Create a payment strategy

We hate saying it—and we hate doing it even more—but getting out of debt is about discipline. It doesn’t work without a plan. It could. But it never does. So, before you do anything else, you have to get organized. Don’t worry, getting organized is just another way to procrastinate, and who doesn’t like a bit of procrastination now and then?

Figure out how much you owe

How much debt do you have? If your answer is an exact number, then feel free to move on to the next step. An approximation? That’s alright, that’s what most people have. If you don’t know, then you might be in debt denial, and the time has come to see whether your debt is as bad as you fear.

The first step of getting out of debt is coming to terms with how much you owe. If you are anything like the average American, then your debt is likely to be spread across several credit cards and some form of an installment loan. Check up on each one and write down your balance, interest rate, and minimum monthly payment. Add all the balances up and take a good look at this number. Internalize it. This is your debt and it’s not going anywhere.

Set up a payment plan

The right way to attack your debts is to line them up and knock them out one by one. Keep paying minimum payments on all your debts except one, and attack that one with everything you’ve got until it’s gone. The strategic question, however, is which one do you pick first:

  • The rational, mathematical answer is that you start with debt that has the highest interest rate. Killing it first lowers the overall interest rate. That means your debt is not growing as fast and the total amount of interest you end up paying is now smaller. Less interest, less debt, less time it takes to pay off the rest.
  • The emotional, human answer is to start with the smallest balance and get yourself a quick win. The sense of achievement propels you forward and helps you to get in the habit of making payments. While this way might be longer and more expensive, statistics say that those who start with the smallest balance are more successful paying off the rest of their debt.

Ultimately, the method is up to you. Look at your track record and be honest about how much willpower you have. Remember that selecting the most efficient strategy is not as important as selecting the strategy you are most likely to follow through.

Explore additional ways to reduce debt

Before attacking your debt head-on, take a look at some of the alternative ways to reduce your debt. That is, other than paying it.

Find a favorable balance transfer option

People with good credit scores might have access to balance transfer credit cards. That’s when you transfer some or all of your credit card balances to a new card at a competitor bank. As a “thank you” for giving them your business, the bank offers an introductory period of favorable conditions, like no balance transfer fee  or a 0% APR for up to 18 months. That’s a great deal, considering that your credit cards are likely to be your highest interest debts. Use this introductory period to pay off as much credit card debt as possible and you might save quite a bit in interest fees.

Apply for a debt consolidation loan

Debt consolidation is when you take out a loan to pay off your credit cards and various smaller loans. You are effectively moving all of your debt into a single location and turning it into an installment loan. Apart from convenience, installment loans tend to have significantly lower interest rates than those of credit cards, so there is a good chance you’ll end up paying less in total.

Broadly speaking, there are two types of consolidation loans: unsecured and secured. An unsecured loan is any old personal loan available to people with good credit scores. If you can’t get an unsecured personal loan, then the other option is a secured (equity) loan, where some of your property (house/car) is used as a collateral. The risk of using collateral is quite obvious—you lose your property in case of default.

Another risk of consolidation in general is that, once you free up your credit cards, you might be tempted to charge them up again, digging yourself further into debt. So, while there is a considerable upside, you should really think twice about how likely you are to make all the payments on time and to keep yourself from abusing your credit cards.

Negotiate better conditions for an existing loan

Your bank will be happy to learn that you are taking an aggressive course of action towards your debt. Feel free to call them and ask whether they could throw something your way to help you along, preferably a lower interest rate. If you are a long-term, loyal client in good standing, then it won’t hurt to highlight your loyalty at least once. If they are still hesitant, mention that a competitor bank is offering you a good balance transfer option, but you would really like to stay on as a long-term client. That should do it.

Remember, banks do not like credit card debt. The interest rates are so high not because they want to profit off it, but because they want to discourage you from carrying a balance in the first place. The system is on your side and the bank should be happy to trade an interest rate for a paid balance.

Enroll in a hardship program

While you are focused on one of your debts, it makes sense to press pause on some of the others. One way to do that is to apply for a hardship program at your bank. Programs vary across banks, but they generally offer some form of debt relief in exchange for your commitment to a strict payment plan. To qualify, you’d have to prove that you are, in fact, experiencing hardship.

Call your bank and tell them you are struggling to pay your debt. Ask specifically whether they offer a “hardship program,” in those exact words. Banks do not advertise those programs and it is not clear who qualifies, but they will probably ask for some additional information, like your debt-to-income ratio, to see whether the program is right for you. Should you be approved, you might get your minimum payments, interest rate, and fees lowered or even suspended for a certain period of time. In return, you’ll have to commit to a fixed monthly payment towards your balance, and the bank might even freeze your card so no further charges are made.

(Do not) consider debt settlement

Commonly done through a specialized agency, debt settlement is an extreme option that wreaks havoc on your credit history. What you do is you stop making any payments on the accounts you want settled and send those payments to a settlement agency instead; they put it in a separate account. After about a year of non-payment, your creditor becomes really worried about your debt. That’s when the settlement agency reaches out to the creditor and haggles, basically, to settle your debt with the money they have accumulated from the diverted payments. The idea is that by then, the creditor is so worried about not getting anything at all that they will accept “at least something” and write off the rest.

Downsides of this option are almost too many to list. Your credit score will be damaged several times over. All those diverted payments will be marked as late on your credit report. The account will be marked as settled and will stay on your report for 7 years. That’s if it gets settled. About 4 out of 5 accounts never do, and then you are stuck with not only your debt, but all those late fees you’ve accumulated during this time.

Additionally, secured loans, student loans, taxes owed, child support, and alimony are not eligible for settlement. And if your account does get settled, you are rarely looking to save more than 30%, a fare share of which is going to be eaten up by various agency service fees. And, as if that wasn’t enough, the amount written off is taxable as income. In short, it’s hard to think of a case when settlement is a good option, but, if you are considering settlement, make sure to research all the aspects before going forward.

File for Chapter 13 bankruptcy

Chapter 13 is a softer type of bankruptcy, where you are put on a forced payment plan for 3 to 5 years and at the end of this plan, your leftover debt is forgiven. Don’t expect that remaining amount to be very high—the payment plan is quite harsh. For the duration of the plan, you will lead an extremely lean lifestyle and end up paying most, if not all, of your debt.

The main advantage of Chapter 13 is that it allows you to reschedule your secured loans and protects your property against default. This option is primarily for those who don’t qualify or do not want to apply for Chapter 7 bankruptcy, but are dangerously close to defaulting on their secured loans and want to save their property.

File for Chapter 7 bankruptcy

Chapter 7 is what most people refer to when they say “bankruptcy.” It liquidates all of your non-exempt assets to pay off as much debt as possible and the rest is forgiven (although not all types of debt qualify). What are those exempt assets you are left with? It varies by state and could be as little as $5,000 worth of property or as generous as a house, a car, your pension, and various other assets. You may read elsewhere that in most Chapter 7 cases, no property gets liquidated, but don’t get your hopes up. This is only because most people who actually qualify for Chapter 7 don’t have much to liquidate, and what they do have is worth too little to bother.

To qualify for Chapter 7, you have to pass the “means test,” which goes through your income, assets, and expenses and determines whether you are able to get out of debt in any way other than bankruptcy. Also, you can’t apply if you declared bankruptcy in the last 8 years.

Keep in mind that bankruptcy is not a “get out of debt free” card you whip out every time you are in trouble.

You shouldn’t be amassing debt in the hopes of declaring bankruptcy once it gets critical. If you have enough income, you’ll not qualify and, if you do qualify, you may be stripped of whatever assets your state deems “excessive.” And with a bankruptcy on your credit report, your credit score is ruined for the next 10 years, raising your insurance rates and limiting your ability to get credit, rent an apartment, and even get employed.

Explore additional ways to earn and save money

Now to the unpleasant part. It’s time to trade your assets for some extra cash. Let’s go item by item and discuss some of the ways to squeeze money out of even the toughest spots.

Trade in or sell big ticket items

The bigger the payments you make and the earlier you make them, the less you’ll end up paying in interest fees. And the best way to fund those big payments is to check whether there is some extra cash sitting in your property.

  • First place to look is a car, which could be traded in for a cheaper model and provide some extra funds almost immediately. If you have two or more cars in your household, then you might even consider cutting down to one car, until you are back on your feet.
  • Another option, a tough one, is your home. Whether you own or rent, you might consider moving to a cheaper neighborhood, trading convenience and status for some extra cash. It’s basically like earning money by taking longer rides to work.

Sell everything you don’t absolutely need

That includes clothes, sports gear, household appliances, electronics, furniture, games and toys.

  • The first step is to go through your stuff and sell everything you haven’t used or worn in the last couple months. And no excuse:, behavioral scientists are yet to find someone who has finally taken up a hobby a year after buying a full set of supplies.
  • The second step, and by now it should be easier, is to sell something you do use, but can actually do without. Like a fancy dress you wear on occasion, a camera, a fitness bracelet, a bike, and even your vacuum.

Selling stuff online is not much of a skill, but it does take some getting used to and requires a certain type of personality to do it well. If you don’t feel like you would get the most for your stuff, then we can almost guarantee that there is a friend or a relative who would be excited to help you out.

Downgrade your subscription services

There is a good chance your cable, cell phone, and internet packages are excessive or, at the very least, not optimized for your actual use. Your cable package is probably the best place to start. If we were you, we’d cancel the cable altogether and sell the TV. But we sense you might not be ready for radical shifts in household entertainment. Well, the least you could do is cut down to the cheapest package you can live with.

Whatever you end up saving might not look like much, but even, say, $20 a month would pay almost $2K of credit card debt over the next 5 years.

Stop investing

Whatever the rate of return on your investments, be it a savings account, pension fund, or the stock market, it’s very unlikely to be higher than the interest rate on your debt. So, by choosing investment over debt, you end up with a net loss interest-wise, and so pausing your investment is a good idea. However, if the interest rate on your investment is in fact higher than the interest rate on your debt, then by all means, keep calm and carry on.

Make more money

Well, duh! Who wouldn’t that apply to? But seriously, this is just to remind you that a second or third job is often an option. So is asking for a raise at work—you never know. Or, at the very least, you could freelance or pick up a hobby that pays.

Use a budgeting tool

Whether an app, a spreadsheet, or an envelope system, monitoring your spending will help you track down and eliminate unnecessary expenses. Split your budget into categories, like rent, gas, food, recreation, and so forth, and whatever is left goes towards your debt. It would help to have clear rules about what goes into which category. For example, gas station coffee is entertainment, not gas, same as ice cream is not food.

The less wiggle room you leave yourself, the better.

Place safeguards against failure

Let’s be honest, paying debt is a joyless endeavor. There is barely any positive feedback, which means you’ll be running on the fumes of your willpower and nothing else. Let’s think ahead and bring some reinforcements for those inevitable low moments.

Try a credit counseling agency

Consumer credit counseling agencies are non-profit organizations that help people navigate their debt. The range of services includes budget counseling, personal finance classes, terms of debt negotiation, strategy development, and so forth. Everything they offer you can do on your own, but the value added is in taking some load off your shoulders and keeping you accountable. Might not sound like much, but then again, staying on track is the main challenge of getting out of debt, and an agency is a viable solution. Keep in mind, however, that you’ll have to pay a registration fee and a monthly fee of about $30 per each of your credit accounts.

Consider destroying your credit cards

Having easy access to more credit is going to put continuous pressure on your willpower. And although your willpower may be strong enough, why chance it? By destroying your credit cards, you can remove the temptation altogether. And yes, you’d also give up the benefits gained through credit card use, but for people struggling with debt it may be well worth it. And you don’t need them—both debit cards and cash are as widely accepted as credit cards, so it’s unlikely to create any additional inconvenience.

Allow yourself to vent

Throwing all of your resources into debt repayment is going to make you miserable. You’ll be going back and forth between wanting things and restraining yourself, thinking “maybe just this once” and then restraining yourself again. The pressure is going to build and build and build until it breaks through and you go on a spending spree or worse, abandoning your strategy altogether. That’s why it’s important to leave yourself a vent and factor some fun into your strategy.

Pick an item, be it a drink out with friends, a movie night, or a dessert at that one place you like, and add it to your monthly budget. Let’s call it a controlled explosion.

Celebrate your wins

Each time you hit a meaningful milestone, like paying off one of your cards, celebrate! Preferably not in a way that will throw you further into debt. More like a bottle of wine that’s a bit above the usual price range or inviting friends over for a home-cooked meal or even taking an afternoon off and taking a worry-free walk around the park. Celebration gives you a sense of achievement and keeps you motivated to carry on.


Join a support group

Remember how we said getting out of debt is similar to fighting an addiction? Well, apparently, we aren’t the only ones thinking that. While not that widespread, support groups for debt management do exist and could be of real help. After all, your new lifestyle is going to be riddled with temptation and tough choices, and it is comforting to know that other people are going through the exact same thing every day. More importantly, it’s an additional way to keep you accountable. You can search for a group in your area or join one of the online communities to share your story, lend your support, and learn from others on the same journey.

Involve your family and friends

Debt is not something openly discussed, and it often so happens that your family and friends are not fully aware of the financial struggle you are going through. Once you start working on your debt, however, they will be questioning a shift in lifestyle or, in the case of your family, will be directly affected by it. Each point of tension between your new lifestyle and your social group will tempt you to snap back. Let your family and friends in on your battle with debt and, hopefully, their support will help you to stay on track.

The bottom line

The formula for getting out of debt is straightforward: create a strategy, trim and negotiate your debt where possible, strip your life of everything extra, and find something to keep you from relapsing. That last part is especially important. Once you’ve dealt with the strategy and kick-off, you are left with months or even years of monotonous grinding. That’s the true challenge of debt, and finding a way to stay sane and resolute is crucial for your success. Good luck!