Taking control of your debt problems will give you peace of mind. As soon as you start tackling your debt, you’ll sleep better, breathe easier, and feel more relaxed.
Start organizing your finances with our seven steps to get out of debt.
Step 1: Acknowledge your debts
Even something as simple as visiting this site is a great start to dealing with your debt. It means that you have admitted that you are having difficulty and have started looking for solutions. You have the right attitude, and by taking the extra steps you can get out of debt.
Step 2: List your income and expenses
It’s time to take a realistic look at your debt situation. Writing down your money coming in and spending money being out is a great way to organize your finances and will help you see exactly where your money is going.
When you start to examine your spending habits, you might be surprised at how much money you spend on small items that you could easily do without.
Write down your income and all your expenses. Be sure to include everything from rent or mortgage payments to phone bills, groceries, and little treats (like your morning cappuccino).
This will show you how much money you have left to meet your debt after paying all of your living expenses, and highlight areas where you may be able to cut back on your spending.
Your written account is called a financial statement and can be used to show your creditors how you manage your debt.
Step 3: Maximize Your Income
Are you getting all the income you can?
You may be eligible for government rights, such as:
Jobseeker’s benefit if you are unemployed or have been made redundant.
Child tax credit and labor tax credit if you have children or work on a low income.
Income assistance if you have low income and meet other criteria.
Incapacity or invalidity benefits, including mobility or attendance allowance.
Maintenance – contact the Child Support Agency if you think you are eligible.
Income tax – make sure you pay the correct tax. Check with Inland Revenue to see if you are on the correct tax code.
Housing assistance and municipal tax deduction – check with your town hall.
Check with the Department of Work and Pensions if you are not sure what you are entitled to.
Think about other ways to increase your income. Here are some ideas:
Consider taking a tenant if you have a spare room.
Ask children of working age to contribute to the bills or pay the pension.
Find a second job, working part time. This can be a good temporary way to increase your income while you try to pay off your debt. Make sure to check the tax situation first.
Increase your pay by working overtime if you can, getting a promotion, or looking for a new job.
If you are applying for a new benefit or find another way to increase your income, it may take several weeks before you start receiving the money, so exclude it from your calculations for now and then revise your situation once you start receiving it.
Step 4: Make Cuts to Cut Your Spending
Now comes the hard part. It’s time to take a look at your spending and figure out where you can save money. You will probably find that cutting your expenses is not that difficult. A few small changes can dramatically reduce your expenses. Here are some ideas:
Use a balance transfer card to reduce interest
If your credit score isn’t too bad, you might consider putting your existing credit card debt on a 0% interest balance transfer card. This will keep your debts from growing because you can avoid paying interest for a few months or even years.
But be careful to check that you will be better because you may be charged for transferring your debts.
Save on your transport
A train or public transport pass can be cheaper than driving. Better yet, can you walk, cycle, or carpool?
Bring your lunch to work instead of buying food at a nearby cafe or sandwich shop. If you’re a coffee addict, cutting back on your daily coffee intake could save you around £ 600 a year.
Eating lots of fruits and vegetables and making things from scratch is usually a lot cheaper than prepared food, and better for you too!
Change your domestic electricity supplier
Many people don’t realize that they can save money on the essentials, but you can save money on expenses like gas and electricity and your home phone by switching to a cheaper provider. Check out Uswitch.com calculators to compare prices and switch to cheaper suppliers.
You can probably think of other ways to cut your expenses. Take a look at your spending and figure out where you can save money.
Step 5: Prioritize Your Debt
Your financial statement will tell you how much money you have left to pay off your debts after paying your essential expenses. Now you need to figure out what to pay to whom. Organizations or people to whom you owe money are called creditors.
Start making regular payments to your creditors, even if you can only pay them a small amount. If your creditors see that you are committed to resolving your debt, they will give you some leeway as you determine your long-term repayment strategy.
Some debts are bigger than others. Your priority debts are those that will have the most severe penalties if you cannot pay them, for example:
Rent or mortgage payments
Electricity, water and gas bills
Fines for magistrates
Internal taxes / VAT payments
At this point, you should have your financial statement and your list of priority and non-priority debts with the amounts you intend to pay. It’s time to start negotiating with your creditors.
Start by writing a letter to each creditor that says you are in financial difficulty. Briefly explain why you got into debt and your intentions to get out of it. Include your financial statement and list of debts.
Your creditors will normally react with empathy and discuss your payments with you.
Tips for negotiating with your creditors:
Don’t give all of your income to one creditor.
Begin your negotiations by dealing with the most urgent debt.
Don’t feel pressured into making payments you can’t afford.
Even if the creditors don’t accept your reduced payment offer, pay it anyway. This will reduce your debt and may persuade them to change their mind.
Obtain receipts for your payments and confirm any agreements in writing.
Step 7: Develop your long-term debt strategy
You have to decide how you are going to get out of debt in the long run. You can benefit from the subscription of a debt consolidation loan to write off your debts and then make a single payment for the loan. The advantages of this are:
Creditors will stop suing you for payments
You will only have one payment to make each month
The interest rate may be lower than what you are currently paying
There are other steps you can take to reduce the pressure you are feeling:
Speak to StepChange Debt Charity – formerly Consumer Credit Counseling Service or any other debt charity for free advice on your options.
Make reduced payments with a Individual voluntary arrangement, a formal agreement to pay a reduced amount.
Go to court. If a creditor sues you with a county court judgment (CCJ), you can resolve the issue in court.
Obtain a Debt management plan. A debt management company can arrange this, usually for a fee, and they will consolidate your debts, negotiate with your creditors, and distribute your payments for you.
To declare bankruptcy.
Get a Order of administration. You can ask for a court order that covers your debts. You pay the court and they distribute your money.