How do I get out of debt?

We run through the main strategies for dealing with your debt problems.

The faster you clear your debts, the wealthier you'll be and the more you'll be able to buy in your lifetime. I explained how that works in How to spend less and have more. Here's how you could get there.

Money management
The main reason people build up debts is a lack of money management, whether that's through peer pressure, consumerism, insecurity, unhappiness or some other reason. You will only be able to reduce your debts and start taking control of your life when you decide that now is the time to draw up a spending diary and a budget, make difficult cutbacks and stick to them. It's hard at first, but the earlier you begin, the easier it is. And you feel great afterwards.

When you roll a snowball it adds more snow at an ever increasing rate. You can do the same with your debts, where you pay off small amounts, but this accelerates without even increasing your payments.

Look at the interest rates on all your debts where you can make overpayments without penalty. Pay the minimum monthly amount on all of them except the one with the highest interest rate, where you overpay as much as you can. When this is cleared off, focus on the next highest interest rate. You'll save a fortune.

Here's an example:

Debts to snowball


Interest rate


Minimum repayment*

Debt one

8% APR



Debt two

14.9% APR



Debt three

20.9% APR



*Usually the minimum repayment is a percentage, but to make it more simple I'm using a fixed amount.

The minimum payments total £162, but let's say you overpay by £138, so that is a round £300. I cheated with this excellent snowballing calculator, which tells me that by putting all of the £138 overpayment to Debt three, which has the highest interest rate, and then to Debt two, before finally Debt one, it'll take 33 months to clear the debt, costing £1,760 in interest.

However, if you pay them off in reverse order, starting with the lowest interest rate, it'll cost you an extra £530 in interest. Notice that the size of the debt on each card is unimportant. Here, the debt with the lowest interest rate has the smallest outstanding balance, but you should still pay it off last.

Get a better deal
You could undoubtedly save a lot of money and pay off debts faster by getting a cheaper loan or credit card. That's obvious.

However, I have a big warning. I've seen a few polls over the years that have all revealed that most people who consolidate debt go on to build more. This often happens several times before the borrower comes round and realises shifting debt around is no solution by itself. By all means consolidate, but only in conjunction with better budgeting.

Accept you can't pay your bills
Insolvency means no longer being able to pay off your entire debts and interest from your income and savings. When you're already insolvent, you might still struggle on, borrowing to repay debt until you're no longer able to do so, and then you're forced into bankruptcy.

Or you can accept your position earlier and deal with it honestly, and up front, and do your best to pay back what you can by working fairly with your creditors. This is by far the best solution for your wealth, wellbeing and lifestyle.

There are five ways to recognise your insolvency. You can simply default without telling your lenders. Having interviewed debtors, former debtors and debt professionals, and having read thousands of messages from hundreds more, I can tell you that this is very likely to be the worst thing you can do. Your situation will deteriorate even further, you will suffer difficulties longer and you will be subjected to enduring mental stress.

Your four better options in insolvency (in England and Wales, with apologies to the rest of the UK):

ñ Agree a debt management plan with your creditors. This is an informal insolvency whereby the creditors freeze interest and accept lower payments for a period of time, perhaps six months. This is a temporary solution only, to be used when you have good reason to believe your financial situation will improve in the near future.

ñ Go bankrupt. You will often be steered towards IVAs by unscrupulous ‘debt help’ companies, because they pay better for the banks and many companies get fat fees from them, which are deducted from your debt repayments. However, frequently bankruptcy is a better solution. It doesn't always involve you losing your home, for example.

ñ Get a debt relief order. This is very similar to bankruptcy, but it's cheaper and for people with smaller debts.

ñ Then there's the IVA, which will still sometimes be your best solution. It will give more back to the creditors and means your insolvency won't be published in the London Gazette and online, and you won't be forced to step down from certain jobs. In some circumstances lump sum repayments may be agreed.

All of these options are going to affect your credit record, to a greater or lesser extent, which will reduce your ability to borrow in the future and will mean you'll pay higher interest rates. There are a vast number of ways each could affect you depending on your circumstances, although often it might not be as dramatic as you believe too.

You should get assistance choosing your insolvency solution. I can't recommend National Debtline highly enough for working through the issues with you. My research repeatedly finds that its advice is of the highest quality. It has a website for England, Wales and Scotland. I also recommend Citizens Advice Bureaux and the Consumer Credit Counselling Service. My favourite resource for debt is this Dealing with Debt discussion board, which is full of knowledgeable people from the industry and supportive former debtors.

More: How to destroy your debt | 10 top tips for personal loans | How to stop overspending in 2012


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