A guide to getting out of debt fast by Jessica Foreman

Monday, 2 October 2017
Debt is part of everyday life. After all, many of us would not be able to own our home if we did not take on a mortgage, and getting our hands on the latest phone usually involves signing up for a credit contract.

However, debt can quickly become a problem if your circumstances change and you suddenly find yourself unable to make repayments on time and in full. Whatever your situation, it’s a good idea to seek out free, impartial advice before tackling your debts, from charities and experts such as The Money Advice Service, StepChange and PayPlan.

If you are having trouble clearing your debts, then here is a guide to getting out of debt and the steps you need to take to do this.

Debt Glossary - Here are some key terms to remember and what they mean

● Creditor - This is who you owe money to. It could be a credit card company or a utility provider.

● CCJ - This stands for County Court Judgment and is an instruction issued by the court on behalf of your creditor for what you owe.

● Default - If the credit account you have to repay is outstanding for too long, your creditor will issue a default on it. This means you have failed to repay the debt in full and it is closed until you can make repayments.

● Priority debts - These are important debts such as your mortgage, utility bills, council tax, income tax and national insurance, hire purchase agreements and court fines.

● Non-priority debts - These are debts such as overdrafts, payday loans, credit cards, phone bills, gym memberships, catalogues or store cards and personal loans.

● Insolvency - This is a solution for when you are unable to repay your debts and have no disposable income. Bankruptcy is a form of insolvency.

Step 1: Evaluate your debts

If you’ve avoided taking some time to truly evaluate and check what you owe and to who, now is the time. Locate and pull together all the letters and information from your creditors and find out exactly what you need to pay back. This will give you a figure that you can use when you move on to the next step of finding a solution - whether that means budgeting to accommodate making these repayments or seeking out a debt solution.

Step 2: Check if you have any legal issues to deal with

If you have not been repaying your debts for a long amount of time, then your creditors may have issued things like defaults or CCJs against you. You should have received notification of these via a letter and it’s important you tackle these issues first. If they are left, they will severely impact your credit rating and can also lead to further fees and charges if left unpaid, which can only cause more financial trouble for you later.

You also need to discern which of your debts are a priority and need to be sorted first.

Step 3: Check your income and expenses

This means taking some time to work out what must be accounted for - bills, rent/mortgage - and what can go. You might be surprised to see payments that you no longer need (such as gym memberships, or subscriptions to TV services you don’t use) or can’t even account for that are eating away at your disposable income and impacting your ability to make repayments on time and in full. Once you get rid of these you might discover you have some new disposable income that can be put towards repaying your debts.

It’s also a good idea to look into finding cheaper options, to save even more money that can be put towards repaying debts. Energy bills are one of the easiest things to switch to cut costs - a price comparison site is the best choice for this - as well as haggling for the best deal when renewing your car insurance or mobile phone contract. Money blogger the Skint Dad has some good advice on how to give your finances a clean-up.

Once the income and expenses are all accounted for and in good order, budgeting is another good thing to have in place. Ensure you always pay bills first then spread the rest of your income on the things that are really needed, including groceries and fuel.

Step 4: Find a debt solution

If moving things around and cutting costs isn’t enough to tackle your debts, then a more formal solution may be required. This can be found in a debt solution, which you can either set up yourself or use the services of a debt management company or charity to set up. Here are the main debt solutions most people find beneficial; just keep in mind that the one you choose will depend entirely on your personal situation.

DMP (Debt Management Plan)

This is an informal solution that means you only make one monthly repayment, which is then spread across your multiple creditors. It means you don’t need to worry about making lots of repayments on time, and a debt management company can do all the hard work for you when it comes to negotiations. A DMP is marked against your debts on your credit report and lasts until all the debt is repaid. However, creditors can still add interest and fees so it could still take a long time to clear your debts.

IVA (Individual Voluntary Arrangement)

This is an insolvency solution and is usually chosen by people who want to avoid bankruptcy. Like a DMP, you only make one monthly repayment that is spread among your creditors, but the debts as well as the interest and charges are frozen and a repayment plan is set up over five years to repay this final amount.

An IVA will impact your credit rating during this time, as it will be flagged on your credit report and listed publicly, but at the end of the process you will be debt-free and able to start over.

Bankruptcy

This is a final resort for many people, but if you really have no disposable income and have a high amounts of debt, then declaring bankruptcy may be the only solution. Bankruptcy lasts 12 months but after this time your debts will be cleared.

However, your assets will need to be used to clear some of the debts, so you will have to sell your home and your car. You are able to keep anything you need to live comfortably though, such as your clothes and white goods.

Step 5: Manage your money and rebuild your credit

Your credit rating will have taken a hit if you are late repaying debts, so once they are cleared you will need to look at rebuilding this. Small and sensible is the best solution, taking on manageable amounts of credit and repaying this off in full to boost your rating.

A low interest credit card that is only used for paying for petrol, which is then paid off in full at the end of the month, will benefit your score and is what most people use when starting again. Avoid taking on credit you don’t need or more than is required to ensure you don’t end up with unmanageable debts again.

Building up your credit rating again means that in the future, if you do need an important credit product such as a mortgage or a home improvement loan, there should be no issues obtaining them.

Tackling your debts may feel like a mountain of a task but it can be done - take it step by step, seek advice and find the best solution for you. You could be debt-free in a short space of time and ready to start enjoying your life again without fear of the letterbox or knocks at the door.

Jessica Foreman is a Durham University graduate specialising in business and lifestyle based writing. She has developed her skills on projects surrounding The British Broadcasting Company, and running a print and online based magazine whilst at university. She is currently looking towards starting her Masters in Mobile and Personal Communications as well as broadening her horizons through travelling.