10 steps to getting rid of debt
1. DON'T IGNORE IT
Not only will your debts rack up more interest but it's likely that the best efforts to ignore the debt won't stop you feeling stressed about it.
2. TELL CLOSE FAMILY AND FRIENDS
By telling others you are admitting to yourself also that you have a debt problem - and the relief of sharing your money worries can be a huge stress-reliever.
3. NOTIFY YOUR BANK AND CREDITORS AS SOON AS POSSIBLE
The Lending Code requires financial institutions to act with sympathy and advice where possible. You may be able to freeze interest or arrange to pay smaller monthly payments to your lenders.
4. DRAW UP A BUDGET
You may know you owe a lot of money but do you know how much money is going in and out of your bank account? A budget will show where you're overspending and where you can make cutbacks.
5. SEPARATE ESSENTIAL AND NON-ESSENTIAL DEBTS
Although the interest you have to pay on unsecured debt such as your credit card may be higher than your mortgage, missing payments on secured debt is much more serious because failing to keep up the payments could result in you losing your home.
6. PRIORITISE DEBT REPAYMENTS
After prioritising secured debts, make sure you start by clearing the highest-interest debt first. It may be worth consolidating your debt into one loan so that you can keep up with all your payments more easily or, if possible, moving it onto a lower rate credit card.
7. STOP SAVING
The amount of interest earned in savings is paltry compared to the rate at which loans' interest rates rack up.
8. SEEK DEBT HELP
There are plenty of free debt advice charities and services at your disposal.
- Advice UK: 020 7469 5700 adviceuk.org.uk
- Citizens Advice: Find the phone number of your local bureau from your local library or phone book or online. citizensadvice.org.uk
- Consumer Credit Counselling Service: 0800 138 1111 cccs.co.uk
- National Debtline: 0808 808 4000 nationaldebtline.co.uk
- Payplan: 0800 280 2816 payplan.com
9. CONSIDER ALL OPTIONS
Going bankrupt or seeking an IVA are also both viable options for those in serious debt – and shouldn't be ignored out of pride or shame.
10. STAY POSITIVE
By taking pro-active steps and being open about your debts you can remind yourself that you're taking steps towards getting out of the red.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.