What is a debt spiral and how to escape it?​

What's it all about?

This article's designed to help you:

• Understand what a debt spiral is, and how it can affect you.
• Recognise when you're at risk of spinning into a debt spiral
• Find help to get your finances and mental health back in shape

What is a debt spiral?

A debt spiral is when you continue to fall further and further into debt. Despite making payments your debts continue to grow due to the interest applied to them. The hole you're in just keeps getting deeper and it feels like your only option for survival is to keep digging – sometimes even taking on new debts to pay off your existing ones.

Is debt always bad?

There's no getting away from it; debt is a basic fact of life for most adults in the UK, but that's not always the catastrophe it sounds like. The day-to-day realities of mortgage repayments, student loans and credit card balances are something pretty much everyone deals with for large chunks of their lives. As long as they're under control, properly managed debts are an accepted part of the financial furniture.

How does a debit spiral start?

The big danger of a debt spiral is that what you owe can keep on stacking up even if you're keeping up to date with your repayments.

How can that happen? Here's an example: suppose you're paying off a large, high-interest debt with hefty monthly repayments. Depending on your payment schedule, it's possible to find your repayments aren't even covering the interest piling up on what you owe—let alone bringing down the overall debt amount. Worse still, a lot of people end up taking out another loan to pay off the first.

Debt spirals often start small. For example, the debt you decided to take on might have been realistic at the time, but then your circumstances changed unexpectedly. You might have taken a drop in income, or had to cope with unexpected extra bills. Recognising when you're at the top of the helter skelter of a debt spiral is the key to pulling yourself back from the precipice—but if your situation changes suddenly, it can be easy to slip.

To put a few hard numbers on all of this, here's a breakdown of kinds of debts UK households were dragging around as of January 2022:

• Total household debts: £63,582
• Total unsecured debts per adult: £3,743
• Average household credit card balance: £2,100

Mental health and debt spirals

If there's one topic the UK hates talking about around the dinner table, it's money. The runner-up, though, is definitely mental health. If you're struggling with a debt spiral, there's no shame in reaching out for help. The problem is that so many of us don't feel that we can talk about this kind of thing. The Great British Stiff Upper Lip can do real damage when it puts people's mental health at risk. Stress, anxiety and depression can all go hand-in-hand with financial problems, and it's easy to feel like you're trapped with nowhere to turn.

You see this most commonly with households with lower average incomes. The lowest earners in the UK, for instance, are over 3 times as likely to have debts totalling over half their yearly income than the top-earning 20%. Looking specifically at people dealing with mental health issues, sufferers are 20% more likely to have debt problems. They're also twice as likely to be falling behind on general household bills and close to two thirds more likely to be tackling Council Tax arrears.

When it comes to mental health trouble, recognising the signs when you or others are suffering is so important.

Here are a few quick pointers:

• Trouble sleeping, focusing or remembering things.
• Feeling nervous, irritable or overwhelmed.
• Feeling burned out or hopeless.
• Lacking energy or motivation.
• Increased heart rate, sweating, trembling or rapid breathing.
• Feeling weak, restless or tense.
• Gastrointestinal trouble or changes in your eating patterns.
• Difficulty making decisions or engaging with other people.
• Uncontrollable worry, panic or anxiety.
• Suicidal thoughts.

Yes, that's a long list that we could probably all tick a few items off once in a while. The point is to spot the dangerous patterns of behaviour as they start, before you or the people close to you get swamped by them.

How to escape a debt spiral

Now let's take a look at some practical ways you can make your debt repayments a little more realistic. There are going to be some scary-sounding terms flying around here, but remember that all of these systems are designed to help dig you out of your debt spiral.

Debt management plan (DMP)

Basically, all a DMP means is that you've agreed a way of clearing your debts with your creditors. You commit to regular payments that you can stick to, paying off a small amount each month to the company organising the DMP. That company then divides the cash up between your creditors. You need to set up your DMP with a company that's authorised by the Financial Conduct Authority (FCA). They'll ask some questions about your financial situation and work out a plan, then ask the creditors to agree to it. Of course, there's a fee for this, along with a handling charge when you make your payments. You can check the details and work out if you qualify for a DMP here.

Debt relief order (DRO)

If you owe under £30,000 in total, don't own your own home and have a low income, you can get a Debt Relief Order from the bankruptcy court. Essentially, what this means is that your creditors need the court's permission to recover what you owe them. Your DRO will restrict you in a number of ways, from preventing you from borrowing over £500 without telling the lender about your situation through to stopping you from starting a business without permission. If you can live with all that, though, you'll usually be declared free from debt after 12 months. For more details about DROs, check here .

Bankruptcy

This is the big one, the older brother of the Debt Relief Order. Like a DRO, you get some protection from your creditors in exchange for accepting some restrictions on your finances and behaviour. Your situation will be checked out by the Insolvency Service and your rights and responsibilities will be explained. You might, for instance, have to hand over bank cards or sell off some of your possessions to help pay what you owe. Despite this, bankruptcy is as much about protecting you as repaying your creditors. Stick to the rules and, after 12 months, you'll automatically be 'discharged' from bankruptcy and your remaining debts will be written off. See here for more.

Seek help

The main point of all this is to show you that there's help available if you're struggling with the financial and mental fallout of a debt spiral. Here are just a few of the organisations set up to help with practical guidance and support:

• National Debtline
• Stepchange
• The Money Advice Service
• Mental Health and Money Advice
• Money Saving Expert
• Debt Advice Foundation
• Mental Health Foundation
• Mind
• NHS Moodzone

RIFT Roundup: What It All Means

• DMP: An informal agreement between you and your creditors about how to pay what you owe.
• DRO: A way of dealing with debts under £30,000, protecting you while you're unable to pay.
• Bankruptcy: A way of protecting you when you can't pay your debts, balancing your interests against your creditors'.