Debt background guide - Get out of debt

If you're starting to feel overwhelmed by your debts, you're unable to pay them off, or there's an increasing risk of being taken to court by the people that you owe money to (your creditors), then you should think about seeking professional advice to help you get control over your debt.

How do I know if my debt is a problem?

Being in debt means dealing with difficult emotions as well as keeping up with your repayments, so it's best to take control of your debt situation now. Take a look at our article on coping with debt for information on the emotional and mental effects of debt.

Debt management is about acknowledging how much debt you're in. Some debts can be dealt with by budgeting carefully, other larger debts may need a more formal debt solution.

How can I manage my debt?

To start with, you need to work out a budget based on how much you earn, how much you owe and all your essential expenses. Your budget will show you how much disposable income you have.

If you're spending too much on your monthly utility bills, paying too much interest on your credit cards or losing out on benefits or tax savings, there are lots of small adjustments you can make to your lifestyle to save money.

For more advice on how to reduce your monthly outgoings, take a look at our article on budgeting or for further advice on how to get control of your debts, read our article on getting out of debt in 7 steps. 

If you can't afford the minimum repayments to your creditors with your current income, or if you're in a cycle of borrowing more money to repay your debts, then it may be time to seek advice on formal debt solutions that can help you get back in control.

What are my options for controlling or reducing my debt?

If you're looking for help with finding a formal debt solution, finding the most appropriate way to get control of your debt depends on various factors:

• How much secured or unsecured debt you have in total

• Your income and your spending

• Who your creditors are and the amount of priority debts that you have

• Whether you already have a County Court Judgement against you

• How much the debt relief method will affect your current employment status and your credit record

The various ways to take control of overwhelming debts and work towards debt freedom are listed below. Many of these options have consequences for your future credit record once you are debt free, so it's important to seek professional advice as soon as possible.

Bankruptcy

Bankruptcy is a court order that you can apply for to free yourself from overwhelming debts so that you can make a fresh start.  An advantage of bankruptcy is that you don't have to deal with the people you owe money to (your creditors).

The main disadvantage of bankruptcy is that you may lose your home and other valuable assets to free up money to pay off your debts. Read more about bankruptcy.

Debt Relief Orders

If you're on a low income and you have less than £15,000 in qualifying debts you may be able to apply for a Debt Relief Order.

A DRO normally lasts a year, during which period you won't have to make any payments to creditors listed in the order, and those creditors won't be able to take any action against you. Read more about Debt Relief Orders.

Individual Voluntary Arrangements

An Individual Voluntary Arrangement (IVA) is a formal agreement that's set up by an independent professional between you and your creditors. With an IVA you come to an arrangement with people you owe money to and pay off a percentage of your total debt. After 5 years your debt is typically classed as settled. Read more about Individual Voluntary Arrangements.

Administration Orders

If your debts amount to less than £5,000, you can apply for an Administration Order. This means that you make a monthly payment to the court, which then makes arrangements to pay off your creditors.

Your creditors won't be able to take action against you while the order is in place. The court takes 10% of your payments as a handling fee to cover costs. Read more about Administration Orders.

Debt Management Plans

A Debt Management Plan is an agreement with your creditors to repay your debts in monthly instalments. With a DMP interest and charges may be frozen, but you may also have to pay a fee if you use a debt management company to arrange the plan. Find out more about Debt Management Plans.

Debt consolidation loans

A debt consolidation loan reduces the pressure of dealing with many creditors as it combines all your loans into one. Debt consolidation loans usually mean that you pay a lower interest rate, but it may take you longer to get out of debt as you may pay your debt off over a longer period of time.

It is important to note that you should only consolidate your debts if you are sure you will be able to afford the repayments, because otherwise you risk getting deeper into debt. Read more about debt consolidation loans.

Where can I get debt advice and information?

If you're in debt it's good to seek professional help as well as doing your own research. Debt charities and professional advice services will give you impartial advice and help you find the path out of debt that's right for you.

We recommend getting in touch with one of the following organisations.

• The Citizens Advice Bureau

• StepChange Debt Charity - formerly the Consumer Credit Counselling Service (CCCS)

• The National Debtline

You can also use our debt directory to find more sources of debt help.

Glossary

Administration Order -  For debts lower than £5,000. The County Court administers payments to all your creditors. Creditors cannot take any more action against you and interest is stopped.

Arrears - When you haven't paid your utility bills, your mortgage, rent or council tax, or missed the payments on your credit card or loan on unsecured debts these sums are known as 'arrears'.

Assets - These are all the valuable items you own including your house, vehicle and possessions such as furniture.

Bailiffs - If you owe money to creditors, they can instruct bailiffs to enter your property and take away goods to cover the value of your debt.

Bankruptcy - This is a legal procedure that writes off all your debts. Bankruptcy is one of many ways to deal with debts you can't pay

County Court Judgement (CCJ) - When you haven't been able to pay your debts to your creditors. CCJs are a way for creditors to claim the money they're owed through the courts. The Court then decides whether there really is a debt to pay.

Creditor - This is the person to whom money is owed.

Debt consolidation loan - If you need to pay off debts, this loan brings all your debts into one loan. These allow you to make one payment a month instead of many. This is often done to get a lower interest rate.

Debt Relief Order - A Debt Relief Order is a new way for those who have relatively little debt, few assets and a low income, to manage their debt situation.

Debtor - A debtor is obliged to repay a debt to a person they owe (known as a creditor)

Disposable income - This is the amount of money that's left over, or available for spending, after utility bills, taxes and mortgage payments

Equity - This is the difference between the debt claims that are held against a property and its market value. Equity is the difference between the amount outstanding on any mortgage or secured loan you may have and the market value of your home

Hire purchase - This is a way to pay for valuable items over a fixed period (such as furniture or electronic goods) and in regular instalments. The vendor owns the goods until the final payment is made.

Individual Voluntary Arrangement - This is a flexible alternative to bankruptcy where a voluntary arrangement is made with creditors through the courts.

Insolvency practitioner - A qualified and recognised specialist who deals with people who are in debt.

Official receiver - A person who deals with administration for people who are bankrupt. They decide whether assets should be sold for the creditors' benefit.

Priority debts - Debts that must be paid urgently, often to avoid penalties. Priority debts include: rent or mortgage payments, gas and electricity bills, council tax, Magistrates fines, Inland Revenue / VAT payments.

Secured debt - Money borrowed which has been secured against a particular asset such as a house, a car or valuable furniture.

Unsecured debt - Credit cards and store cards debts are examples of unsecured debts, because they aren't tied to a specific asset or a property.