How To Get Out Of Debt
If you are living with large amounts of debt, taking that first step to making a change and finally clearing it can feel daunting.
This is why, if you want to get a handle on your debts and what you owe, we have created this guide. Its aim is to provide you with the knowledge to tackle your debts head on, and point you in the direction of where to go first. It will walk you through a number of debt solutions, explain what some key debt related terms mean and hopefully provide you with the inspiration and confidence to keep going and eventually become debt free.
There is no magic solution – getting out of debt takes lots of dedication and hard work. But here at PayPlan we strive to offer manageable fixes, experienced advice and lots of help – every step of the way.
Our expert team are also on hand, six days a week via phone or live chat, so don’t hesitate to get in touch if you want to talk and see what the next step is for you.
How To Become Debt Free: Step 1 – Understand Exactly What You Owe
Before you can make any headway into removing your debts, you need to understand what you owe, who you owe it to and if there are any legal instructions issued against you that you need to deal with.
First, take a look at your credit report. This is where you will find all the information related to your debts, what credit you have and how much you owe. You’ll also be able to see your credit rating and any defaults or CCJs that may be significantly affecting this.
We have an in-depth guide here on the site that takes a look at what affects your credit rating and how to check your credit report, which could help you with this first big step.
Step 2 – Carefully Check Over Your Income And Expenses
If you are struggling with debts, maybe you don’t want to look over your bank account. For many, it’s something that is not checked a lot, simply because it rarely contains good news. But when you look deeper into your account you may notice certain outgoings that you don’t recognise or that could be impacting your ability to repay your debts.
Include all of your expenses in your analysis – everything from utility bills and rent or mortgage, to things like food shopping and even those small treats you enjoy; like a takeaway sandwich for lunch. Keep a note of these for later.
How To Pay Off Debt: Step 3 – Remove Big Debts First
It’s a good idea to first tackle those big priority debts that you are struggling the most to repay, before any smaller ones. Removing these will dramatically improve your credit rating.
Paying off these debts will improve your financial situation and also allow you to use the money you free up to remove the rest of your debts or to start putting away for a rainy day.
What is considered a priority debt?
- Your rent or mortgage payments
- Utility bills – gas, electricity and water
- Council tax
- Legal instructions against you – such as CCJs
Use A Debt Solution
There are a number of debt solutions to choose from, once you’ve considered which debts you need to tackle first. Here we break down each one, to help you decide which may be best for your situation. Before you take one of these on though, we recommend you speak to an impartial financial expert, who can confirm if you’ve made the right decision.
The Information You Will Need When You Set Up A Debt Solution
It’s important you take some time to gather all of the paperwork and identification that you may need to set up one of the following debt solutions. Here are some examples of what you may be asked for:
- A form of ID – This could be your passport, driving licence and a bill from the last three months with your current address on it.
- A list of all your creditors – We recommend taking the time to find the account numbers and the exact amount that you owe for each of these to make things easier for the debt management company you choose.
- Information and paperwork about any legal instructions – If you have any CCJs or defaults issued against you then you need to have the details for these ready to share to ensure you are meeting the terms of these.
- A detailed list of your current incomings and outgoings – This should be everything from your wages to how much you typically spend on fuel each month to what your food shop costs every week. This will help the debt management company when it comes to deciding how to work out your minimum monthly repayment.
What debt solutions are available?
Debt Management Plan (DMP)
A DMP is an informal debt solution that allows you to make one single debt repayment that is then split amongst your creditors. You can set one of these up through a DMP company – PayPlan, for example, can help with this. The company will deal with your creditors for you and ensure both parties are abiding by the terms of the agreement.
Here are the pros and cons of a DMP, broken down to help with your decision:
Pros of a DMP
Cons of a DMP
You only have one debt repayment to make each month, meaning the headache involved with dealing with multiple creditors is gone.
Creditors can still apply charges and interest, so it may take longer to clear your debts than other debt solutions.
You will be debt free once the DMP is over, this is because it will continue until all of the debts are cleared.
You may find it harder to get credit, even though your rating is likely to be low anyway, because a DMP will be flagged against the credit products you are repaying it through.
It is an informal agreement, so you can cancel any time.
Creditors can still take legal action against you, meaning you may still have to deal with CCJs or defaults being issued.
You don’t have to release any equity to your creditors – such as the value of your property.
Neither your place of work or your friends and family will need to know if you are using a DMP to repay your debts.
How do I qualify for a DMP?
To apply for a DMP to repay your debts, you must:
- Have up to £4,500 worth of debt that you are struggling to make repayments on.
- Have enough money to be able to afford a smaller monthly repayment.
Our dedicated DMP section on the site should be able to offer you more information about this debt solution.
Individual Voluntary Arrangement (IVA)
An IVA is an effective way of clearing a large portion of your debts. It does take five to six years to complete but you only have one affordable monthly repayment to make and you don’t need to deal with your creditors.
An IVA is considered to be a preferable alternative to bankruptcy, as it allows you to repay what you owe and has less of an impact on your life and financial situation.
Let’s take a look at the pros and cons of an IVA:
Pros of an IVA
Cons of an IVA
A large portion of your debts will be wiped, leaving you with a smaller amount to repay in manageable monthly repayments.
An IVA does take five to six years to complete, meaning your credit rating will be impacted during this time and you won’t be able to take on any further credit.
You won’t have to deal with your creditors. Your insolvency practitioner will manage all communication with them.
You may be asked in the fifth year of your IVA if you can remortgage your home to release any equity. However, many people find that they are unable to do this due to their poor credit rating and so the IVA will be extended for another year.
Fees and charges on your debts will be frozen, so you won’t have to pay any more than what you owe already.
You will be listed on the Insolvency Register for creditors to search and find you.
You don’t have to disclose an IVA to your landlord, unless it is part of your contract and so you should have no problem holding on to rented accommodation.
An IVA is a binding legal agreement, therefore you cannot simply cancel it without repercussions or another debt solution in place.
Your repayment plan is based solely on your income and outgoings, which means you will only pay back what you can definitely afford.
If you receive any large amounts of money, such as a windfall, this will automatically be paid into the IVA.
How do I qualify for an IVA?
An IVA is not a solution to take lightly and so there are some standard requirements you must meet to be able to take one on. These include:
- You must live in England or Wales or Northern Ireland – if you live in Scotland you will need to take on a Trust Deed instead.
- You must owe at least £7,000 or more in unsecured debts.
- You are finding it difficult to make the minimum repayments on your debts
We have more information available on the site about IVAs, to read up further on the solution.
Debt Relief Order (DRO)
This debt solution is best for those who are not homeowners and have less than £1,000 when it comes to assets. It is an alternative to bankruptcy for people without property to put forward to repay their debts with. DROs work in a similar way to bankruptcy in that they last for 12 months then the debts are written off after this period.
Here are the pros and cons of a DRO to consider:
Pros of a DRO
Cons of a DRO
Ideal for those who have little to no assets. You can keep your car if it is worth £1,000 or less.
Your credit rating will be significantly affected for six years from the date the DRO is set up. This means you will find it very difficult to obtain credit which can affect any big life decisions you may wish to take on – such as buying a house.
Wipes your debts after one year and all charges and interest are frozen.
You can’t take on this debt solution if you are a homeowner.
A DRO is a lower cost option to bankruptcy, it costs £90 to take on compared to £680.
This is a formal debt solution, so you must abide by any regulations placed upon you while it is in effect.
You will be listed on the Insolvency Register.
How do I qualify for a DRO?
Because DROs are a niche debt solution, there are strict criteria:
- You must have debts of £20,000 or less and a disposable income of less than £50 per month.
- Your assets must be worth less than £1,000 – including your car.
Read our page on DROs to find out more and to decide if it is the right solution for you.
Bankruptcy is, for many, a last resort solution. It wipes your debts but places a lot of restrictions upon you when it comes to credit. However, it will also use your assets to repay as much of your debts as possible, which means you may lose your house and car. The bankruptcy process lasts for 12 months. After this you will be debt free.
Here are the pros and cons of this solution:
Pros of bankruptcy
Cons of bankruptcy
It is one of the most effective ways of clearing your debts, as it waives what you owe.
Bankruptcy stays on your credit report for six years from the date it is set up. This means it will affect your ability to get credit even when the initial 12 month period is over.
You will not lose anything that you need to live comfortably, such as clothing, household items and white goods.
Your assets will be sold to clear some of your debts, so you may lose your home and car.
You won’t have to deal with your creditors ever again or negotiate directly with them during the process.
You may not be able to continue working, or get a job, in certain financial sectors.
You are restricted when it comes to managing a business. For example, you must have court approval to direct a business of a different name to the one you were registered under when you were made bankrupt.
You will have to pay a fee of £680 to set up your bankruptcy.
How do I qualify for bankruptcy?
Bankruptcy is a serious solution and you must meet certain criteria to qualify – be sure to check your situation against these points first before making an application:
- You must have no disposable income or means to repay your debts.
- You can pay a fee of £680 to apply for the insolvency solution.
- You have assets, such as a house, that can be used to pay a portion of your debts.
You can find out more about bankruptcy via our bankruptcy section on the PayPlan site.
How to Get Rid of Debt: Step 4 – Managing Your Money
Once you have a solution in place, it’s important you carefully manage your money to ensure you can continue to make repayments if necessary and don’t have any need to apply for credit any time soon.
Budgeting is the easiest way to get a grip on your spending and ensure everything is accounted for on a month by month basis.
Start by taking your income and expenses – that you discovered and fixed earlier – and pulling out the larger and most important payments:
- Utility bills
- Council tax
- Debt repayment costs
Then move on to other important monthly bills you must repay in full:
- Car insurance
- Car tax
- Mobile phone bill
Finally, pull out any other necessary expenses:
- Food shopping
These are all the things that must be accounted for, to ensure you can continue to live comfortably.
Depending on the debt solution you require, these expenses can look different to our example. For example, with an IVA it’s unlikely you’ll have any disposable income left over as the plan aims to work out exactly what you need each month then take what’s left.
However your finances now look, you must now budget to ensure repayments are made and all expenses are accounted for. No more last minute, big financial decisions or impulse purchases. It’s time to be a little more frugal, abide by your budget and start to live your life again. It can be done and PayPlan can help you find a solution that works for you.
Here is a breakdown of what to do once you have a good idea of what your spending to cut costs and save a little extra cash that can be put towards your debt repayments to clear your debt faster.
- Remove any unnecessary expenses – Subscriptions you no longer need can free up a large amount of money to put towards repaying your debts.
- Look for cheaper alternatives – If your car insurance is up for renewal or your phone contract then it may be a good idea to source an alternative option that costs less. Comparison sites are really helpful or you could talk to your current provider about lowering the amount.
- Switch suppliers – As long as your debts are not linked to your utility bill provider, you should be able to change to a cheaper supplier fairly easily. Again, comparison websites can help with this.
Now that you know the steps to take to get rid of debt, it’s time to speak to a financial expert about your situation, who can offer further guidance. Get in touch with one of our team today, who would be happy to chat about your situation.