaining balance will end up higher than it has to be.

A good way to ensure bills are paid on time is to set up a direct debit, or standing order for any totals that are the same. This also helps build up a positive credit rating. With bills being paid on time, you can reduce the amount of aded charges you are contributing to, which in turn will help you get out of debt much quicker.

4. Debt Consolidation

This method involves acquiring a debt consolidation loan, which covers the amount of outstanding debt you owe to various creditors. Once they’re paid off, you can then focus on paying the debt back whilst only having one creditor to focus on.

In theory, this is simple, but in many cases, this is not a viable option – for many in debt, their credit rating is very low, making it highly unlikely to be accepted for a loan such as this. You can read more about Debt Consolidation on our website.

Similar options involve a balance transfer credit card, where you can use money from this card to pay off some of your existing debt. Often these cards involve a low or 0% interest rate, but it’s worth remembering that these companies may charge fees – always check the small print and your eligibility before applying!

5. Create a budget

A budget is a great way to help get on top of your debts, as you can understand exactly what you have coming in and going out which can put yourself much more in control of your finances. A successful budget can be achieved by looking through previous bank statements and other financial documents that reflect your spending and income.

You can then understand whether you can cut costs in some areas in order to contribute more towards your existing debts. Even if it’s only a few pounds here and there, by doing so you’ll be able to reduce your debts quicker than before.

We offer further advice on creating a budget on our website, and with a quick search online you will be able to find various budgeting templates that may be of use to get started.

6. Speak to your creditors

Each company will have their own policy for consumers to query whether they can have their debts reduced. Whilst it isn’t guaranteed that they will agree to reduce or write any of your debt off for you, it could be beneficial to reach out and talk with them directly. If you are really struggling to keep up with your payments, it’s much better to inform your creditors about this than to remain silent or ignore them.

This option may be ideal for those who are only dealing with a few debts, but if you are facing a lot of debt from multiple creditors, then the prospect of reaching out to each of them may feel daunting and can also be very time consuming. This is where reaching out to specialists who can assess your debts for you or speak with your creditors on your behalf may come in useful – such as ourselves!

7. The ‘Snowball Method’

There are different ways you can approach paying off your debts. The Snowball Method involves you focusing on paying off your smaller debts first. Once your smallest debt is paid off, you move on to the next smallest debt and so on.

Slowly, you will be closing off the number of debts you have so you are left to deal with your larger debts, but fewer creditors, until you become debt-free.

8. Prioritise high-interest debt

This method involves you paying off your loans that incur the highest interest first. By doing so, the rate at which your debts increase through interest will reduce and you will be left with your lower-interest debts to deal with until all debts are paid off.

Want further help with debt?

The guidance above is in no way exhaustive, but they are some good starting points for those wanting to be debt free. If you’re seriously struggling and still lost with where to start, then don’t hesitate to reach out for help.

Money Advice offers a free consultation to get things started. We can point you in the right direction, or help get an application together for certain debt solutions.

Start your journey towards getting debt free with Money Advice.