According to a recent survey, as many as 41% of EU households have to repay liabilities, most often in the form of bank loans, loans, and installments for purchases. BIG InfoMonitor has calculated that at the end of 2016 nearly 2.5 million Europeans were not able to pay their bills on time. Why do we not repay our debts? The most common reason is a lack of financial liquidity (e.g. loss of a job or an accident) or overestimation of one’s financial capabilities, such as taking out too many loans, which with time begin to overwhelm the home budget. From that point, it’s easy to fall into a debt spiral and suffer a severe knock to your mental freedom.
Here are 5 steps you can take to make it much easier to get out of debt.
Step 1: Be aware of the problem
Excessive debt is nothing pleasant and there’s no point in deceiving oneself that everything is fine. Debtors often act like addicts – to the bitter end they stubbornly claim that they have everything under control and that their rebound from the bottom is only a matter of time away. That, of course, is the wrong approach.
It’s very important not to try to pay off debts by incurring further debts. It’s clear that having financial commitments can make life very uncomfortable and it’s much better to get rid of them. Well, at least those that are costly. In reality, only a mortgage loan is a relatively safe debt. Living on credit and indulging financing cravings with borrowed money is not going to pay off in the long term. It only leads to deep problems and sooner or later will push every indebted person to the edge of an abyss.
Fighting debt isn’t easy. That’s as clear as crystal. It’s a difficult and bumpy road, often requiring much sacrifice. But there’s no point just closing one’s eyes and pretending, as a child might, that what we do not see doesn’t exist. It’s time to face facts and regain our independence and financial freedom.
Step 2: Time to put things in order
It may be hard to believe, but there are people who don’t even know what debts they have and who those debts are owed to. I say this from my own experience of helping a few people who only began to worry about debts only when they received a court informing them about the establishment of a secured charge on their property.
This is often the result of a debt spiral, when one loan is used to finance another and so on and off. It’s so easy to get lost in all this and even unknowingly end up in debt with a company that wasn’t even associated with the one you originally borrowed from. Always look for the best personal loans you can find and make sure you don’t just sign something someone in a suit behind a desk gives you without knowing exactly what it is and what the consequences could be.
At this stage, it’s important to perform your own audit and try to get all debts written off. Gather your creditors’ details including how much you owe them. It’s often the case that companies or institutions, after several unsuccessful attempts at independent debt collection, place the matter in the hands of companies dealing exclusively with debt recovery. It’s also worth compiling a list of your most complex debts, from the most urgent to the relatively safe. Be sure to prioritize your mortgage and utilities, if these also form part of your debt.
Step 3: Prepare your household budget
Debtors always think that they can manage their household budget, but the fact that they have large liabilities contradicts this. That’s why you have to go back to basics. Sit down with a card and a pen and write down your regular expenses and income. You will almost certainly find that the latter does not cover the former, which means that you simply have to start cutting costs. I wrote about running a household budget some time ago and it’s funny how what I said hasn’t lost its relevance at all.
The basic principle with a household budget is that expenditure should less than revenue. That will allow money to be left over to use on debt.
Step 4: Cut the expenses and get extra money
One thing is certain: you can’t get out of debt by living beyond your means. It’s necessary to remove from the household budget those expenses which are not intended for living purposes, and which are only cravings or luxuries. Let’s remember that for someone in a very difficult financial situation, going out to the cinema or for a meal might be a luxury.
Getting out of debt is often about more than cutting costs. It’s also about finding extra sources of income. This could include finding a new job or asking for a salary raise. It could also include selling items, taking surveys, or even taking a useful hobby and making it into a business.
Step 5: Agree and start paying off debts
So, household finances ordered, unnecessary cut expenses, additional sources of income found. Now it’s time to get down to paying off your debts. It’s a tough task psychologically because you suddenly discover that you need to spend your disposable income on things that don’t tangibly exist anymore but are still a thorn in your side. Essentially it’s like keeping the beast at bay, but something you need to do to get rid of that beast for good.
Tip: You must contact your creditors and inform them of your intention to repay the debt. Showing goodwill is essential. If the debt has already been taken over by the debt collection company, it’s worth calling that company immediately and asking for an interview with an appointed advisor.
Another good option is to apply for a longer period of time in which to repay. This type of solution is best negotiated with a debt collection company. At times a creditor, e.g. housing associations, are also able to cancel part of the debt in exchange for the repayment of a larger part of the debt. Banks, on the other hand, often offer to combine several loans from different banks into one commitment with a lower installment plan. This is usually referred to as a consolidated loan.
Finally, a brutal truth: debts don’t appear from thin air and are usually the consequence of ill-considered past choices. The worst thing you can do is to bury your head in the sand and pretend that the problem doesn’t exist. You can get out of debt and get your mental freedom back step by step – it might take time, but you can do it.