7 ways out of the debt trap

If you're in financial trouble and have debt you can't manage, it's time to stop and change course.

It all starts with you. You need to be motivated to change your finances because it's a prerequisite for getting your life back on track. Even the best plan will fall apart if you don't commit to making the necessary changes

Get an overview - create a budget

Start by creating a detailed budget for a full year. It is important that you include ALL household expenses, both fixed and variable.

Fixed expenses typically include rent, electricity, water, heating, internet, mobile subscription, streaming services, insurance, membership fees and loan repayments. Variable expenses include food, transportation, vacations and entertainment, hobbies, etc.

Income can be salary, transfer income, pension, bonus, vacation pay, etc.

If your expenses are higher than your income, you should take immediate action to change the situation. If expenses and income are roughly equal, there are also reasons to take action, mainly for the sake of faster debt repayment.

A thorough and detailed budget will not only give you an accurate overview of your financial situation, but will also be a useful tool if you want to consolidate your debt into one loan (consolidation).

The necessary savings

Put all major purchases on hold.

Cut up all credit and debit cards. They cost you expensive fees and interest and tempt you to spend money you can't really afford.

Go through your variable expenses with a critical eye. Reduce and cut where possible.

You can also save money on your fixed costs such as mobile telephony, internet and electricity. All you need to do is research the market for better deals.

You might also want to take a look at your insurance policies. Some insurance companies are prepared to give a hefty discount if you gather all your insurance policies in one place.

Banks also compete on price. However, it's important to think strategically here, because you may very well need your bank to help you consolidate your debt. So, wait a minute.

Once you have a savings plan, it's a good idea to incorporate the savings into a new, revised budget 2.0.

Alternative income

If the savings aren't enough, you might consider working more. This will provide you with extra income that you can use to pay off your debt.

If you're not able to take on paid overtime in your current job, you may need to look for a supplementary job. There are plenty of opportunities for evening and weekend work. Go to jobindex.dk and search for 'evening and weekend work'.

Of course, you'll need to keep your life together - and few people can handle working 70 hours a week - but you'll earn a significant extra income if you can put in just 8-10 hours a week.

In this context, you should be aware of the special rules on B-income and B-tax.

Negotiating with creditors

Basically, everything is negotiable. This also applies to your debt and how you settle it. That's why it's relevant for you to engage in direct dialog with your creditors or your creditors' representatives.

Start by getting an overview of your debt. How many debts do you have? How much do you owe in total? How much are you paying off your debt? What are you paying in interest and costs?

There are hardly any of your creditors who want to draw a line under your debt. But some may have an interest in closing your outstanding debt on terms that are also in your favor.

In connection with a possible consolidation of your debt, you may be able to agree a composition on one or more of your debts. A composition is the repayment of debt at a discount. It's not uncommon for creditors to be willing to cut 20-30 percent of the debt in exchange for you paying off the remaining debt immediately.

Chords are not the only option to ease your debt burden. If you've shown a willingness to pay - and have been paying off debt for a long time - you may be able to propose an interest freeze or - alternatively - a reduced interest rate. This will be especially relevant if you have some expensive consumer or payday loans.

In any case, you should reach out to all your creditors to explore the options. And if you don't already have a debt settlement agreement, make sure you get one. It's important that you demonstrate your willingness to pay.

Next, it's time to contact your bank to talk consolidation.

Consolidation of debt

Consolidation means that you consolidate all your debt into one loan, with one set of terms. This reduces your total outstanding debt to something that is not only more manageable, but also cheaper.

You need to realize that most financial institutions take a cautious approach to consolidation. The bank will first and foremost be interested in the size of the debt and the risk the bank is taking by consolidating your debt. It's not only a question of your finances, but also whether the bank trusts you. That's why it's important that you have everything in order before you arrange a meeting.

The bank generally expects you to be able to present a sustainable financial plan. And this is where all your preparatory work comes into play: Budget 1.0 and Budget 2.0 with incorporated savings, agreements with your creditors, new revenue streams, etc.

Think of it like an exam; the better prepared you are, the more likely you are to pass.

Don't worry if you are rejected. You can contact another bank to hear about your options. Banks often assess a case differently and as such, a no can also turn into a yes.

Debt counseling

If you find it impossible to manage your financial situation, you may want to consider seeking professional help. There are a number of voluntary associations and organizations that offer free help and advice to people who are financially vulnerable. These include Forbrugerrådet Tænk, Dansk Folkehjælp and Den Sociale Retshjælp.

In addition, there is a plethora of private debt counselors who basically all offer the same thing, but on different terms.

Your situation does not call for new expenses, but it may be worthwhile to hire a private debt advisor. It all depends on the agreement you make with the debt advisor.

Avoid so-called subscription schemes where you commit to paying a fixed monthly amount. Instead, go for a 'performance agreement', where the debt advisor is paid according to the savings he or she achieves on your behalf.

Go for a fixed-term agreement. This ensures that the debt advisor is kept on their toes and that you get value for your money.

Debt relief - if the debt is hopeless

If you have hopeless debt that you have no chance of paying back, you may be able to get debt relief. This means that your debt will be reduced or erased.

You apply for debt relief at the probate court in the jurisdiction where you live. It's free and there are no restrictions on how many times you can apply.

Debt relief means that you pay a fixed amount to your creditors over typically three years. The amount is determined by the bankruptcy court and is based on your finances.

Not all applicants are granted debt relief. The rule of thumb is that you must have a debt that is so large that you will not be able to pay it back within 10 years.

You cannot usually obtain debt relief if you have unresolved financial circumstances. This applies, for example, if you are looking for work, a student, homeless or similar.

The bankruptcy court also assesses whether you have shown willingness to settle the debts you have incurred.

You can contact the bankruptcy court to find out more about the conditions for debt relief.