The 7 Steps

Seven steps for getting out of debt

Step 1: Acknowledge Your Debts

Visiting debtgeek 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.

Step 2: Work out your income and expenses

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 starbucks coffees.

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.

Step 3: Maximise your income

You may be eligible for government entitlements, such as:

• Job Seekers Allowance
• Child Tax Credit and Working Tax Credit
• Income Support
• Incapacity or disablement benefits
• Maintenance – contact the Child Support Agency if you think you may be eligible
• Housing benefit and council tax relief

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.

Step 4: Cutback your spending

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.

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.

Step 5: Prioritise your debts

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.

Step 6: Contact your creditors

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

Step 7: Long Term Strategy

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