For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.


How to Clear Your Debts

For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.

How to Clear Your Debts – All You Need to Know, FAQs, Loopholes & More

Getting yourself into debt is extremely easy but getting yourself out of it can seem downright impossible sometimes. 

While it’s true that there are many debt solutions that you can utilise in the UK, it’s important that you know what’s appropriate for you so you tackle your debts effectively. 

In this post, I’ll be looking at different approaches people take to clear their debts and guiding you through how these approaches work.

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Becoming Debt-Free

The first step to becoming debt-free is to become aware of all of the debts you have. 

Of course, being informed about all the debts that you need to repay is going to help you make a better decision about how to manage them. 

The first thing you should do is get a hold of your credit file. Your credit file is a document which contains information about your financial dealings including your bank accounts, loans, payments as well as any forms of credit that you may have taken out. 

Your credit file is used to calculate your credit rating. It also contains information about payments made by you towards your debts. 

Going through your credit file can give you a good sense of most of the debts you have. 

If you feel you have other debts that are not mentioned in your credit file, you can track them down by going through old emails or letters from creditors as well as your own old bank statements.

Once you have a list of all the debts you owe, you should calculate the amount of monthly surplus income you earn. Your surplus income is the amount of money that remains after you’ve attended to all of the monthly essential costs of running your household. 

Depending on your surplus income, the types of debts you have and how much debt you’re in, you’ll make a decision about which debt solution to go for. 

Some solutions such as ‘full and final’ settlement offers and Individual Voluntary Arrangements (IVAs) involve you getting a portion of your debt written off. 

Other solutions such as a debt management plan (DMP) would involve you paying back the entirety of your debt. 

Finally, there are some debt solutions such as bankruptcy and Debt Relief Orders (DROs) which involve you making no payments at all towards your debt and them being written off. That being said, these debt solutions do have some other dire consequences which you definitely need to be aware of. 

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If You Can Afford Monthly Payments

If you can afford a monthly payment every time and your creditor(s) agree to it, then you’d be best off setting up a debt management plan (DMP) with them. 

A DMP is an informal solution which means that it’s not legally binding. Your creditor(s) can still take action against you even if you’re in a DMP. That being said, this is quite rare as long as you keep making your payments on time. 

A DMP is also great because of the fact that it’s extremely flexible with how it works. If your financial circumstances worsen in the future and you can only afford to pay a lower amount as part of your monthly repayment, you can easily get changes made to the terms of your DMP. 

Please note that although you are not “formally insolvent” when you opt for a DMP but a DMP still has quite a negative effect on your credit score. 

This is because you make reduced payments towards your debt when you’re in a DMP. These reduced payments cause your credit score to fall. 

Though, it’s important to note that in your credit file, your reduced payments are flagged to be part of a DMP. This is so that anyone who’s looking through your record knows that your payments are reduced because you opted for a DMP. 

You can also opt for an IVA which would cause interest and charges on your debts to be frozen. If you can get the interest rate to become zero in this way, you can save a lot of money overall.

For more details on DMPs and what other approaches you can take if you can afford to fully pay off your debt, click here

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If You Can’t Afford Monthly Repayments

If you can’t afford to pay back the money in instalments but can afford to pay it back as a lump sum, that’s something you should definitely consider. 

Please be aware of the fact that the lump-sum you present to your creditor(s) does not even necessarily have to be the complete amount. 

You might be able to get your creditor(s) to agree to write the remaining portion of your debt off. 

Your creditor(s) would be willing to do this if they feel that you won’t be able to realistically pay back the debt if you do it through instalments. 

On the other hand, if you can’t afford to pay anything at all to your creditor(s), then you may be able to get yourself a Debt Relief Order (DRO) or you could apply for bankruptcy. 

Bankruptcy would involve all of your unsecured debt(s) such as credit cards, personal loans, etc. being written off. 

Bankruptcy is extremely risky since none of your assets are protected. As a result of this, your home, vehicle and other valuable assets would be seized from you and sold off in order to pay for what you owe. 

Please note that there are some debts that bankruptcy does not cover, for example, child maintenance fees. 

A DRO is often called the shorter and cheaper alternative to bankruptcy. It’s aimed at individuals with low income and little to no assets. 

If you get accepted for a DRO, your debt repayments get frozen for a year. After this year has ended, your financial circumstances are assessed. 

If it’s concluded that you still can’t afford to pay back your debts, then they are written off. 

Like all debt solutions, a DRO can cause people’s credit ratings to go down dramatically. 

For more details on what to do when you can’t afford to pay, click here.


There are a number of ways to clear your debts but the approach you take should be determined by what your financial circumstances are, how much debt you’re in and the types of debts you have. 

Be sure to assess all of these factors thoroughly before making a decision on how to tackle your debts.

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