Free yourself from debt

After several years when all everyone talked about was easy credit, the economic downturn has transformed this focus overnight into an overriding concern about debt.

Although it can sometimes seem as if you’ll never be clear of your debts, it is possible to tackle the problems and make big strides towards getting your finances in a healthier position.

The first thing to remember is that you’re not alone. Consumer debt (including mortgages) now stands at more than £1,457 billion, according to the Bank of England. The average owed by every adult in the UK is a massive £30,435.

With so many of us now affected,  debt charities have seen a huge increase in calls. “We have had a 70% increase in the number of people contacting us last year compared with 2007,” says Beccy Boden Wilks, a spokesperson for debt charity National Debtline. In January, typically one of the busiest months of the year, the charity was receiving 1,600 calls a day.

Of course, not all debt is bad debt. Buying a home or going to university inevitably means borrowing money, and there are always times in our lives when debt is a way of investing in the future. But, when it becomes impossible to meet all your financial obligations, your debt has turned into bad debt and you need to take action.

1. Draw up a budget

Whatever the size of your debt, your first step should be to draw up a budget. This will give you an indication of the scale of the problem. “List your priority debts,” advises Frances Walker, a spokesperson for the Consumer Credit Counselling Service (CCCS). “These are things that keep a roof over your head and include your mortgage or rent, council tax and utility bills. Then list all your income and outgoings and see how these balance out.”

Although it can be tempting to fudge the figures, an accurate budget will make it easier to get debt-free. “Be realistic about your spending, but also about your income. Put down your guaranteed take-home pay but not the overtime payments, as these could disappear,” says Diane Watson, special advice team leader at debt management company Payplan.

There are plenty of online tools that can help you. For example, the CCCS has an online ‘debt remedy’ tool that automatically questions any figures that could be incorrect – and don’t forget the Moneywise's free budget planner and money diary.

2. Reduce your expenditure

When pulling together your budget, it makes sense to see whether you can reduce your expenditure. Online comparison tools allow you to shop around for the best deals on everything from your gas and electricity bills to your mobile phone contract. Also consider cancelling anything you might not need, such as your gym membership.

If you find yourself paying an extortionate amount of interest on your credit card each month, it could be worth switching to a card offering 0% interest. There are fewer of these around now, but you can find them all with online tools such as Moneywise’s credit card finder.

You have to pay a transfer fee, typically between 2.9% and 3% of the balance you move to the new card, but this is less often than the money you will save in interest.

3. Claim your benefits

More than £8 billion of tax credits and benefits go unclaimed each year – some of this could be yours, especially if you’ve lost your job. You can check out if you’re missing out at, or speak to a debt charity. Most of them have a benefits section that can check whether you’re claiming everything you should be.

You may also want to consider boosting your income. Taking a part-time job, getting a promotion or offering to work extra hours will help you clear your debts faster.

4. Check your credit rating

Whether you regularly flirt with debt or you’re constantly in the black, it’s always worth getting your credit rating checked on a regular basis.

There are three main credit reference agencies – Callcredit, Equifax and Experian – that collect information from lenders and sources such as the electoral roll, mobile phone companies and the county courts. Although there’s plenty of overlap, they deal with different lenders, so it’s worth asking each of them to provide a credit check.

Statutory reports cost £2, although all of the agencies offer subscription-style services if you’d like to keep regular tabs on your rating. For example, among the subscriptions on offer, Callcredit charges £12 for three months, which includes email alerts of any changes, and Equifax charges £7.50 a month for unlimited online access to your report.

Details stay on your report for six years, although you can ask for changes or add notes. For example, if you had debt problems because you were seriously ill or unable to find work, you could put a note to that effect on your files for potential lenders.

5. Contact your creditors

However, if your outgoings stubbornly remain greater than your income, you may need a debt relief plan. “First, think about what you can afford to repay,” says Beccy Boden Wilks. “If you’re out of work, it could be as little as £1 a week.”

Once you’ve got an idea of how much you can afford to pay back each month, contact your creditors. You can either do this yourself by phone or in writing (there are plenty of sample letters available on the debt charities’ websites), or a debt charity can do it on your behalf.

“Contact your lenders as soon as you realise you have a problem,” says Diane Watson. “If you miss payments and haven’t contacted them, they’ll think you’ve chosen not to pay, and there’s a big difference between those that can’t pay and those who won’t.”

Although that phone call can be a daunting prospect, lenders will be fairly sympathetic, if you can show you are taking steps to address the problem. For example, Halifax mortgage customers who fall behind with repayments may be able to reduce their monthly repayments by extending the term of the mortgage, switching to an interest-only mortgage on a temporary basis, moving to a different product or setting up a payment arrangement to clear any arrears.

In more serious cases, where the property has to be sold, Halifax might allow extra time in order to prevent repossession.

Credit card companies will consider ways to make your life easier too. They will often freeze interest and charges, generally for around three months, to stop your debts escalating. You can then repay what you owe.

Boden Wilks says that this can be an option if you are made redundant

It’s sensible to move your current account if you have an outstanding debt with your bank. Legally, the bank can take what it is owed to repay the debt and this might include diverting any money going into your current account. If this happens, you could find yourself unable to pay your mortgage or rent.

It may be tempting to take out another loan to repay your existing debts, but think twice before you do. “If you get a cheaper rate, it can make it easier to clear your debts, but it’s not always a good idea,” says Boden Wilks. “A lot of consolidation loans are secured against your property: if you default, you could lose your home.”

In addition, because of the cheaper rate, a consolidation loan often increases the time it takes to repay your debts.

6. Could you write-off debt?

If you’ve racked up thousands of pounds of debt, your best option may be to arrange an individual voluntary arrangement (IVA) or to file for bankruptcy. With an IVA, you come to an arrangement with your creditors to pay back some of the outstanding debt over five years.

Typically, you’d look to pay back between 20% and 25% of your debt – providing at least 75% of your creditors support the arrangement. Your budget is revised each year, and repayments can increase if you come into money, but once the five years are up, your debts are written off.

Bankruptcy is slightly different. Although you can file for bankruptcy yourself, for a fee of £495, a bankruptcy petition can also be presented by one of your creditors, providing you owe them at least £750 and the debt isn’t secured against your property.

Whoever starts the proceedings, you will need to provide your local county court with details of your income, outgoings, debts and assets. You’ll have to attend a court hearing, and you’ll be put in touch with the official receiver, who will assess your situation and share out any assets between your creditors. Then, after a maximum of 12 months, you will be discharged of your debt.

However, Watson warns: “The details will be on your credit file for six years and, even after this time, you can still be asked whether you’ve ever been made bankrupt or had an IVA when applying for credit.”

A third option for those struggling with unmanageable debt is expected to be available since 6 April this year. Debt relief orders will be aimed at people who are not homeowners and have debts of less than £15,000, assets of less than £300 and a surplus monthly income of £50 or less after essential outgoings. You’ll have to pay a one-off flat fee of £90 and this will discharge you of any debts within a year.

7. Get advice

Some of these options may not necessarily be right for you. Boden Wilks explains that they could affect your job and your home. “If you’ve got £30,000 of debt, work in the voluntary sector and rent your home, bankruptcy might be an option,” she says. “But if you have a home with £70,000 of equity in it, work in financial services or the legal profession and have £10,000 of debt, it’s not a good option.”

And not all debts are included in these arrangements – for example, student loans have to be repaid regardless of the action you take.

Boden Wilks adds: “It’s not just a question of how much you owe; the solution will depend on your circumstances. Getting advice will help you understand your options and take the right steps towards a debt-free future.” 

Where to get help

Consumer Credit Counselling Service (0800 138 1111)
National Debtline (0808 808 4000)

Citizens Advice Bureau (Your local CAB can be found in the phone book)

Credit Action (020  7436 9937)