Navigating the complexities of debt can be overwhelming, especially when it feels like the numbers are constantly working against you. From recognising the early signs of debt spiralling out of control to exploring the most effective strategies for managing it, this article offers a comprehensive guide on how to clear debt in various scenarios.
Whether you’re considering using savings to offset debts, contemplating government schemes like Breathing Space, or facing the tough decision of more drastic measures such as Debt Relief Orders or Bankruptcy, we provide clear, actionable insights.
Our aim is to equip you with the knowledge and tools needed to confidently tackle your debt and embark on the path to financial freedom. So, let’s dive into the details.
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What Are The Signs of Problematic Debt?
Debt is common, like a mortgage or car loan, but sometimes it can grow into a bigger issue. Here’s how to tell if your debt is becoming a problem and action is needed:
- Constantly Overdrawn: Regularly dipping into your overdraft is a red flag. It could mean you’re starting a debt spiral.
- Spending More Than Earning: If you’re regularly spending beyond your means, it’s a sign of trouble ahead. Understanding how to clear debt starts with recognising this pattern.
- Growing Credit Card Bills: Credit card debt can sneak up on you, particularly if you’re just paying the minimum.
- Worried About Debt: If thoughts of debt keep you up at night, it’s a clear indicator that it’s time to take action.
- Debt Greater Than Income: A serious sign is when your yearly income is less than what you owe, excluding your mortgage.
Answered ‘yes’ to any of these? It’s time to tackle your debts. Ignoring them only makes things worse. Reach out to our MoneyAdvisor team for guidance on the best course of action:
Are you struggling with unaffordable debt?
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How to Clear Debt Fast
Eager to free yourself from the burden of debt quickly? Here’s a straightforward guide on how to clear debt fast.
A good first step you can take is creating a budget plan in order to track your expenses accurately. Once you have a good understanding of what exactly you’re spending the most on, it can help you cut down on unnecessary expenses and identify which ones are essential.
Once you cut down on expenses that are not a necessity, you could free up more that goes towards paying off your debts. Also, make sure to check your budget regularly to ensure that your spending is within your set limits.
After creating a budget, you can find out where you can cut down. For example, gym memberships and TV subscriptions are some expenses that you might have to pause on spending so that you can utilise the money to spend on paying off your debt.
Some other ways you can cut down on expenses include searching for methods to save on your weekly shopping such as buying less meat or switching to supermarket own-label brands. Also, make sure to shop around so that you can see if there is a better deal on your other expenses, such as your broadband and phone.
It’s smart to tackle the most expensive debts first. Why? They cost you the most in the long run. Usually, the most expensive debt includes the one with the highest interest rate. So, paying off debts like these will offer you more financial relief.
If you’re wondering how to clear credit card debt, a 0% balance transfer card can save you from high-interest rates. These cards help to clear out your old expensive debt, so you’ll owe money on the new card instead, but at an interest rate that is much lower, usually 0%.
Typically, a balance transfer card will have a 0% rate for a set period. For example, 28 months. During this period, you won’t have to pay any interest. But note that you might have to pay a small fee. This method will help you to save a large amount depending on the amount you owe and the previous interest rate.
It will also give you the opportunity to pay off the amount you owe faster, as more of your money will go to paying off the actual debt instead of the interest.
If you want to have a positive impact on your debt, it is wise to pay more than the minimum payment requirements. If you’re able to do this, paying more every month could indicate that you clear your debts faster, and you’ll have to pay less interest altogether.
The chances of you incurring debt are high when spending on your credit card, mainly when the cost of living crisis is putting more pressure on household budgets. As researched by Statista, between July and August 2023, the total credit card debt in the UK increased by half a billion pounds.
So, try to use cash in hand instead of using your credit card. This will reduce your temptation to spend. Once you reduce your credit card use, you might even find it easier to pay off your credit card debts.
If you increase your income, this means you will have more spare money that you can put towards clearing off your debt. Even if your current job doesn’t offer you a pay rise, there are many other ways in which you can boost your income.
Furthermore, it’s also worth checking whether you’re claiming all the state benefits that you’re entitled to. You never know. There’s a possibility that you might be missing out on valuable ppayments. If you want to check which benefits you’re entitled to, the Gov.UK website has some helpful calculators.
Having the wrong tax code can make a huge difference to your monthly take-home pay. So make sure to check if yours is accurate. Apart from this, selling items that you no longer need will help you earn some extra cash, which you can use to clear off your debt.
In addition, consider reclaiming rebates and charges. In a situation where you have paid bank charges for going over your limit or you were mis-sold payday loans, ensure that you can reclaim any money. Similarly, if you had to work remotely during COVID-19, you might be able to claim a tax rebate to help cover your costs.
If you’re struggling, talk to your creditors. They might offer solutions that ease your payment burden. Inform them of your situation so that you can work together and come up with a solution that would be beneficial for both parties. They have a responsibility to offer you support by providing a range of affordable options that will enable you to clear your debts.
Remember, each small step brings you closer to a debt-free life. How to clear debt is not just about paying off what you owe, it’s about changing your financial habits for a better future. Ready for the next step? Keep reading for more insights on managing your finances!
Should I Use My Savings to Clear Debt?
Wondering whether to dip into your savings to clear debt? It’s a common dilemma, but the answer might be simpler than you think.
Typically, debts like credit card loans have higher interest rates than what your savings earn. For instance, a £2,000 debt at 17% APR costs you £340 annually, while the same amount in a savings account at 1.5% interest only earns £30. By using savings to pay this debt, you could be £310 ahead each year!
However, before you rush to use your savings, think about the following:
- Early Withdrawal Penalties: If your savings account penalises early withdrawals, it’s worth doing some math. Compare the penalty cost against the interest you’re paying on your debt.
- Low-Interest Debts: Sometimes, your debt might have an interest rate lower than your savings account. In such rare cases, it might be more beneficial to keep your debt while letting your savings grow. But remember, this works only if you’re disciplined with your finances.
- Maximising Your Savings: If you decide to keep saving, look for accounts with competitive interest rates. For example, Raisin UK offers accounts with rates that outperform many others, along with additional savings boosts.
Using your savings to clear debt can be a smart move, but it’s not always black and white. Evaluate your situation carefully, and remember each decision you make is a step towards financial stability.
Apply for Breathing Space
If you’re feeling overwhelmed by debt and unsure where to turn, the government’s Breathing Space scheme could be a lifeline. Here’s what you need to know:
This scheme, introduced in 2021, offers temporary relief from creditors for up to 60 days. It allows you time to seek debt advice and find a solution without the pressure of accumulating interest or enforcement actions.
There are two types of breathing space:
In order to be eligible for Breathing Space, you need to:
- Reside in England or Wales.
- Struggle to repay debts as they come due.
- Not currently be in a Debt Relief Order, Individual Voluntary Arrangement, or be undischarged from bankruptcy.
- Not have used Breathing Space in the previous 12 months.
To apply, you’ll need to go through an approved debt adviser. They can guide you through the process and help you understand if this is the right step for you.
Common Solutions to Clear Unaffordable Debt
If you’re struggling to pay off your debts, note that there are various debt solutions you can consider. We recommend you explore alternative debt solutions that can address your debt-related concerns effectively.
However, it’s crucial to keep in mind that each of these debt solutions has specific eligibility criteria. Selecting the right one can lead to debt resolution while choosing the wrong one could worsen your financial circumstances.
Hence, seeking guidance from a professional debt advisor is a prudent step to take if you find it challenging to determine the most suitable debt solution on your own.
- Additionally, you may be eligible for Minimal Asset Process bankruptcy (MAP). For that to work, you need to prove that you have only a limited income and few valuable assets.
- This MAP option is known for its speed, cost-effectiveness, and simplified process, making it a practical choice to explore.
If you need personalised assistance based on your current financial situation, please feel free to complete our online form by clicking here to receive help from our Money Advisor Team.
What is The Best Option If I Can’t Clear My Debt?
If you’re facing a situation where you can’t clear your debt despite your best efforts, the best option is to consider a Debt Relief Order or Bankruptcy instead of other debt solutions. There are last-resort options, but they come with significant consequences. Let’s explore:
As mentioned before, A DRO is suitable if your debt is less than £30,000, you don’t own a home, and you have little spare income. Under this, creditors can’t reclaim their money without court permission. There’s a £90 fee involved, and you might be discharged from debts after 12 months if you still can’t pay. However, applying for a DRO requires guidance from an authorised debt adviser.
Take a look at this post from a forum discussion where a user states how a DRO was helpful to clear off debt:
This is the final resort when all else fails. Applying for bankruptcy involves an adjudicator from the Insolvency Service. If declared bankrupt, your non-essential assets are used to pay creditors.
Most debts are written off after 12 months, but the impact on your credit rating is severe and long-lasting. You might have to sell significant assets, and obtaining credit becomes much harder for six years.
These options should be considered very carefully due to their lasting impact. If you’re at this crossroads, keep reading for more information on managing these challenging financial situations.
Key Points
- Some signs of problematic debt include being constantly overdrawn, spending more than earnings, increasing credit card bills, regular debt worries, and debts surpassing income.
- Strategies to clear debt quickly include creating and regularly reviewing a budget plan, reducing non-essential expenses, targeting high-interest debts first, switching to 0% interest credit cards, and paying more than the minimum balance.
- Using savings to pay off high-interest debts is possible except when early withdrawal penalties apply or when debt interest is lower than savings interest.
- Consider taking up a Breathing Space Scheme. A government initiative offering temporary relief from creditors for up to 60 days, with two types – Standard and Mental Health Crisis Breathing Space.
- Advanced debt Solutions include debt Management Plans, Individual Voluntary Arrangements (IVA), and Administration Orders for more challenging debt situations.
- Last Resort Options: Details on Debt Relief Orders (DRO) for debts less than £30,000 and Bankruptcy Orders as a final option, highlighting their long-term consequences on credit rating and asset retention.
FAQs
Yes, you can take up a debt solution in order to write off some or all of your debt if you’re struggling to pay it off in a reasonable amount of time.
Yes, this time limit is known as the limitation period. However, note that in order for a debt to wipe off, there are certain criteria that it should meet. This includes: you have not admitted to owing the debt in the last six years, you have not made any payments in the last six years, and you have not received a CCJ for it.
Yes, unpaid debt does not go away. You will owe the money unless the debt is either forgiven or paid. So, even if a debt is sold to a collection agency, you still have to pay it off.
