Overcoming the Debt Problems in 2022
With the outbreak of Covid-19 pandemic, there has been a severe economic fallout that has resulted in a massive hit on our finances. As a result, we feel that we are drowning in debt one after the other and looking at how soon I can overcome debt problems and breathe out for rescue. Though right now the situation might be tough for every one of us, on an optimistic point of view, there is always a way out. This “way out” however may not always be quick and instant solution. But the earlier you get into the root of the debt problem, the easier it is to deal with it.
In my article, Simple 10 ways to come out of Debt Faster , I have explained simple ways but with this guide I am going to break it down to the root cause.
STEP 1 – Assessing the severity of your debt situation
Whether it is debt crisis or a debt problem, you may be waiting impatiently to know where you stand right now. So, we would like to present below two ask-yourself questions that will clear give an indication where you might be.
- Are you finding it difficult to meet you basic routinely expenses such as rent, electricity bills, mortgage, credit card payments?
- Are your debts (excluding mortgage) larger than a year’s after-tax income?
If the answer is yes for either of the above questions, it means that you are facing a debt crisis. Even if you’re having huge debts, if it can be service at a minimum level, it means you are “not” in a debt crisis, and a different solution will need to be applied.
Don’t worry. Now that you know where you are, you will soon know how to come out of it. Let’s look at it optimistically.
So, let’s how we can help you take slow but steady race out of the woods.
Dealing with a Debt Crisis
Many people would not like to go in depth to a problem being faced, but rather try to ignore it. But as you are now reading through this article, we are glad to let you know that you have taken a good start to understand the situation and trying to sort things out – meaning you are searching a “way out”.
Unlike debt crisis, when you are facing minor financial difficulties is what can be called as debt problems. Debt counselling agency is are mainly available for those with urgent financial support during debt crisis. (Citizens Advise and Step Change Debt Charity)
Dealing with a Debt Spiral
What is a debt spiral exactly? It is a cycle which a lot of people get into and are unaware of it, until you realize that everything seems to be spinning out of control. For example: It’s like when an airplane has got caught to a turbulent weather and finally ends up crashing down and destroyed completely. So how do you get trapped in the spiral?
This often starts with a simple financial mistake of spending more than you can afford to.
If you are wondering how bad your debts are, what counts is your debt in proportion to your ability to pay. Whether your credit card expenses and borrowings are more than year’s salary after tax, then this is quite severe. If you do not know how your debt size grew, then this is a dangerous sign of financial mismanagement.
You may ask yourself; how did I build up the debt size?
Q1 – “Well, I planned my expenses and shopped to buy the cheapest phone that I can afford to pay back”
Q2 – “Well, I am not sure really how my expenses increased, I just used my credit card and my debts grew”
Saying yes to the 2nd, it means you are spending more than your limits, and if you continue to borrow to pay back your debts, then you will ultimately end up in a debt spiral. So don’t worry, this article will take you through the “way out”
STEP 2 – A checklist to overcome your debt problem
The checklist provides you the chance to explore every available option that you can make use of to solve your “not so severe” debt issue. It is highly advisable to go through the total list as you can understand all ways that can help you solve your debt problem.
Approach 1 – Sorting your spending
Below given are a few strategies that will help you manage your cash and reduce expenses to manage your debt problems.
- Plan your expenses before spending. If you are in a debt problem, then it is essential that you do a budget to handle your spend
- Check what state benefits you are entitled for. You will find something that will help you make use of.
- Are you struggling with repayments (such as mortgages), then you need to speak to your lender, who will definitely have a few alternative and flexible solutions.
Approach 2 – Cutting debt related costs
Speeding up repayment of debt will help to lower interest rates being charged.
- Your credit reference file shows your current credit commitments and payment records. Get this checked for free and based on this you will be able to understand new cheap credit options available.
- Shifting to cheaper credit card options. The cheapest possible borrowing is the use of credit card facility. Even if you do not have great credit score, there are deals which you can make use of through credit cards, for example: zero interest for installments.
- Instead of getting new credit to cut credit card cost, banks provide their existing credit card customers a chance to create substantial savings by helping them to move other debts to them at special rates.
Grants and support schemes.
Certain utility companies are present which assist you especially if you have large arrears in your utility bill. To benefit from those schemes, you need to become a registered customer of the company.
Gas & Electricity schemes are offered by British Gas Energy Trust and Scottish Power Energy People Trust
Schemes related to Water is listed in The Consumer Council for Water website and has information these schemes.
- Repaying your debt using savings. It is a known fact that Interest earned on savings is less than interest payable on borrowings. Therefore, the tip can be to cut your high interest debts wherever possible and look at the savings you have to pay off your debt. To check this.
- Danger of minimum repayment for credit cards. When you are a credit card user, the minimum repayment are calculated in a way that keeps you locked in for years. To check on this.
- Remortgaging. It is important to know that mortgage is a loan taken making your house as the security asset. If you are unable to pay back your loan, banks can take your house. Therefore, there are cheap deals available, especially if you have decent equity amount at your home.
Approach 3 – Managing and overcoming debt problems
Even with the above checklist, if you are still finding it difficult to come out of your debt problem, then it is time that you consider more serios options for a solution.
A. Speak to your lender
Never ignore or miss payments due. It is always important to make your lender aware on any difficulties you have in settling loans on time. They will in turn see on any preventive measures of reducing your borrowing expenses.
B. Seeking government assistance
There are interest-free borrowings that can support you settling your debt without growing added interest costs.
Council support schemes
Local authorities are available to ensure that resident struggling financially are given emergency support. For example: people who are not able to afford to buy their food, people needing shelter after returning from prison. However, the sad truth is that each council has the authority to choose what kind of financial help to offer and to whom, for which some people may not find the right solution.
C. Budgeting loans
The Government has interest-free loans available for these
D. Should you consider a debt management plan?
What exactly is a debt management plan (DMP)? It is a debt solution that allows you to pay off your debts at a rate you can afford. For example: if you are struggling to repay the amount originally agreed with their creditors, this is where the DMP provider comes in to help you work out your affordable payment and negotiate with your creditors to accept that they will get their dues over a longer period than in initial credit agreement. While you pay the DMP provider the monthly affordable amount, they will distribute it to your creditors every month as negotiated.
E. IVA or DRO – which is the most suitable for you?
IVA (Individual Voluntary Agreement) is a legally binding agreement that agrees with your creditor on the affordable debts that can be paid over a set period. If there are any unpaid debts included in IVA, these are written off as bad debts when the agreement is completed. This however might have a negative influence on your financial outlook as it makes a dent in your credit score.
Debt Relief Order (DRO) is a preferable and alternate solution that will help you to deal with your debts if you can’t afford to pay them. The DRO helps you to clear your debs, where you make no payment to creditors for a specific period. It stops creditor taking actions against you and help you start afresh.
STEP 3 – Constantly review how things are going
As you have now read through this article, you will understand that for every debt situation, there is always a ‘way-out’. You are not alone in your financial struggles. There are many useful tactics that are available out there and various credit support schemes that you can make use of.
With this, it gives birth to another vital step – that is a ‘consistent review’. Constantly reviewing your current financial progress is an essential step one needs to take, to make sure if you are making your ‘way-out’ from your current debt problems. Always ask yourself, are the applied approaches working for me? Am I making progress through these approaches? If not, what adjustment do I need to make to subdue the debt problems? Therefore, such constant feedbacks will fast track your gradual progress to improved financial conditions.
Expecting the unexpected future…
Unexpected financial challenges are very likely to arise in the future. For example: it may be a sudden loss of your job, an unexpected cost for healthcare, an economic downturn which could block your income from your business; especially during this current pandemic situation. Therefore, it is essential to start building up your savings (even in a small way), while tackling your debt problems.
An overpowering financial problem is not easy to deal with. Hence always take an optimistic step forward. All you need do to is to think of setting priorities for your financial goals. This will help to overcome the financial challenges and reduce the financial stress.
