Guide to Getting Out of Debt

Guide to Getting Out of Debt

Beyond simply having your finances constrained, being in debt is also an enormous source of stress for many individuals. In fact, a recent survey showed that more than half of workers today and an alarming 64% of millennials are battling financial stresses. If you are living with debt, the best time to start getting out of it is now.

Paying off your debt may seem like an insurmountable task right now, but as with most things, developing and sticking to a carefully crafted plan can help you overcome almost any obstacle.

Getting Out of Debt

While a large percentage of the population may be in debt, not everyone knows exactly how to get out of it. Follow the steps below and you’ll be well on your way to being debt-free.

Steps to Getting Out of Debt

  1. List It All Out: This first step is crucial. In order to pull yourself out of debt, you need to know exactly how much you owe and where you owe it. Take the time to physically list out debts, balances, interest rates, and minimum payments either on a piece of paper or an Excel document. The more precise you are, the better.

Be sure to use the three free annual credit reports (TransUnion, Equifax, Experian) to make sure you don’t have any outstanding cards or bills that you may have forgotten about.

  1. Pay It Off Right: Once you’ve listed out all of your debts and determined your total debt, figure out which cards and debts need to be paid off first by looking for the highest interest rates. You may be tempted to pay off debts that hold the lowest balances, but doing so is simply taking funds away from balances that are costing you more in interest payments.

Be sure to keep paying minimum payments on your other debts so that they remain current.  You want to avoid late fees.

  1. Set Goals: This step often goes overlooked. Setting financial goals helps you to gauge your progress, identify difficulties and problems, and also serves as a mental reward that will keep you going. Goals such as paying off a card every two months, cutting your debt in half, or to simply stop using credit altogether, are all up to you. What’s important is that it’ll give you structure with achievable goals that you can celebrate as you conquer each one.
  1. Create a Budget: Budgeting is key to bringing yourself out of debt. Find as many ways as possible to save money: coupons, loyalty cards, weekly allowances, eating at home, etc. If you map out exactly how much money to spend and how much to put towards your debt, you’ll soon start to notice a steady decrease in your bills. You will also identify how much money you have left after paying bills, and determine the best way to utilize that money to achieve your goals instead of spending it without much thought.
  1. Sell the Toys: If you haven’t done so already, it’s time to sell all the expensive items in your home that you simply don’t need. It may be hard to part with your jet-skis and your fancy new car that you’re still paying down, but becoming debt free can take a significant lifestyle change. You may have to re-think your priorities — would you rather keep the car or drop the debt?
  1. Keep At It: Sticking to a budget and putting your hard-earned cash towards paying off your debt can be mentally and emotionally taxing. You’ll likely not be able to live the way you did before, and you certainly won’t be able to spend as freely.

But that doesn’t mean you can’t reward yourself every now and then. In fact, doing so is essential. Go out for dinner one evening, see a show, or order a pizza. Treating yourself (with moderation) can help you stick to your budget and ensure you don’t fall off the bandwagon and start spending again.

A Note on Debt Collectors

If your debts become past-due, they may be sent to a collection agency or debt collector. Many of these agencies specialize in pursuing overdue payments in exchange for a fee or a percentage of the total owed debt.

While dealing with a collection agency may be a necessary part of getting out of debt, it is important to know your rights and which debt collector practices are in fact illegal. This list from USA.gov will help you recognize when a collection agency is engaging in illegal tactics.

According to USA.gov, a debt collector may not:

  • Contact you at inconvenient times, for example, before 8 AM or after 9 PM, unless you agree to it.
  • Communicate with you at work if you tell the debt collector your employer disapproves.
  • Contact you after you send a letter to the collector telling them to stop, except to notify you if the creditor or collector plans to take a specific action.
  • Communicate with your friends, relatives, employer, or others except to find out where you live or work.
  • Harass you with repeated phone calls, profane language, or threats to harm you.
  • Make any false claim or statement that you will be arrested.
  • Threaten to have money deducted from your paycheck or to sue you, unless the collection agency or creditor intends to do so and it is legal.

If you would like to file a complaint about a debt collector, contact the agencies listed below for more information:

Tips & Tricks

  • Know Your Institutions: Many credit card companies and banks will have higher interest rates for a variety of things. Late payments, cash advances, overdrafts, and balance transfers all commonly come with either an increase in interest rates or a flat cash fee. Knowing the ins and outs of your specific bank or creditor can help you avoid letting these hidden fees pile up.
  • Transfer Balances: Balance transfers can result in fees for doing so, but they might also allow you to move debt from a high interest card over to a low interest one to save money overall. Be sure to read the fine print as a low APR might only last for a few months before it jumps up even higher than your last card, leaving you even worse off than before.
  • Emergency Fund: You may want to make it a priority to build up an emergency fund while you are paying off your debt. While it may be tricky to navigate just how much should go towards one rather than the other, doing so could prevent sinking even deeper into debt if an emergency occurs. Having cash on hand will keep you from borrowing from credit. Even starting with $1,000 in your savings account will help you in many emergencies, such as car repairs, unexpected doctor visits, trips for family emergencies, etc.
  • Windfall Money: Birthday check, tax refund, or lottery winnings coming your way? It’ll take some self-discipline, but be sure to put that money towards paying off your debt. Just because some extra cash in your wallet wasn’t expected doesn’t mean it shouldn’t be used to pay the bills. Stay strong and stick to the plan. The freedom of being debt free will make all the sacrifices worth it.
  • Extra Income: Whether it be asking for a raise at work, finding another job, or getting a second job (like Uber, Upwork, or a part time job), bringing in extra income each month can really help you to put a sizable dent in your debt.
  • Negotiate a Better Rate: It is possible to get your credit card company to lower your APR just by asking them. Customers with a strong payment history are likely to get better results but, if you are looking to negotiate your rate, the tips found online at The Simple Dollar may help you get better results.

Getting Professional Help

If, after changing your behaviors and following the steps above, you are still having trouble climbing out of debt, you may want to contact a professional credit counseling service.

These agencies will be able to take an in-depth look at your finances and spending habits to give you an objective and expert opinion on your options. Here are a few resources to help you find these services:

Accredited Credit Counseling Services

These services may also advise you to use debt consolidation, debt settlement, or perhaps even file for bankruptcy. Before choosing any of these options, however, it is crucial that you first speak with a professional. Improperly using debt consolidation, settlement, or bankruptcy can lead to even more problems down the line. An expert opinion will help you fully realize the risks involved.

Debt Consolidation

Debt consolidation is a way to refinance your current debts. Debt consolidation entails taking out one large loan to pay off your debts. As a result, instead of putting your money towards many small monthly payments, you’ll be paying off one single loan.

While it may sound appealing to combine all of your debts into one single payment, the truth is that debt consolidation generally should be viewed as a last resort. Many times, debt consolidators will offer low monthly payments, making it seem like you end up paying less. But these low payments are typically spread out over a longer period of time.

So, while you may be making lower monthly payments, you actually end up paying more because you are in debt even longer.

Debt Settlement

Debt settlement is a way of negotiating with creditors and, for many, is only used if payment through traditional means is determined to be unlikely. In exchange for forgiving the entire amount of a debt, the creditor agrees to accept only a portion of the overall amount in one lump sum.

Think of it as a way for creditors to cut their losses: instead of squeezing out small payments each month over multiple years, they can instead accept a large portion of the total debt all at once, allowing them to move on and put their company resources to use somewhere else.

Debt settlement may require you to set aside a certain amount of money into a separate savings account for 36 months before beginning the debt settlement proceedings. As such, making these necessary payments may be difficult for some and, as a result, might make debt settlement unrealistic.

What’s more, your creditors are under no obligation to accept the terms of the settlement, so engage in this practice at your own risk.

Filing for Bankruptcy

Bankruptcy is, for many, a last resort. While it can offer a fresh start in terms of debt and financial security, it also can have many drawbacks like a severely reduced credit score.

What’s more, bankruptcy does not eliminate all kinds of debt. Some debt, known as priority debts, will remain in place even after declaring bankruptcy. A few examples of these debts are income tax, alimony, death or personal injury claims from driving under the influence, and more.

It is crucial to know what’s at stake before filing bankruptcy. Be sure to use the professional counseling services listed above before deciding to file bankruptcy. Also, consider consulting an attorney for additional information and guidance.

Resources

To find more information on how to get out of debt, use the search terms “debt guide”, “debt relief”, and “personal debt” or utilize the resources below.

Federal Resources

Federally Accredited Credit Counseling

Where to File a Complaint Against a Debt Collector

DISCLAIMER: This guide is provided only for informational purposes and is not intended to be a substitute for legal or other professional advice. This guide does not contain nor is it intended to provide legal or other professional advice for any specific situation and readers should not take action or refrain from taking action, based only on the information provided in this guide. Goldberg & Osborne has attempted to provide accurate and current information in this guide, but cannot and does not guarantee that the information is accurate, complete, or up to date. This guide may contain links and/or search terms that will lead to external websites as a convenience to the reader, but Goldberg & Osborne is not responsible for the content or operation of any website other than its own website. The presence of a link or a search term does not imply and is not an endorsement by Goldberg & Osborne of the website provider or the information contained on any linked website or on any website contained in search results from a search term provided in the guide.