What does living debt free mean?

Debt can seem like an unavoidable consequence of living in the modern world, but there are steps you can take to reduce your reliance on credit or remove it altogether. At National Debtline, we have been helping people get out of debt for over 30 years. Millions of people in the UK have financial difficulties. We know that this can be tough to deal with. It can sometimes feel overwhelming, but there are solutions. If you need a fresh start, there are ways to get one.

Living debt free can mean different things to different people. Unless you own your home outright, you’ll usually need to pay a landlord or mortgage lender to keep a roof over your head. And borrowing isn’t always avoidable, if you need an essential item straightaway, your options might be limited. But by reducing or clearing as much of your debt as possible, you can put yourself back in control of your finances.

Being debt free allows you to decide how your money is spent, giving you financial freedom.

Is living debt free realistic?

It isn’t always going to be possible to become debt free overnight. For example, if you have a mortgage, this can take years to repay. And unless you have savings, there may be times when borrowing may be the only way to buy something you need urgently. But there are always steps you can take to move towards a debt free future.

Borrowing money also isn’t always a bad choice. The key is making sure you get the best deal possible and can afford the repayments you are going to have to make. Always think carefully before deciding to borrow and consider the pros and cons of the decision you’re about to make. If you can wait to buy, this will often save you money in the long run.

There can be disadvantages to being completely debt free. For example, if you have no credit, this may have an impact on your credit score. This could make it harder to access credit and services that you may need in the future. So having some credit can be beneficial, if it is affordable and costing you as little as possible.

You also need to understand what your options are right now. Can you afford to repay your debts in a short space or time or is this not realistic? Can you realistically afford to repay your debts in the long term if not?

Steps to become debt free

The first step on the journey to becoming debt free is always the same, you need to work out an accurate and reliable budget. We know that when you are struggling with debt, the thought of writing down your income and outgoings might feel like the last thing you want to do. But doing a budget might be easier than you think.

You’ll need to list:

• the money you have coming in (your income); and
• the money you are spending (your outgoings).

Make sure you include amounts for things you pay for occasionally such as gifts, car repairs and clothing. Be realistic, it may be possible to go without some things in the short term, but your budget isn’t going to work unless you can stick to it. It is also a good idea to save some money in case of emergencies.

If you’re not sure if your spending is realistic, call and speak to one of our advisers. They can give you free help to work out a sustainable budget.

Take some time to look at any steps you can take to increase your income and whether there are ways to reduce your costs. See our Making the most of your money guide to find out more about how to do this.

You’ll also need to gather information about all your debts. Find out how much you owe, the interest rate payable, and record the minimum contractual payment for each debt. Check if the money you have left over after paying your essential costs will cover the minimum contractual payments you need to make.

• If there is enough money left over, you are solvent.
• If there isn’t enough money left over, you are insolvent.

The solutions that are available to you will depend on whether you are solvent or not.

How to be debt free in 6 months

This will only be an option if you are solvent and have either:

• a small amount of debt; or
• a lot of money left over after meeting your essential costs.

We’ll explain repayment strategies in more detail later, but you’ll aim to pay everything back as quickly as possible by putting all of the spare money in your budget towards your debts.

You could also look at cutting back on spending for a short period of time to free up more money. For example, you might reduce or cut out spending on things like hobbies, gifts and leisure activities. This isn’t a good idea in the long term as it can be difficult to sustain, but could be a short-term option.

How to become debt free in 1 year

As before, if you are solvent this is only likely if:

• you have a small amount of debt; or
• you have a lot of money left over.

We’ll explain repayment strategies in more detail later, but you’ll aim to pay everything back as quickly as possible by putting all of the spare money on your budget towards your debts. It is going to be harder to stick to cuts to essential spending for 12 months, so don’t count on going without things that you are likely to spend money on such as gifts, socialising and hobbies.

If you are insolvent, you could have several options. These options may affect your credit rating.

• If you have money left over after paying all your essential costs, you may be able to agree to making reduced payments yourself or use a debt management plan. If your creditors can see that you can’t afford your normal payments, they may agree to freeze any interest and charges that were being added.

• If you have £75 or less left over and owe £50,000 or less, a debt relief order might be a solution. There are also rules about how valuable your assets can be, and you cannot own your own home. If a debt relief order is made, your creditors cannot ask you to make any payments to the debts that have been included for 12 months. As long as you still meet the qualifying criteria throughout this time, your debts will be written off.

• If you don’t qualify for a debt relief order, you may be able to consider going bankrupt instead. A bankruptcy order will stop you being chased for most kinds of debts. You can sometimes be asked to make payments towards your debts for three years, but this is based on what you can afford to pay. If all of your income comes from state benefits, or if you have less than £20 a month spare, you won’t be asked to pay anything. Any valuable assets you have, like houses or cars, could be sold to help pay your debts. At the end of 12 months, your debts are written off.

• In limited circumstances, a creditor might agree to write off a debt if they can see that you have no reasonable way to repay pay it. For example, if you can prove that you have no money to pay, no assets and that this is unlikely to change in the future.

You can find out more about all of these solutions and see more about whether you might qualify for them by reading our Ways to clear your debt guide. You can get free expert advice about which solutions are available and a recommendation about what’s best for you from National Debtline.

How to get debt free over the long term

There are different longer terms options, but what will or won’t work will always come down to how much money you have left over. This is why your budget is so important. If your budget isn’t accurate and you can’t stick to it, you can end up choosing a solution that isn’t going to be right for you. It is also a good idea to review your budget regularly, say every six months or so, to check for changes.

If you are solvent, it still makes sense to pay as much as you can each month after paying your essentials. The longer repayment takes though, the more important saving becomes. If you don’t have money set aside to cover setbacks and emergencies, you can end up having to borrow more money to pay for things you can’t go without.

On top of just making the biggest repayments you can, there are some other solutions that may be available if you are solvent.

• You could look at shopping around for better deals. If you move a debt to a lower interest product, this can save you money and mean you can repay the debt more quickly. For example, you may be able to move a credit card balance to a new card that charges zero interest for a period. There will usually be a charge for this, so make sure you take account of this when working out what you’ll save.

• You may also be able to consider consolidating your debts. This means taking out a new loan to repay all your existing debts. This can sometimes save you money if the interest rate on the consolidation loan is lower than the interest on your current debts. However, be careful because if your loan will be repaid over a longer period of time, you can sometimes end up paying more overall. If you default on the new loan, you may be asked to pay back what you have borrowed and all the interest that would be added across the term of the loan. As a result, you could find yourself owing significantly more money than before you consolidated.

If you are insolvent, there are lot of different solutions that might be available to you depending on your circumstances. Read our Ways to clear you debts guide to find out more. This could include repayment arrangements such as a debt management plan or individual voluntary arrangement.

Proven strategies for debt repayment

If you are solvent, there are a couple of repayment strategies you could consider.

The first of these is the avalanche method. You pay the minimum amount on your credit debts and then use any spare money to pay off the debt with the highest interest rate. This is usually going to be the quickest way to get debt free as you reduce the amount of interest that builds up as you are repaying your debts.

The second is the snowball method. You again pay the minimum payments on all your debts and then use any spare money to pay off your smallest debts first. As each debt is paid, you are left with more money to clear the next one. This may give you a more immediate sense of progress than the avalanche method, which can help keep you motivated. It is likely to see you paying more back overall though.

You should not use these strategies if you are insolvent. Call and speak to one of our advisers to get free advice about whether you should prioritise payments on any of your debts and how to manage payments to all your creditors.

Paying chosen creditors ahead of others can make it harder to get reduced payments agreed, and in some circumstances can cause serious legal problems. For example, if you go bankrupt you could face longer bankruptcy restrictions, and your preferential payments may be taken back from whomever received them. There are also circumstances where you must pay certain creditors ahead of others.

Managing money while paying off debt

A reliable budget is the most valuable tool to keep you on track. You should check your budget every 6-12 months. Make sure your spending hasn’t changed and check you’re getting the best deals you can, for example, can you get better deals on home insurance or on your energy bills?

It is also important to save money for occasional costs and emergencies. The only way to avoid borrowing again is to have money saved for when you need it. Find out more by reading our Saving money guide.

There may be other sources of help available if you haven’t got the money to pay for something essential. See the guides in our Cost of living topic.

Living debt free every day and staying debt free long term

To give yourself the best chance of staying debt free, you need two things to overcome the challenges you’re likely to face.

• A balanced budget. Your income needs to be bigger than your outgoings. Remember to check your budget regularly and look for ways to increase your income and lower your spending. But always be realistic.

• Savings. You need to have money set aside for occasional costs, such as gifts, clothing or car services. You should also put money aside for emergencies and unexpected costs. For example, white goods like washing machines and cookers will need to be replaced eventually, and if you own your own home you may need to carry out repairs.

How National Debtline can help you

Wherever you are in your debt-free journey, National Debtline can help.

• We can help you put together a realistic and sustainable budget.
• We can help you choose the best way to become debt free.

We will always be available to give you free advice to help you overcome any of the debt challenges that you face.

FAQs

What’s the fastest way to become debt free? 

This depends on your circumstances, but if you cannot afford to meet the normal payments on your debts, then the quickest way to become debt free will be legal insolvency. This includes debt solutions such as debt relief orders, individual voluntary arrangements and bankruptcy.

There are lots of factors to consider when choosing a debt solution, get free help to find the right one for you by calling National Debtline.

Can I be debt free without paying everything I owe? 

This depends on your circumstances. If you cannot afford to meet the normal payments on your debts, you may be able to consider debt solutions such as a debt relief order, individual voluntary arrangement or bankruptcy. If you have assets (valuable things like cars and houses) that could be sold to pay your debts instead, these options may not be suitable.

Speak to one our advisers for free advice about which solution is best for you.

Is it better to pay off debt or save first? 

Unless you have a savings account with a higher rate of interest than the rates charged on your debts, paying back your debt first will normally save you money. However, if you do not want to take our more credit, or are no longer able to take out credit, it is really important to build up a pot of savings to deal with unexpected costs and bills.

What happens after I become debt free? 

It is up to you, being debt free puts you back in control of your finances. If you want to avoid debt in the future, you can take steps to limit your need for credit. But borrowing isn’t always a bad thing, and unless you have large savings can sometimes be unavoidable. If you’re worried about getting back into debt or have a bill you can’t pay, you can get free advice from National Debtline.

Can I live a no debt lifestyle on a low income? 

Avoiding debt can be difficult on a low income as you will have less spare income to save (if you have any). Unless you have savings, it can be difficult to manage if you get an unexpected bill or need to replace an expensive item like a washing machine. There may be organisations who can give additional help, read our Organisations that can help guide to find out more.