How to Get Out of Debt

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by ratewise

Possibly the biggest challenge that society is faced with today is debt, and how to get out of debt. We want to get out of the debt trap because it is exactly that, a trap.

Banks make their money by lending money to individuals, which they must pay back with interest. Due to the high interest rates, we spend most of the time just paying off interest. Therefore, we lose a lot more money by getting into debt than we gain.

Any decent financial manager will advise you to get out of debt, but how to get out of debt?

Plan and organize

This should be the starting point for anyone who wants to know how to get out of debt. Firstly, you need to know exactly what you owe and to whom. It is a good starting point to make a list of all of your debt and arrange them in order of importance.

Debt that can be of lower importance are things with longer terms and low-interest rates. It would make sense to put urgency into those debts with high-interest rates so that you can get them paid off as soon as possible and in doing that you pay as little interest as possible.

A good plan can also show you exactly where you stand with your debt compared to your income. You can use this to set up a payment plan so that you get everything paid back as soon as possible, instead of just pushing it aside for future concern.

Get a debt management plan

These are also known as a DMP and can be taken out from any DMP provider. Your provider then goes to work, much like in the process mentioned above, by organizing and prioritizing all of your debt.

A great bonus of choosing a DMP provider is the fact that they are professionals and thus they know the best ways to proceed with how to get out of debt.

Another benefit is that they go to work with negotiating with your creditors for the best possible terms and rates. They put this all into a simple plan and you make a monthly payment, which they then manage between all your debt priorities.

Look into debt relief orders

These are orders that can be issued in extreme cases where there is very low income and very few assets. The total debt amount can be frozen for a given period, normally 1 year, and if circumstances have not changed by then, the debt is written off.

Declare bankruptcy

This is more of a last resort when all else fails. When you have no possible means to pay back your debt you can declare bankruptcy.

By doing this all of your assets are used to pay off as much debt as possible and all the rest gets written off. You are then debt-free and can make a new start.

This will, of course, lead you to get blacklisted and for a specified period (normally 10 years), you are not allowed to take on any debt. This can be rather detrimental to your financial credibility.

Negotiate a settlement to write off your debt

When there is one big creditor that you are unable to pay back in full, a settlement can be negotiated. In this case, you would show the creditor that you have no means to pay them back in full and that the circumstances are unlikely to change in the future.

In this case, they could accept a final payment, or a final number of instalments, after which they will write off the remainder of the outstanding amount.

Get debt advice

One of the most important starting points of how to get out of debt is to get advice. The advice can be sought from experienced friends and family, but in the best cases, from professionals.

They work with these things all the time and they are up to date with the most recent rules and regulations.

There are many free debt consultants available. It can be as easy as searching your local area for someone.

They have all the skills needed to get a grip on your debt, they can make the calculations, they can prioritize creditors, they can negotiate better rates, and they normally have friends in the right places to nudge things in your favour.

We hope that this article has helped you in your journey of how to get out of debt. And remember, the best way to stay out of debt, is to never get into debt.

How much debt is bad?

How much debt is bad for your finances? Generally, a healthy debt-to-income ratio is anywhere below 43%.

Above that level, you may find yourself having difficulty coming up with the funds to make your payments.

What happens if I can’t pay my debts?

If you can’t pay your debts, you can apply for a debt relief order or file for bankruptcy. Be sure to try to come to an agreement with your lender first before you take those courses of action.

At what age should you be debt free?

While everyone’s financial situation is different, in order to properly prepare yourself for retirement a good goal age to be debt free is 45.

How much credit card debt is ok?

Up to 10% of your income is ok to have as credit card debt. This leaves you with enough income to move to pay it off afterward. 

What age group has the most debt?

The age group that has the most debt is borrowers ages 25 to 34. This is due to them just starting out on their journeys in life, borrowing to buy their first car, finance their education and so on. 

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Categories: Personal Finance
Tags: Debt