20 ways to escape debt for good

It's official: we are a nation in debt. UK personal debt at the end of April 2010 stood at a mammoth £1,460 billion, according to statistics from debt charity Credit Action.

The average personal debt in the UK (excluding mortgages) is £8,761 per household – and as a nation we spend the first 50 days of each working year paying off interest on the money we owe.

But while it may feel like you'll never rid yourself of your debts, there are plenty of ways you can better your situation and become debt-free. Follow these 20 steps and you can make the dream of a life without debt a reality.


The first step you need to take is to face reality and be honest about your situation – it might sound obvious, but until you've done so you can't start tackling the problem.

It also helps to let others know about your situation. "Telling someone else takes away the stress," says Mike Thomas, debt expert and Moneywise's own 'Debtwizard'.

"Telling friends and family also means you can avoid those awkward situations, such as eating out, where you could be forced to spend more money than you've got."

Without revealing all the details, letting your employer know you're struggling is wise from a welfare point of view.


The maths is simple: why put money into a bank account paying 5% interest at best, while racking up greater credit card debt at a significantly higher interest rate of up to 19.9% APR?

Building up a savings buffer for future emergencies is invaluable, but if you're in the unfortunate position of already being in debt, make paying the debt off your priority.


Working out a budget when money is tight may sound a thankless task, but not only may the process highlight areas you could cut back on, but it could also prove an invaluable step towards acquiring a more disciplined attitude to your finances.

"Around 80% of my clients have never drawn up a budget; they just muddle along with their overdrafts and credit cards," says Thomas. But by listing all your outgoings and how much you could cut back, you can put yourself back in control.

Before contacting your lenders, it's worth seeking professional advice so that you know what your rights are. Here are some useful contact details for free advice:

Citizens Advice
(020 7833 2181)
The National Debtline
(0808 808 400)
The Consumer Credit Counselling Service
cccs.co.uk (0800 138 1111 or 0800 138 3328 in Scotland)


The Citizen's Advice Bureau takes on 9,568 new debt problems each day and is just one of the free debt advice services that has had to cope with a huge influx in debt queries.

So with charities and free advice services seemingly stretched to breaking point, does it make more sense to pay for help instead?

Debt management companies argue that the money you pay them in fees is worth every penny because they can chase your creditors more quickly and efficiently than the over-stretched free firms.

If your interest is frozen, the saving from this could outweigh what you've had to pay in charges or what you'd pay in interest with a free service.

Still, the overwhelming advantage of non-charging organisations is that you know 100% of your payments are going towards reducing your debt.


Once you've prepared a financial statement detailing your income and expenditure, you can send this to your lenders.

You should be able to agree with them an alternative amount of money to pay back each month. Even if the amount is minimal, it will show you're still committed to paying off the debt.

Thomas warns against hastily agreeing to pay back small amounts of debt over an incredibly long time frame, as this means the debt burden hasn't been addressed but simply delayed.

Ultimately, the interest payable over such a long period will work against the apparent saving of the monthly payments. However, if it's all you can afford, it at least establishes a better relationship with the lenders.


According to Credit Action, an average of 230,137 unsolicited telephone calls are made to UK consumers daily by debt management and personal loan companies. If a lender is putting you under undue pressure, it pays to be clued up on your rights.

The Office of Fair Trading's (OFT) debt collection guidelines say that "putting pressure on debtors or third parties is considered to be oppressive".

Unfair practices include contacting debtors at unreasonable times; pressurising them to sell property or raise funds by further borrowing, or making the debtor feel obliged to repay in unreasonably high instalments.

"It also says that it's wrong for lenders to enforce more than one debt collection at a time if you've not got enough money," says Thomas.

That doesn't mean you can write off all debts that fit into the above guidelines, but it will show the lender that you're aware of your rights and expect it to play fair.

For a full copy of these guidelines contact the OFT on 0800 389 3158.


It makes sense to pay your most expensive debts first, but you also need to consider what you stand to lose for non-payment. Don't assume that the debt with the highest rate of interest is your top priority.

"People often pay off their credit cards first because of the interest rate, but you should pay priority debts first," says Thomas.

Priority debts should be those that have fairly dire consequences if you don't pay, says Deborah Shields, information and policy officer for the Money Advice Trust.


To work out what a priority debt is, look at the penalties for non-payment: these could be imprisonment, or loss of home or essential goods or services. Your mortgage or rent, utilities, council tax, child support and magistrate fines all fall into this category.

Secondary debts don't carry the same tough sanctions: you will be issued with a County Court Judgment if you've fallen behind on your credit or store card payments, unsecured personal loans, bank loan or credit sale.

In the case of hire purchase items, you'll lose the part-purchased items.


Use your credit card in the wrong way and you'll literally pay more for it. There are three different uses for a credit card: cash withdrawals, purchases and transfers.

The rate of interest charged for each use is different, with withdrawals costing considerably more than purchases and transfers.

For example, say you've got a 0% balance transfer card and you've made a transfer onto this new card; you've also made a purchase with your credit card costing 16.6% APR; and you've withdrawn cash at a separate rate of 27.9% APR.

Instead of paying off the most expensive debt first, your payments are directed towards the balance transfer first, while interest on your purchase and withdrawal gathers apace.

Nationwide, Saga and MBNA don't use this charging structure, and, fortunately, all providers will be forced to revert to a positive payment hierarchy from January 2011.


You may get a better deal with a secured loan but that's because it's secured against your possessions. If you fall behind with payments, you risk losing your home or other valuable assets, which you wouldn't with an unsecured loan.

Thomas also believes there's no such thing as an unsecured debt if you're a homeowner. The lender can apply through the courts for a charging order to put your debts against your home. But Shields argues that this view is "a bit alarmist".

She says: "The process is quite long and relatively rare. It's a difficult area because you don't want to lull debtors into a false sense of security, but you don't want to unnecessarily add to people's worries either."


Consolidating all your debts into one makes things easier to manage, but essentially you're just shifting the debt around. "At the National Debtline, we hear from people who've consolidated their loans and are still in a real mess," says Shields.

You can obtain a new loan either from the bank or by securing it against your home. The new loan will offer a much lower rate of interest, bringing your monthly payments down.

"People don't realise that the payments will be made over a far longer time and effectively they are paying interest on interest," Shields says. 


It's all too easy for the debtor to end up in a spiral where they owe money here, there and everywhere. Payday loans, for example, lend smaller amounts of money – typically £500  – that have to be paid back within the following month.

Three-figure APRs are pretty normal but the idea is that the amount paid back is relatively small because of the quick turnaround. "For some people these will be necessary," says Thomas. But don't look on them as an easy or long-term solution.


An estimated 165,000 households in the UK use illegal moneylenders, according to the Office of Fair Trading (OFT), with the average cost of a loan from a loan shark three times the cost of a legal lender, according to Directgov.

All lenders are required to have a consumer credit licence from the OFT and to comply with certain legal obligations, which include the use of proper paperwork and fair collection methods.

However, loan sharks rarely use paperwork, take bank cards as security of payment, and use violence and intimidation to collect money.

Remember that any loan without a licence is deemed 'unenforceable', which means, by law, you can't be forced to pay it back. You also haven't done anything legally wrong by borrowing from a loan shark and can't be prosecuted.

If you have information about loan sharks, report it to the national illegal moneylending hotline on 0300 555 2222.


"Ask yourself 'are there any benefits I could be taking?'" advises Shields. You could claim Jobseeker's Allowance if unemployed or made redundant; child tax credit and working tax credit if you have children; income support if on a low income; incapacity and disability benefits, maintenance costs, and housing benefit or council tax relief.

To check your eligibility for benefits use turn2us.org.uk's benefits checker or call 0808 802 2000.


If you live with a partner and have unsecured debts, provided they are in your name only, you can still be declared bankrupt without your partner being asked to repay them or there being any threat to the home you share.

But bear in mind that if you make joint applications for credit cards or mortgages this could have an adverse effect on your partner's credit rating.

It's worth contacting one of the main credit agencies such as Equifax or Call Credit to ensure their personal credit file hasn't been damaged too.


Before you go down the insolvency route, consider a debt management plan. They are a good way of managing debt if you've been refused debt consolidation, your circumstances have changed, or you're trying to cover costs with credit cards.

These plans are available through debt management companies and charities, which will contact the creditors on your behalf and make the necessary arrangements. But if your debts are too high, it might make more sense to write them off.


Aimed at people on low incomes and with no assets, debt relief orders are for those with debts under £15,000.

However, the strict qualifying criteria – you can't be a homeowner; have a car worth more than £1,000; have more than £50 disposable income a month or assets above £300 – mean few people are eligible.

Debt relief orders are a cheaper way of writing off debt than going bankrupt as they cost just £90, and those on Jobseeker's Allowance can arrange to pay the one-off charge over six months.


IVAs usually last five years and are basically a legal contract between you and your creditors to repay a percentage of the debt in that time.

The IVA will be supervised by a licensed insolvency practitioner. You will have to reach an agreement with your creditors to avoid the consequences of bankruptcy.

Unlike bankruptcy, an IVA means you won't have to surrender your home or business, but you may have to release some equity at the end and cash in any realisable assets like endowment policies or other savings or investment plans.


Someone goes bankrupt in the UK every 51 seconds, according to Credit Action (based on working days only). There's now much less of a stigma attached: you can apply for bankruptcy online and don't have to see your name in the papers any more. 

A petition is presented to court, and if the court official considers bankruptcy appropriate, a court order will be made.

You will pay a monthly contribution to your trustee – from any income left after your living costs – for three years after the discharge period (12 months).

However, bankruptcy should be the last resort: only consider it if you have serious debt problems – for example, a home you want to protect.

Not only will you have to declare yourself a bankrupt if you want to apply for credit over £500, but you could face restrictions on your job and be forced to downgrade your car and other personal possessions, as well as release equity from your home.


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Disagree with #2 - technically it makes sense but it's a good idea to have 3 months' of living costs in easily-accessible cash - especially in these uncertain times. Mitigating risk through this is easily worth a 9% APR hit.