7 steps for getting out of debt

Debts can cause stress and worry but there are many ways to deal with them. Getting your debts into line will give you peace of mind. You will sleep better, breathe easier and feel more relaxed.

We’ve worked out seven steps to confronting your finances and getting out of debt.

Step 1: Acknowledge your debts
Step 2: List your income and expenses
Step 3: Maximise your income
Step 4: Make cutbacks to tackle the debt
Step 5: Prioritise your debts
Step 6: Contact your creditors
Step 7: Work out a long term debt strategy

Visiting our site is a positive start to dealing with your debt. It means you have admitted that you are struggling and are seeking solutions. You have the right attitude and with a proactive approach, you can climb out of debt.

It’s time to take a realistic look at your debt situation. Writing down your incoming money and outgoing expenses is a great way to organise your finances and will help you see exactly where your money is going. Often your money is wasted on small items without you even realising. When you start looking at what you’re spending where, you might be surprised at how much goes on nothing.

Write down your income and all your expenses - from your phone bill to your groceries to your petrol to those little treats you sneak yourself, like morning cappuccinos.

It will show you how much money you have left over to tackle your debt after you have paid all your living expenses.

Your written account is called a financial statement, and can be used to show your debtors how you are managing your debt.

Are you getting all the income you can?

You may be eligible for government entitlements, such as:

• Job Seekers Allowance if you are unemployed or have been made redundant
• Child Tax Credit and Working Tax Credit if you have children or are working on a low income
• Income Support if you are on a low income and meet certain other criteria
• Incapacity or disablement benefits, including mobility or attendance allowance
• Maintenance – contact the Child Support Agency if you think you may be eligible
• Income tax – make sure you are paying the correct tax. Check with Inland Revenue to see if you are on the right tax code.
• Housing benefit and council tax relief – check with your local council

Check with the Department of Work and Pensions if you’re not sure what you’re entitled to.

Think about other ways you can increase your income. Here are a few ideas:

• Consider taking in a lodger if you have a spare room
• Ask children working full time to contribute to the bills or pay board
• Get a second job, working part-time. It may be a good temporary way to increase your income while you are trying to sort out your debts. Make sure you check the tax situation out first
• Increase your salary by getting a promotion or going for a new job

If you claim a benefit, it might take several weeks before you start receiving it, so it’s best to exclude it from your calculations for now and then review your situation once you start getting it.

Now comes the hard part. It’s time to look at your spending and work out where you could make savings. You will probably find that it’s not that hard, and a few small changes can cut your expenses significantly.

Here are some ideas:

• Save on your transport - a train or public transport season ticket may be cheaper than driving. Even better, can you walk; ride a bike or car share to work?
• Cut back your food costs - take your lunch to work instead of buying food from a nearby café or sandwich shop. Eat simply, rather than buying luxuries. Fruit and vegetables are usually much cheaper than prepared food (and better for you!).
• Switch your household suppliers - many people don’t realise 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 supplier. Check the uSwitch.com calculator to compare prices and switch to cheaper suppliers.

You can probably think of other ways that you can cut your spending. Take a look at your expenses and figure out where you can cut down.

Your financial statement will tell you how much money you have left over to pay your debts. You now need to work out what to pay to whom.

Start making regular payments to your creditors, even if they are small. If your creditors can see you are committed to sorting out your debt, they will give you some leeway while you figure out your long term repayment strategy.

Some debts are more important than others. You should prioritise your debts according to how they will affect your life. So, for example, your gas and electricity should be a high priority so it doesn’t get cut off.

The idea is to work out which debts you should pay first and how much you can afford to pay off each one. It’s a good idea to pay something, even if it’s a token amount, just so your creditors know you are serious. Then you can work out how you are going to deal with your debts in the long term.

A creditor is someone you owe money to. By this stage 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.

It should be straightforward. You need to write a letter to each creditor that says you are having financial difficulties and briefly explains the reasons and your intentions. Include your financial statement and your list of debts.

Your creditors will normally respond empathetically and discuss your payments with you. If you would like help writing the letter, you can use the templates on our site.

Tips for negotiating with your creditors:

• Don’t offer all your income to one creditor
• Start your negotiations with the debt nearest its final sanction
• Don’t commit yourself or feel pressurised to make payments you can’t afford
• Even if creditors don’t agree to your reduced payment offer, pay it anyway. It will reduce your debt and may persuade them to change their mind
• Make sure you get receipts for your payments and confirm any agreements in writing

You need to decide how you are going to deal with your debts in the long term. You may benefit from taking out a loan to pay all your debts off and then just make one payment towards the loan. The advantages of this are:

• creditors will stop chasing you for payments
• you will only have one payment to make, instead of spreading it between your debts
• the interest rate may be lower than you are currently paying

There are other ways to deal with your debt that will also take the pressure off. These include:

• talking to the Consumer Credit Counselling Service for free advice about your options
• making reduced payments with an Individual Voluntary Arrangement, a formal agreement to pay a reduced amount
• going to court. If a creditor takes action against you with a County Court Judgment (CCJ), you can resolve the issue in court
• using a debt management company. For a fee, they will consolidate your debts, negotiate with your creditors and distribute your payments between them
• declaring bankruptcy
• getting an Administrative Order. You can apply for a court order that covers your debts. You pay the court and they distribute your money

Back to top