Getting out of debt

Helene Mueller
eCollect support team

To get out of a debt situation means clearing all default liabilities towards a creditor. This mechanism is requisite in order a debt-free process to be attained. When a borrower falls behind with his regular payments, he will be considered as fallen into a bad debt situation. In order to quickly step out of the overdue default process, the borrower can choose between resorting to professional debt help services or carry out different DIY methods. Even if the consumer does not possess the sufficient funds to hire a paid debt counsel agency, he can turn to organisations, which offer free debt help. If the debtor prefers to deal with the past-due situation on his own without using a professional agency, he can proceed with the so-called Do-It-Yourself dealing with debt schemes.

Get out of debt: the DIY method

The DIY method, widely known as the Do It Yourself scheme, in the debt sphere comprises all tools and strategies, which will help the debtor get out of a default situation, but without the use of specialised advice agencies. All debt clearance methods and tools, which are provided by a debt help agency, can be also carried out individually by the debtor himself. When a debtor falls behind with his liabilities, he can try different debt clearance techniques:

  • Prioritisation of all debt obligations. Here the consumer should prioritise his liabilities from the most important to the least important. The idea of this method is each month the priority debts to be cleared first. Such defaults are dangerous for the consumer, if not paid, as they are followed by different consequences. For example, an unsettled mortgage loan can lead to legal actions, foreclosure and repossession of debtor’s home. Household bills, which are delayed or covered by the minimum, can drastically increase their further monthly interest, which will lead to aggravation of the overall debt situation. All unpaid priority defaults will lead to severe penalties, if not settled in time.

  • Debt-snowball method. This scheme aims to overlay all debts on a monthly basis, where the consumer starts repaying the least expensive debts and proceed towards the debts with higher interest. While attacking the smallest defaults first, paying them in full each month, the consumer must continue covering his other liabilities but hold them to minimum repayment. When the smallest debts are cleared, the debtor will proceed to the larger ones, until he completes the get out of debt scheme.

  • However, some financial and debt specialists repudiate the debt snowball method as successful and offer a different one. According to their researchers, when a consumer starts repaying his obligations, but does not follow his budget plan correctly or has more liabilities than monthly income, he will hardly have the sufficient sum left to recover all his obligations. Therefore these experts suggest another method, where the debtor should cover the debt with the highest interest first, proceeding towards the smaller ones. This might lead to prolonged total repayment period but will clear debtor’s largest obligations.

  • The debtor can prepare his own budget plan and also carry out various informal negotiations with the creditor, arranging more convenient debt terms. If the consumer wants to proceed with official agreements, he can hire a law representative to take care of further formalities.

  • If debtor’s monthly budget surplus is very low, equal to zero, or is a negative quantity, a bankruptcy filing is most likely to be applicable as a last-resort getting out of debt method. Filing for bankruptcy can be carried out by a legal representative acting on behalf of the debtor, the consumer himself can apply for insolvency, or bankruptcy proceedings might be requested by the original creditor. In all cases, this process will damage debtor’s credit report, but when he suffers from severe income loss, this might be borrower’s only option. As an alternative, he can apply for a Debt Relief Order, available for UK and Wales residents, where the debtor will be relieved from his obligations for a period of time. If after this time-frame his income has not improved and he is still not able to cover the liabilities towards the original lender, the debtor will be discharged from his monetary obligations and they will be marked as written off for good.

  • There are types of debt clearance methods that cannot be carried out by the debtor, not by a debt help agency. Such schemes are, for example, a Debt Relief Order, an Individual or Company Voluntary Arrangement, a Trust Deed, a Debt Arrangement Scheme, all valid for either UK or Scotland. These methods can be only suggested by a debt-counselling agency but must be further implemented by court and law representatives. If the debt help organisation has an internal legal department, it can assist the debtor during the legally filed dent clearance methods.

Used literature & external links