Getting Out of Debt

Assess Your Current Debt Situation

The first step to getting out of debt is to fully understand the details of what you currently owe. Grab a pen and paper and make a list of all your debts, including:

• Credit cards - List out each card, the balance, interest rate, minimum payment, credit limit, etc.
• Personal loans - Include who the loan is through, original loan amount, current balance, interest rate, monthly payment, etc.
• Auto loans - Note the lender, loan balance, interest rate, monthly payment, and months left on the loan.
• Mortgage - Include the loan amount, lender, interest rate, monthly payment, etc.
• Student loans - List each loan out separately with the balance, interest rate, monthly minimum, lender, loan type, etc.
• Medical debt - Specify the hospital/provider, original amount owed, current balance, interest charges if applicable.
• Any other debts - Make sure to include any bills in collections, payday loans, debts to family and friends, back taxes owed, etc.

Once you have gathered all the details, add up the total amount you currently owe across all debts. Also total the minimum monthly payments. This will give you an idea of how much of your income is going just to keep up with minimums.

Make note of any really high interest rate debts versus lower interest debts. Generally, you'll want to focus on paying down the high interest debts first while making minimum payments on the lower rate debts. This "debt avalanche" approach helps you reduce the total interest paid over time.

Knowing the full picture of what you owe, the interest rates, and total monthly payments is key to strategizing how to efficiently repay your debts.

Reduce Your Interest Rates

One of the quickest ways to pay off debt faster is to reduce the amount of interest you are paying. High interest rates can really add up, so finding ways to lower them can help you get out of debt quicker.

Contact Your Creditors

Call up each of your creditors and explain your situation. Many may be willing to reduce your interest rates, especially if you have been a long term customer with good standing. Ask about any hardship assistance programs they offer as well. Don't be afraid to negotiate - the worst they can say is no. Even a 1-2% decrease in your rate can make a big difference over time.

Consider Balance Transfer Offers

For credit card debts, look for low or 0% APR balance transfer offers from other cards. This allows you to move your balances over and avoid interest for 12-18 months typically. Just be sure to pay off the full amount before the intro period ends to avoid deferred interest. Balance transfers work best if you have good credit.

Explore Consolidation Loans

Another option is taking out a debt consolidation loan or personal loan at a lower interest rate to pay off your high-rate debts. This works best for unsecured debts like credit cards. The benefit is you replace multiple payments with just one fixed monthly payment at a lower rate. Be sure to shop around as rates can vary widely.

The key with any of these tactics is to continue making at least the same total monthly payments as before, so more goes to pay down the principal balances. Lower rates help you get out of debt faster.

Cut Spending Wherever Possible

The quickest way to free up more money to pay off debt is to cut back on spending. Look closely at your budget and identify areas where you may be overspending on discretionary purchases. These are wants, not needs, and trimming them can help you find hundreds of dollars each month to put toward debt.

Review monthly budget and trim discretionary spending

Analyze your budget line-by-line and look for any unnecessary expenditures you can eliminate. For example, reduce dining out, entertainment, hobbies, subscriptions, memberships, shopping trips, and impulse purchases. Avoid activities and habits that tempt you to spend. Being more mindful about discretionary purchases could save you $200+ each month.

Downsize housing, vehicles, or other major expenses

Housing, transportation, and insurance tend to be people's biggest monthly costs. Could you downsize your home, apartment, or car for something less expensive? Even a couple hundred dollars in savings here can make an impact. Review all recurring major bills and shop around for better rates. Changing insurance companies or negotiating bills can yield savings.

Look for ways to save on essentials like groceries and utilities

Get strategic with essential spending categories like groceries, gas, and utilities. Clip coupons, buy generic brands, shop sales cycles, and visit multiple stores to get the best deals. Share streaming service logins with family to cut costs. Turn off lights, adjust the thermostat, and unplug devices to conserve energy. Every dollar saved from necessities can be redirected to pay off debt faster.

Increase Your Income

Boosting your income is one of the most effective ways to pay off debt faster. Here are some strategies to earn more money that you can put towards debt:

Ask for a Raise or Promotion at Work

If you've been excelling at your job for awhile, consider asking your boss for a raise. Do some research on average salaries for your role and put together a list of your accomplishments and contributions. Schedule a meeting to make your case for why you deserve higher pay. Aim high but be reasonable - even a small bump of 3-5% can add up over time.

You could also explore getting promoted to a higher position with more responsibility and pay. Take on new projects and skills to make yourself indispensable. When promotion opportunities arise, demonstrate your interest and pitch yourself as ready for the next level.

Get a Side Gig or Freelance Work

Pick up part-time work or freelance gigs to earn extra income on top of your regular job. Take on babysitting, dog walking, tutoring, delivery driving, or whatever fits your schedule and skills. Sign up for TaskRabbit or check gig economy apps like Uber to monetize your free time.

You can also leverage skills like writing, design, programming, consulting, etc. into freelance work. Build out your portfolio and create profiles on Upwork, Fiverr, Freelancer to attract clients. Set hourly rates and stick to them. The extra money from side work really adds up.

Have a Yard Sale or Sell Unneeded Items

Go through your home and look for anything you can sell for quick cash - old electronics, furniture, clothes, books, toys, etc. Have a yard sale or post items on Facebook Marketplace and Craigslist. Take high value items to pawn shops or consignment stores. Declutter your space and make money to pay down debt.

Make Extra Payments

After you've met your minimum monthly debt payments, take any extra funds available and apply them towards your highest interest debt. This "debt avalanche" approach is considered one of the fastest and most effective ways to pay off debt as it reduces the total interest you pay over time.

Some strategies for making extra payments:

• Immediately use any windfalls of cash such as tax refunds, bonuses, gift money, inheritance, etc. to make lump sum payments on your debt. Don't stash extra money in savings until high interest debts are gone!
• If you get paid biweekly, there will be 2 months a year where you get a "third paycheck". Use these to make an extra debt payment.
• Cut your expenses to free up more money and apply this directly to debt each month. Downsize housing, reduce transportation costs, pause retirement contributions beyond any company match, find cheaper insurance, cancel unused subscriptions and memberships, lower utilities, pause activities for kids. Every dollar saved can go towards debts.
• Pick up a side gig or find ways to earn extra income that is 100% allocated towards debt payments. Uber driving, freelancing, tutoring, dog walking and other flexible jobs can generate hundreds a month you can use to crush debt faster.
• Sell any unused items around your home on Craigslist, eBay or Facebook. Have a garage sale. Returning bottles and cans for deposits can also add up over time. Use all of this to make extra debt payments.

The higher the intensity of payments using these strategies, the faster you can escape the burden of debt and continue toward other financial goals. Remain intensely focused on directing all available resources each month until you've wiped your debt out for good!

Avoid New Debt

Getting out of debt requires changing your habits around borrowing money. If you continue to rack up new debt, it will undermine your efforts to pay off what you already owe. Here are some tips to avoid taking on new debt while paying off the old:

• Use cash or debit cards: Using credit cards makes it easy to overspend without realizing it. Switch to cash or debit cards for as many purchases as possible. When you pay with physical money, you feel the impact of purchases more.
• Cut up credit cards: If you know you won't be able to resist charging on a credit card, cut it up or freeze it in a block of ice. Reduce your access and temptation to charge more.
• Build an emergency fund: Having cash savings for unexpected expenses keeps you from reaching for credit when something comes up. Try to save $500-1000 or more in a dedicated emergency account.
• Just say no to loans: It can be awkward, but say no if friends or family ask to borrow money. Don't take out loans or financing for any purchases either. Each new debt will distract you from the get-out-of-debt mission.

Staying out of new debt is essential for making progress on existing balances. Live frugally and avoid financing anything until you're completely debt-free. The short-term sacrifices will pay off tremendously in the long run.

Consider Debt Settlement

If you have unsecured debts like credit cards that you are severely behind on, debt settlement may be an option. With debt settlement, you stop making payments and instead try to negotiate a lower lump-sum payment to settle the debt.

There are two main ways to pursue debt settlement:

Negotiate Directly with Creditors

You can contact creditors directly to negotiate a settlement. Explain your financial hardship and offer a lump-sum payment that is less than the full balance owed. Be prepared to start with an offer of 40-60% of what you owe. The creditor may counter before you reach an agreed upon settlement amount.

Get any settlement details in writing from the creditor before sending your payment. The letter should state that your lump-sum payment settles the debt in full. Keep records of all communications.

Work with a Debt Settlement Company

Debt settlement companies negotiate with creditors on your behalf. They often claim to have better success getting settlements compared to individuals doing it alone.

Research companies thoroughly. Reputable ones are transparent about their fees and services. Fees are typically a percentage of the enrolled debt amount.

Debt settlement programs can last 2-4 years. The company sets aside monthly payments from you in a dedicated account until there is enough to make settlement offers. You stop paying creditors directly.

Make sure all settlement agreements are in writing from creditors before the debt relief company pays them from your account. Legitimate settlements should relieve you of further collection efforts.

Debt settlement can hurt your credit and result in taxable income from debt forgiveness. Consider all options carefully for your situation before committing to this path.

Explore Debt Management Plans

A debt management plan (DMP) can be a good option if you need help managing high-interest credit card bills. DMPs are set up through nonprofit credit counseling agencies. Here's how they work:

• You make one monthly payment to the credit counseling agency. This payment covers all your debts enrolled in the DMP.
• The agency distributes your payment to each of your creditors per your DMP agreement.
• Creditors may agree to lower your interest rates and waive certain fees when you're on a DMP. This can make your debts more affordable and easier to pay off.
• You could repay your debts in full in 3-5 years through a DMP. This is often much quicker than trying to tackle it alone.
• Credit counselors can advise you on budgeting and money management as part of the DMP. This can help you avoid falling back into debt.
• Joining a DMP could negatively impact your credit score in the short term but will help in the long run by getting you out of debt.

The key benefit of a DMP is consolidating multiple debts into one payment and having an agency negotiate with your creditors. Make sure to choose an accredited nonprofit agency and clearly understand all fees before enrolling in a DMP. This option may help you escape debt more quickly.

Look Into Bankruptcy as a Last Resort

Bankruptcy should only be considered if your financial situation is truly dire with no realistic path out of overwhelming debts. The two most common bankruptcy options for consumers are Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy eliminates most unsecured debts like credit cards, personal loans, medical bills, and utility bills. Any assets not exempt under state law can be liquidated to pay creditors. The bankruptcy stays on your credit report for 10 years.

You can only file Chapter 7 bankruptcy if you pass the "means test" showing your income is under the state median. High income filers have to go through the more complex Chapter 13 bankruptcy.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy allows you to keep property like a house or car while being put on a 3-5 year repayment plan overseen by the bankruptcy court. Your future income pays off creditors according to the payment plan.

At the end of the repayment plan, any remaining unsecured debts are discharged. As with Chapter 7, the bankruptcy stays on your credit report for 10 years.

Chapter 13 can stop foreclosures and wage garnishments while debts are reorganized and paid down over time. You must have regular income to qualify for Chapter 13 bankruptcy.

Consult a Bankruptcy Attorney

Before considering bankruptcy, meet with a qualified bankruptcy attorney in your state to discuss your specific situation. They can provide legal advice on the best bankruptcy chapter and next steps to take if you decide to file.

While bankruptcy can provide much-needed relief, it comes with significant long-term consequences for your credit and finances. Weigh all options carefully first. Bankruptcy should only be a last resort when you have no other way out.

Create a Debt Freedom Plan

The key to successfully getting out of debt is having a solid plan that keeps you focused and motivated. Once you've assessed your debts, reduced interest rates, cut spending, and looked at ways to earn more money, it's time to pull it all together into an actionable plan.

Start by listing out all your debts and their details:

• Credit Card A - $5,000 balance at 15% interest
• Credit Card B - $8,000 balance at 20% interest
• Personal Loan - $12,000 balance at 10% interest over 5 years
• Auto Loan - $15,000 balance at 5% interest over 4 years

Next, document your monthly net income after taxes - let's say that is $2,500 per month in this example.

Then, create a detailed budget that accounts for essential expenses like:

• Housing - $800
• Utilities - $150
• Transportation - $120
• Food - $400
• Minimum Debt Payments - $500
• Emergency Fund - $100

That leaves $430 per month that can be applied to accelerate debt payoff. Focus first on paying off Credit Card B since it has the highest interest rate. Pay the minimums on all other debts, and put any extra towards Credit Card B.

Projecting this out with an avalanche repayment strategy, you could pay off Credit Card B in 10 months. Then move to Credit Card A which would take another 8 months. The personal loan would take about 18 more months, and the auto loan 12 months after that.

In total, it should be possible to pay off the $40,000 in debt in around 3 years by sticking to this plan. The key is cutting expenses, increasing income when possible, and paying as much as you can towards the highest interest rate debt first. We hope you stay motivated by tracking your progress and reminded yourself of how great it will feel to be debt-free!