thinkmoney's guide to getting out of debt


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Borrowing a bit of extra cash from time to time when we need to can be a quick and convenient way of covering costs - and many of us do it.

Some recent figures from HSBC looked at borrowing on credit cards alone - both in the past and today. Back in 1984, people in the UK owed a total of £4.5 billion on their credit cards - whereas today, that figure has sharply increased to £57 billion.

However, although borrowing on things such as credit cards, overdrafts and personal loans could be useful, getting into debt is always something of a risk - particularly in the current climate, when many people's finances are feeling the effects of rising living costs and squeezed disposable incomes.

If you find yourself struggling with your debts, you could end up facing serious problems: such as damaging your credit rating, being issued with County Court Judgments (CCJs), or - in the case of secured debts, such as your mortgage - having your home repossessed.

With this in mind, the sooner you can get out of debt, the sooner you can improve your financial security, and regain control of your money.

Here's thinkmoney's guide to getting out of debt and improving your financial health.

What types of debt are there?

Debts can be divided into two different categories: 'priority' and 'non-priority'. It's important to know the difference between the two types of debt, as falling behind with them could have very different consequences.

Priority debts

Generally speaking, your priority debts are the most important of all the debts you have to consider.

They include:

  • Mortgage/rent
  • Secured loans
  • Hire Purchase agreements
  • Utilities (gas, electricity & water)
  • National Insurance
  • Council tax

Failing to keep up with these costs can come with serious consequences, such as eviction or repossession of your property, or - in extreme cases - imprisonment. However, your lenders will give you time to take action to avoid these outcomes, which are considered a 'last resort' - so don't be embarrassed about talking to your lenders directly to get help and advice.

Non-priority debts

Non-priority debts include all types of unsecured borrowing, such as credit cards, store cards, overdrafts and personal loans. However, just because they're classed as 'non-priority' it doesn't mean that repaying them isn't important - it just means the consequences aren't as serious.

Having said that, non-repayment of these debts could damage your credit rating, affecting your chances of successfully applying for further credit if needed - and your unsecured lenders could take legal action against you if they feel it's necessary.

Managing your debts

As long as you can keep on top of your monthly repayments, borrowing money needn't be much of a problem - and could be a helpful way of covering costs from time to time. However, it's important to look out for the 'warning signs' that could indicate that your debts are, or could soon become, unmanageable.

Signs to look out for include:

  • Using credit to cover essential costs, such as bills
  • Repaying your debts late, or missing payments altogether
  • Having little disposable income.

If any of these signs sound familiar, it's important to take action as quickly as possible. Getting professional debt advice and guidance could help you find the best way of getting back on top of your debts - and stopping the problem getting any worse.

Steps to getting out of debt

Depending on your overall financial situation, there are various steps you could take to help you get out of debt.

If you're dealing with your debts well…

1. Consider 'overpaying' your debts. Making more than the minimum monthly repayments could save you quite a bit of money in the long term - you'll pay your debts off in full sooner, so interest won't have as long to grow. Setting up Direct Debits for your repayments should help to ensure the money for your repayments leaves your account on time every month.

2. Try increasing your 'spare' income. Cutting back on your monthly spending could help to 'free up' some more room in your budget, and give you a bit more cash for repaying your debts. You could cut back on your monthly outgoings by switching to a cheaper energy provider, joining a 'loyalty' scheme at your local supermarket or arranging a car share with colleagues from work to cut back on petrol costs and general wear and tear on your vehicle.

3. Think about a debt consolidation loan. It could make repaying multiple debts easier - and reduce the risk of missing payments and damaging your credit rating. Consolidating your debts with a loan essentially groups all your unsecured debts into a single debt, which you could then begin to repay with single monthly payments to just one lender. As long as you can commit to making regular monthly payments until you've paid the loan off in full, debt consolidation could make managing your debts that bit simpler.

If you're struggling with your debts…

If you're having difficulty repaying your debts every month, there are various approaches you could take to help you get back on top of them.

Firstly, plan a strict budget. This could help you to make sure both your priority and non-priority debts are safely covered every month, along with all your other costs.

The first step is to calculate your total monthly income. Then, work out all your outgoings. If you deduct your monthly outgoings from your income, you'll be left with your spare income. As long as you never spend more than that on non-essentials, you should be OK.

Furthermore, there are various debt solutions designed to help people in different situations - depending on what type of debts they have, how much they have to repay overall, their general income & expenditure, etc.

Let's take a quick look at some of the most common approaches to dealing with problem debts.

  • Debt management plan. If you can no longer afford to repay your unsecured lenders as originally agreed, agreeing a debt management plan would let you make reduced, affordable repayments until you've repaid your debts in full - or until you can make your original payments once again. If your lenders agree to a debt management plan, they may also agree to freeze interest.

  • Individual Voluntary Arrangement (IVA). If you have a significant amount of unsecured debt that you can no longer afford, an insolvency solution such as an IVA could be the ideal approach. It's designed to let you make affordable repayments over five years (in most cases), get protection from any further action from your lenders and - on successful completion - write off any debts you have left included in the IVA. If you're a homeowner, it's likely you'll have to release some of the equity in your home.

  • **Debt Relief Order (DRO).**This is an insolvency solution designed as an alternative to bankruptcy for people who simply can't afford to repay their unsecured debts - and have a low available income, few valuable assets and relatively low debts (£15,000 or less). Entering a DRO would stop repayments towards your debts for 12 months (along with freezing interest), and - if your circumstances still haven't improved after this time - write your unsecured debts off.

All debt solutions come with downsides too - for example, all these debt solutions will damage your credit rating, which could make things such as taking out further credit and getting a standard bank account difficult for six years. You may also end up repaying more overall if you repay debts more slowly, due to growing interest.

For more information on your credit rating, you can read our comprehensive thinkmoney guide to What you need to know about your credit rating here.

Depending on where you live in the UK, there are different debt solutions available. For example, residents of England, Wales and Northern Ireland could apply for an IVA or a DRO. On the other hand, if you live in Scotland, there are other debt solutions available - such as the LILA (Low Income, Low Asset) route into bankruptcy, Trust Deeds and the Debt Arrangement Scheme.

Let's have a quick look at these Scottish-only approaches.

  • LILA route into bankruptcy. This is designed for people who can't afford to repay their unsecured debts in a reasonable amount of time, and have a low income and low available assets. You must earn no more than £237.20 a week and have personal assets worth no more than £1,000 each or £10,000 in total to qualify. If your LILA application is successful, you'll be declared bankrupt, which usually lasts for 12 months and comes with all the usual consequences of bankruptcy.

  • Trust Deeds are another insolvency solution - often considered the Scottish equivalent of an IVA. It's a legally binding agreement between you and your unsecured lenders, which could allow you to make affordable monthly payments, stop any further legal action from your lenders and, on successful completion (usually after three years), write off any remaining unsecured debt. Like an IVA, it's likely you'll have to release some equity if you're a homeowner.

  • Debt Arrangement Scheme (DAS). This is a statutory form of debt management provided by the Scottish government, which could allow you to repay unsecured debts in full, but at an affordable pace. If you qualify for DAS, you'll be put on a Debt Payment Programme (DPP), which would let you make affordable repayments, have interest on your debts frozen and prevent any further legal action against you from your lenders.

Again, these debt solutions will damage your credit rating for six years, and could come with other consequences, so speak to a professional debt adviser first to get further advice and guidance.


Although dealing with debt can be difficult, the sooner you can get your debts under control, the sooner you could regain your financial stability, and get the peace of mind that comes with knowing you're on top of your money.

Debt problems can have a real impact on your health and happiness. Working on your debts and improving the way you control your finances can make you feel better all the time - not just when you're looking at your bank balance!

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