How to Get Out of Debt

You started using debt as a means to build your credit and the plan backfired. Simply put, you want to get out of debt and don’t know how.

Even worse, you have more debt payments that you can comfortably afford and your balances have skyrocketed. And that credit score you worked so hard to build is not so useful after all because you can barely make ends meet.

Debt is relatively easy to get into to but can seem practically impossible to get out of. As the balances rise and interest accrue on those credit cards, the burden becomes more and more strenuous. And if you couple that with all the other installment debt you have on your plate, you can find yourself struggling to pay back what you owe.

The good news is debt is not the end of the world. And by taking the proper steps, you can start knocking down those balances and ultimately get out of debt once and for all.

How to Demolish Debt

Before you get started with the process, you have to ask yourself if you’re willing to do what it takes to get out of debt. While it sounds good to tell yourself that there’s a light at the end of the debt tunnel, your actions are ultimately what will determine your fate.

Simply put, demolishing debt isn’t necessarily a walk in the park and there will be times when you want to give up but you have to be committed to the cause and remember why you started.

And in case you’re wondering if it’s even worthwhile to get out of debt, think about your financial future. Every dollar wasted today will have serious implications for your finances later on down the line. So, if you reach retirement age and are still buried in debt, chances are you’ll have to scale back your lifestyle drastically to stay afloat.

You should also consider the impact a heavy debt load has on your retirement. If you continue to settle for making minimum payments and not getting aggressive with your installment debts, the amount you’ll be able to contribute to your nest egg could be substantially lower. And this prevents you from taking total advantage of the power of compounding interest.

With that being said, are you up for the challenge? If so, read on for a list of steps to take to get started:

Step 1: Take a snapshot of your debt

Do you know what you owe? Before you can get out of debt, you need to take a snapshot to see where you stand. You’ll want to grab a notebook or open a spreadsheet and note the following about each debt you owe:

• Creditor’s name and contact information
• Type of debt; revolving (credit card) or installment (loans)
• Current Balance
• Credit line (if applicable)
• Minimum payment
• Due date
• Interest rate
• Status (current or delinquent; if the latter applies, note the past due balance)

Step 2: Create a debt-payoff fund

The next step is to create a debt-payoff fund to start placing a dent in those balances. You’ll continue to make minimum payments on all your debts, but use the money from this fund to execute your debt-payoff strategy.

Wondering where the money will come from? Oftentimes, it’s as easy as taking a long and hard look at your budget and cutting out those variable expenses, or wants, to free up funds. You may also want to consider finding a side gig, taking on a part-time job, working overtime, or using your creative talents to bring in extra money. Financial windfalls are another great way to boost your debt-payoff fund.

Quick note: if you are delinquent on any of your debts, be sure to get caught up before you begin allocating extra funds on other accounts. Try reaching out to your creditor to determine if they have a financial hardship program to help you get back on track. Or look to your budget and make some serious sacrifices to make this happen.

Otherwise, you’ll continue to damage your credit rating and could be hit with a charge-off or repossession, which will severely impact your credit and could have harsh legal consequences for years to come.

Step 3: Select a debt-payoff strategy

It’s difficult to reach the finish line if you have no idea how you’ll get there. But now that you’ve figured out how much money you’ll have at your disposal every month to accelerate debt-repayment, it’s time to select a debt-payoff strategy and execute your plan.

Most consumers start with credit card debts since they are usually the most draining to their wallet. The two most common strategies for dealing with credit card debt are the:

• Debt snowball method: Make the minimum payment on all your outstanding debts, but allocate any extra funds to the credit card with the lowest balance.
• Debt avalanche method: Make the minimum payment on all your outstanding debts, but allocate any extra funds to the credit card with the highest balance or that’s costing you the most (in interest).

If you don’t have any credit cards but are looking to find relief from installment debt, the debt snowball, and debt avalanche can surely assist. But if you’re the situation is out of hand and you need more options or rapid relief, keep reading.

Explore Debt Relief Options

What do you do if you can’t afford debt payments and are considering bankruptcy? Is there any hope for your situation? Fortunately, there is, and the options may provide you with the relief you need in a jiffy without pounding away at debt payments for months on end.

Debt Consolidation

You can streamline the debt repayment process by rolling all of your smaller debts into a single loan. This may be a viable option to pay off debt faster if the new loan product has more favorable terms because you’ll pay substantially less in interest. Furthermore, your monthly payment may be lower, which means you’ll be able to pay over and above that amount to reach the finish line faster.

To consolidate your debt, it will be necessary to take out a debt consolidation or home equity loan. The next step is to pay off all your outstanding debts using the proceeds and make a single monthly payment to the new creditor until the balance is paid in full.

Another option is to open a balance transfer credit card. They are accompanied by a promotional period where APR is not assessed. To derive the greatest benefit, you’ll need to transfer all your outstanding balances to this card and pay it in full before the promotional period ends. But you must also refrain from using the cards you’ve paid off or your plan will backfire.

Debt Settlement

If you’re in dire financial straits and debt consolidation doesn’t seem like a good fit, you have the option to explore debt settlement. It may have serious implications for your credit, but you may be able to get out of the debt hole faster.

In essence, you’re communicating to the creditor that you’re willing to pay an amount (usually substantially less than you owe) in exchange for relief. This means that they can’t file a lawsuit against you later on the down the line. However, they can report the debt to the credit bureaus as settled, which negatively impacts your credit report.

When you begin working with a debt settlement company, you’ll more than likely be told to stop making monthly payments to demonstrate to creditors that you are unable to keep up with your debt obligations. But you will be making payments to a savings account that the debt settlement company will use when negotiations commence.

You should also know that debt settlement only works for unsecured debt products, like personal loans not backed by collateral (with the exception of student loans) and unsecured credit cards.

Consumer Credit Counseling

Unsure of which path is best for you when dealing with a large debt loan? Speak with a consumer credit counselor to help you navigate the murky waters and devise a plan that best suits your needs. They are employed by nonprofit agencies and offer their services free of charge, so you won’t have to spend even more of your hard earned money to find a solution. l

An Important Tip

Are there any debts on your credit report that are untimely, inaccurate, or questionable? You have the right to validate the debts by sending letters to the credit bureaus requesting that they are verified. This forces the creditor to respond with proof that the debt is accurate, update the details in your credit report, or delete the debt from your file. But if they don’t respond within the allotted 30-day window, the debt will be removed from your credit report and they may be legally unable to collect from you.

How to Deal with Debt Collectors

Until you break free from debt bondage, you may find that the debt collectors to be an extreme nuisance, particularly if you have quite a few past-due debts. But you have rights, and the debt collectors must adhere to the federal law or could face consequences.

Debt collectors are prohibited from:

• Contacting you before 8 am and after 9 pm
• Contacting you at work if you request that they stop because your employer doesn’t approve
• Harassing you during phone calls
• Reaching out to you once a Cease and Desist Letter has been issued. (Note that they can follow-up one additional time with their intended next course of action).

If you determine your rights have been violated by a debt collector, file a formal complaint with the Consumer Financial Protection Bureau, the Federal Trade Commission, or the attorney general’s office in your state.

The Bottom Line

Paying off your debt can be a marathon, not a sprint. But what matters most is that you’re making progress towards your goals. And by assessing your situation and doing a cost-benefit analysis of all your options, you’ll be in the best position to get out of debt once and for all.