Struggling with debt can be tough, so you may be seeking a plan to clear this debt. If so, you’re in the right place to learn about ‘Get Out of Debt Plans What Are Your Options?’
Each month, over 170,000 people come to our website for guidance on their debt problems. We understand how you feel. Our team knows what it is to struggle with debt, as some of us have been in this spot before.
In this article, you’ll learn about:
- Different types of debt.
- How to choose which debt to pay off first.
- Options for getting out of debt.
- Ways to possibly write off some debt.
- How to stay out of debt once you’re debt-free.
We hope to make your journey to being debt-free less scary. Let’s learn how to manage your debts better and become free of them.
What are the different types of debt?
Debts can be categorised in different ways. Two of the most common ways to categorise debts are secured or unsecured debts, and priority or non-priority debts.
Secured debts are when the borrower uses an asset as security within the credit agreement, usually a property. Whereas an unsecured debt is when the borrower doesn’t have to list any of their assets as collateral in the credit agreement.
But when it comes to trying to get out of debt, the categorisations you really need to know are priority and non-priority debts. Some debts are more important than others to pay off.
Don’t worry, here’s what to do!
There are several debt solutions in the UK, choosing the right one for you could write off some of your unaffordable debt, but the wrong one may be expensive and drawn out.
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Which debt should you pay off first?
You should always prioritise paying off priority debts before trying to pay off non-priority debts.
Priority debts include the following:
- Rent or mortgage arrears
- Secured loan arrears
- Council tax arrears
- Court fines and unpaid child maintenance payments
- Tax credit overpayments
- Income tax, National Insurance or VAT debts
- Energy debts
Many of these debts have been discussed in detail in individual articles, which can be found via our debt info page. Non-priority debts include student loan debt, personal loans, credit cards and other consumer credit.
Sometimes agreements to pay for a vehicle or internet and phone bills can also be classified as priority debts when they’re necessary for your employment or to manage a health issue or disability.
How can I get out of debt?
You can get out of debt by sticking to the original repayment plan you agreed to within the credit agreement. But if this isn’t possible or you want to get out of debt faster, you can use a get-out-of-debt plan, also known as a debt mitigation strategy.
Get out of debt plan Vs debt solutions
It’s important to distinguish between what we mean by debt plans and what we mean by debt solutions. Get-out-of-debt plans are usually utilised by people who have debts but want to get out of them more effectively or faster.
On the other hand, debt solutions are used by people who are struggling with the required repayments on their debt and will or have fallen into arrears. Debt solutions require negotiating with creditors, whereas get-out-of-debt plans can be implemented independently to better manage your existing debts.
Could you write off some debt?
- Affordable repayments
- Reduce Pressure from people you owe
- One simple monthly payment
What are the different get-out-of-debt plans?
The most common get-out-of-debt plans are:
- Debt consolidation
- Debt snowball strategy
- Debt avalanche strategy
- Debt settlement
- Debt Management Plans (DMPs) – this one is technically an informal debt solution which will require negotiating with creditors. But it’s a very common plan to use.
What is debt consolidation?
Debt consolidation is a debt plan that merges multiple debts into one bigger debt while also saving money on interest payments.
It works by taking out new credit large enough to completely pay off multiple existing debts (including charges!). Simultaneously, the new credit should have lower interest than the combined interest paid on the existing debts to save money.
For example, if you have two personal loans of £500, you might take out a third loan of £1,000. The new credit will be used to pay off the existing loans, and savings will be made if the new £1,000 loan has a better interest rate than your two £500 loans.
There are specific credit options used exclusively for the purpose of debt consolidation, such as debt consolidation loans.
What is the debt snowball strategy?
The debt snowball method is whereby the borrower repays the required amount on all debts to avoid getting into arrears. However, the debtor then uses any remaining disposable income from their monthly income to overpay on the smallest debt until that debt has been paid off.
They continue this by overpaying on the next smallest debt and so on until all debts have been cleared. In a nutshell, the snowball method focuses on reducing the number of debts you have regardless of how much interest is applied to each debt.
How do I prioritise paying off my debts?
The snowball method prioritises paying off the smallest debt. However, this shouldn’t be prioritised before paying the minimum payments required on all other debts, as this would cause arrears.
The snowball method doesn’t negate the golden rule of repaying priority debts over non-priority debts discussed at the start of this guide. As all minimum debt repayments are being made, there should be no arrears on any debt.
However, if a priority debt did fall into arrears, this should take priority over putting more money towards the smallest debt.
What is the debt avalanche payment strategy?
The debt avalanche payment method requires the debtor to pay off the minimum required amount each month on all debts to avoid any arrears. Any remaining disposable income is then used to pay the debt with the highest rate of interest until that debt is cleared. This continues by focusing on the next debt with the highest interest rate.
Whereas the snowball method focuses on reducing the number of debts as quickly as possible, the avalanche method focuses on paying off the higher-interest debt.
There are pros and cons to the debt snowball method and the debt avalanche strategy. We have compared these two get-out-of-debt plans in our Pay Off Debt Plan article.
What is debt settlement?
Debt settlement is when you make an offer to settle a debt for less than its worth. You might want to make an offer if you suddenly come into money you weren’t expecting.
There is a possibility that personal loan or credit card companies will accept less for a lump sum payment, but it’s not guaranteed. But you need to be aware that debt settlement can negatively affect your credit report and credit rating.
What are Debt Management Plans?
A Debt Management Plan is a non-legally binding debt solution that must be negotiated with creditors. However, they can be negotiated independently with creditors. They are used when you will struggle to repay multiple creditors their monthly repayments.
When a Debt Management Plan is accepted, you make single monthly payments based on how much you can realistically afford. The payment is divided between all your creditors proportional to how much you owe each of them.
Do creditors accept Debt Management Plans?
Creditors don’t have to accept Debt Management Plans, and because they’re not legally binding, creditors can change their minds later. Although, it’s uncommon for creditors to cancel the DMP agreement if repayments are being made as agreed.
What’s the best way to get out of debt?
The best way to get out of debt is different for each debtor. There is no single best route to clear your debts because everyone’s situation is somewhat different.
This is why it’s so important to get free debt advice from a debt charity to help you make the right decision regarding debt plans and solutions.
Get out of debt plans for credit card debt
Debt consolidation, the snowball method and the debt avalanche strategy can all be used to get out of credit card debt. One of the most effective ways to get out of credit card debts is to use the debt consolidation method with a balance transfer credit card.
A balance transfer credit card is a special type of credit card that allows the borrower to transfer multiple other credit card balances to this card, as long as the balance stays within the new card’s limit. Thus, it’s geared to enable debt consolidation. There will be a fee for making credit card balance transfers, which is usually between 1% and 2% of the balance carried over.
Balance transfer credit cards are ideal for debt consolidation because they usually come with a 0% or low-interest rate for a fixed term, allowing the debtor to pay off as much of their credit card debt for a set period without incurring interest. Always check with the credit card issuer what the interest rate will revert to in the future.
Get out of debt plans for personal loans
Debt consolidation, the snowball method and the debt avalanche method can be used to get out of multiple personal loans as well. If you opt for the debt consolidation method, you may want to consider using a debt consolidation loan to help you do this.
Is it better to pay off debt or save money?
It’s always better to pay off arrears over trying to save money. By clearing your arrears you rescue the possibility of a court order and debt enforcement action, including bailiffs.
But is it better to pay off more of your debt, such as making debt overpayments, than saving money? It’s almost always better to pay off the debt for a couple of reasons.
By making debt overpayments, you are reducing your debt and reducing your risk of defaulting on debts, which would result in more serious consequences like legal action.
Moreover, the interest applied to debts is usually greater than the interest you receive from the best savings accounts. This means you are saving more money by paying off more of the debt, compared to the amount of interest you would be paid from a savings bank account.
Can I get out of debt and save at the same time?
Trying to save while paying off debts isn’t always possible and even when it is possible, it might not be worthwhile.
This is because – as mentioned above – the interest you pay on debt is usually higher than the interest you earn in a savings account. This is especially true when you have unsecured debts.
Can I get out of debt with no money?
Yes, it’s possible to get out of debt even when you don’t have any money.
There are some debt solutions designed to help people who have no money or very little disposable income left over to pay their debts, such as bankruptcy or a Debt Relief Order (DRO).
A Debt Relief Order is considered a lesser version of bankruptcy. If you have minimal disposable income each month and no valuable assets, you might qualify.
A DRO allows you to block all creditors from contacting you for a year. And at the end of the year, if your situation hasn’t improved, you can write off all of your debt.
How can I become debt-free and stay out of debt?
Once you’ve managed to get out of debt, it’s so important to stay out of debt. There are various methods to help people manage their finances better, but one of the most effective is to create a monthly budget.
By creating a monthly budget, you’ll be able to keep track of your finances better and avoid overspending.
You may want to make your variable monthly expenses more certain, such as asking for an energy prepayment metre that requires you to pay for energy in advance.
Are you struggling with unaffordable debt?
- Affordable repayments
- Reduce pressure from people you owe
- Lower monthly repayments