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The global economy is built to encourage borrowing. The credit scoring system, for example, rewards us for borrowing money and paying it back on time. People with a good credit score often have an easier time applying for mortgages, rental agreements, loans and credit cards – but you have to have a credit history in order to build that score in the first place. This is where the concept of ‘good debt’ and ‘bad debt’ develops. Long-term debt such as mortgages are considered ‘good,’ while short-term solutions such as payday loans are considered ‘bad.’ The point is that short-term solutions can easily become necessary when a person finds themselves trapped in a debt cycle. 
 
What is a debt cycle? 
 
People borrow money for all sorts of reasons. The stigma surrounding personal debt may suggest that debt problems are always the result of financial mismanagement, but this is not always the case. With an economy that encourages the accumulation of ‘good debt,’ it is easy to find yourself with a level of monthly re-payments that are initially manageable. Circumstances can change quickly, however, and it is at this point that the manageable debt suddenly begins to spiral into a seemingly endless cycle of outstanding bills. 
 
For many people, all it takes is a large, unexpected cost – perhaps an emergency home repair, or a vehicle breakdown or accident. When it is not possible to meet that cost from existing funds, it may be necessary to borrow money, incurring more debt. This cycle of increased borrowing that leads to increased debt can easily trap people, because it makes it very difficult to build savings. This means that when the next unexpected cost happens, more borrowing is necessary. 
 
Breaking the cycle 
 
As with all difficult situations, the process of breaking the debt cycle must begin with accepting that there is a problem. This is more difficult than it sounds, for two reasons. Firstly, the stigma associated with personal debt can create a reluctance to acknowledge the issue. There is often an assumption that people with unmanageable personal debt are reckless and got into trouble by living beyond their means without any thought for the consequences. This type of victim-blaming can be very damaging to mental health, not least because it discourages people from seeking help. This stigma can therefore be a significant factor in keeping people trapped within a debt cycle. 
 
Secondly, there are all kinds of businesses that exist to profit from people being trapped in a debt cycle. Payday loan operators, some debt management companies, and even gambling services benefit from keeping people in financial difficulty. Payday loans, for example, provide a very short-term solution, but incur costs while simply delaying the problem. Some debt management companies charge a high percentage of the single monthly payment they help you to arrange, which extends the life of your debt by a significant margin. Gambling services prey on the vulnerable by offering the possibility of a big, debt-clearing win. 
 
Once you have recognised your debt cycle and the trap it represents, there are some clear and straightforward steps that can help you break that cycle and achieve a financially stable life. 
 
Understand your financial situation 
 
When you are overwhelmed with debt, your financial situation can be very confusing. Everybody has different outgoings on different dates and, the more debt that is accumulated, the more unmanageable that schedule can seem. This situation happens easily because it is a gradual process, occurring over an extended period of time. In order to take control of a financial situation that has spiralled out of control in this way, it is essential to get the full picture. Take some time to go through your monthly bank statements. Identify the points at which your income is deposited and compare this to each of your outgoings. This process will provide a clearer understanding of the situation, and where changes can be made. It may be possible to adjust payment dates as a first step, for example, to ensure that bills are paid while funds are still available. 
 
Create a new budget that includes a savings plan 
 
Having gained a clearer understanding of your financial situation, it is important to create a new budget. This should take into account all of the essential outgoings and bill payments while also including funds for savings. Even if that is only a small monthly amount, it is important to build the habit of prioritising saving. This is because an unchecked debt cycle prevents you from saving, while a lack of savings keeps you in the debt cycle. 
 
Get advice from reputable professionals 
 
While there are many kinds of businesses that prey on people in debt, it is still important to seek the advice of reputable professionals. Every personal debt situation is different. The basic, first steps of understanding your financial situation and creating a budget that includes a savings plan will help to put you on a path to breaking the debt cycle, but professional guidance can provide an efficient exit from the trap. It is essential to complete thorough due diligence when looking for debt advice, however, with the absolute minimum being to look for licensed practitioners who are able to provide positive testimonials from past clients. 
 
The Smith & Barnes solution 
 
The team at Smith & Barnes Insolvency are highly experienced professionals, skilled in advice and guidance for those in problematic personal debt situations. Providing a full package of assessment and solution at a low cost, fixed fee rate, Smith & Barnes will work to understand your specific needs and tailor a process to deliver the outcome you prefer. The priority is to break that debt cycle in a way that alleviates stress and anxiety, and leaves you in a stronger, sustainable financial position. As fully licensed practitioners, this can involve implementing and administering a Debt Management Plan, including acting as point of contact for your creditors. Contact Smith & Barnes today to find out how you can break the debt cycle and achieve a more stable financial future. 
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