Are We Deliberately Driven To Bankruptcy?

Some insolvency experts believe we're being deliberately driven into deeper debt. Here are ten tips to force your way out of this diabolical plot.

Oooh conspiracy! Is it possible that the government has a deliberate policy of encouraging people to spend more than they earn? The signs could certainly be explained in that way. They've allowed mortgage companies to gradually relax their lending criteria in all sorts of ways, they don't force lenders to assess income before they provide unsecured loans or credit cards and, in 2004, they relaxed the bankruptcy laws so that people can wipe clean their debts and be discharged from bankruptcy in just three to twelve months. You could even argue that the government's failure to educate people about saving, investing and the dangers of debt is all part of the master plan.

In the short-term, which is what politicians live for, it is a sound policy to keep people borrowing and spending at about the present rate, in order to sustain economic growth. The thousands of people driven to bankruptcy will just blame themselves, so it's win-win for the government.

Some insolvency practitioners have privately agreed with this theory. To that end, they expect more and more people to take the 'easy' route of bankruptcy.

But enough about conspiracy theories! Don't be a pawn to the government (he said melodramatically)! If you have some - or lots - of debts, here are ten tips to help you. Whilst you read, consider how much it would improve your finances if you pledged to do every one of them!

1. The first step to clearing debts

The sooner you stop trying to look richer than you are, and the sooner you start living within your means, the better off you'll be. I don't just mean financially, but in terms of your happiness too. You may think you can't live without the luxuries you've grown accustomed to. You may not want to lose face with your family, friends and neighbours. But, when you finally bite the bullet, you'll eventually realise that it's not so bad after all.

In fact, getting to grips with your finances will make you feel much happier than all those other things do! I know, because I've read lots of posts on our Dealing With Debt discussion board from people who've seen the light and mended their over-spending ways.

2. Budgeting

I doubt most people have any idea what their various expenses are, which means it's pure luck if they don't have debts. To find out where your money is going, you do a Statement Of Affairs, which will help you determine how your income compares to your expenses.

To take advantage of your new knowledge, you then draw up a realistic budget, remembering to save monthly in advance for big expenses such as MOTs, holidays, Christmas presents and so on. Don't be over-optimistic. Some basic expenses, such as clothes, can be much higher than you think. If you get it wrong you'll just be disheartened.

3. Living within your means

You then do an experiment to see what you actually spend your money on. For a month, keep a small pad and a pen with you at all times. At every reasonable opportunity, write down what you've spent money on and how much. It's likely you'll surprise yourself. 'So that's where the money goes,' you'll think.

With this as a guide, you can cut down on luxuries, or eliminate them altogether if your situation is severe. Make your own sandwiches for lunch, go back to a basic TV package and listen to the radio.

Always have in your mind what you've allowed yourself as 'entertainment' money and, as you spend or withdraw cash, deduct it from the total.

If you really get the saving bug, you should take a look at the Living Below Your Means discussion board for more tips.

4. Snowballing

A very Foolish trick is to 'snowball' your debts. It's very simple: you pay the minimum monthly payments on all your debts except your most expensive one, i.e. the one charging the most interest. With that one you throw all the spare money you can at it. When it's paid off, you then move on to your next most expensive. You pay less and less interest this way, which means more and more of your money goes to actually paying off the debt, hence 'snowballing'. Doing this you'll pay less interest, clear your debts faster and be able to start saving sooner!

5. Reducing your biggest costs

If you haven't remortgaged for a while (or ever!) it's very likely you will save thousands by doing so. I know it seems like a lot of effort, but that's why good old Motley has partnered with no-fee mortgage broker London & Country, which will search the whole market of 8,000 mortgages to get the most suitable deal for you. There's bound to be a much better one out there! See our mortgage centre for contact details.

You should also assess your need for a car. Do you need one? If yes, could you make do with a cheaper, more efficient and reliable one? Be honest!

6. Reduce your smaller costs

There are all sorts of little bills that could be reduced or eliminated. You could cancel your payment protection insurance (PPI) on your cards, loans and mortgage for a start. If your mortgage company says you must have this cover then, firstly, grrr! Secondly, get your insurance from a standalone provider, as it's likely to be an awful lot cheaper. See this article for more on PPI and cheaper (plus better) alternatives.

The Motley Fool is all about comparing prices to find you the best deals. Particularly if you have debts you should take advantage of this by comparing everything including: car insurance, life insurance and utility bills.

7. Food shopping

One bill that can easily spiral out of control is your food bill. Try writing out a shopping list before visiting the supermarket and make yourself stick to it. One alternative to this is to order online where you can't be tempted. You could also see how much you save by buying non-luxury items only. It may surprise you.

8. Get better deals on everything

Again, The Fool can help here. You should look for cheaper loans and get a current account - with a lower interest rate on overdrafts. You can also get better credit card deals, although ideally you want to get rid of your credit card debt as soon as possible, as it's probably your most expensive debt.

Just think, if each idea in points 6, 7 and 8 saves you just £10 per month each, that'll add up to a massive monthly saving.

9. Put the money you save into reducing your debts

If you go through all the effort of saving money as I've described above, don't waste it all by spending frivolously! If you use it to pay off your debts more quickly, when your debts are cleared you'll have all that free income each month to do with as you please, with no obligation to anyone. How fantastic does that sound?

10. Get help

And finally, if you're in serious, deep dark debt trouble, don't panic! Face your problem squarely and get help. Two charities that can be very helpful are the Consumer Credit Counselling Service and Citizens Advice.

I'm sure many of you have never dreamed of posting on Internet discussion boards before, but you should still take a look at our Dealing With Debt board. Read some of the posts, you may be surprised how useful and comforting they are. 'Lurk' for a bit and gather information. You might even want to write an anonymous message of your own.

> Visit our Get Out Of Debt centre