Most Americans are in debt. Not all debt is bad, but too much debt is a drain on your finances, and your emotional and psychological well-being. Worrying about debt is very stressful and a source of conflict in many relationships. You didn’t get into debt overnight, but how can you get out of debt quickly? Filing bankruptcy is the easiest and quickest option, but there are also some other ways to get out of debt.
Filing a Bankruptcy
A Chapter 7 bankruptcy filing is the quickest way to get rid of most debt. In Chapter 7, you are allowed to discharge most unsecured debt, such as credit cards and medical bills. You can also keep debts you may want to keep, like car loans and mortgages. The trade off with a Chapter 7 is that you may end up losing some assets if they are not exempt. It is a good idea to talk to an experienced bankruptcy attorney before filing a Chapter 7 so that you know if you qualify, what assets may be at risk, and to identify any other potential issues that may come up. If you don’t qualify for a Chapter 7, you will likely qualify for a Chapter 13 filing. In Chapter 13, you enter into a repayment plan with your creditors that will last three to five years. Chapter 13 is not necessarily a quick way to get out of debt, but it can be an effective way to handle your debt and it can give you quick relief from incessant phone calls and collection efforts. Again, you will want to discuss Chapter 13 with a knowledgeable bankruptcy attorney who can help assess your specific circumstances.
Make a Plan
If you don’t want to file a bankruptcy, the first step to getting control of your debt and your finances is to make a budget. Make a list of all of your monthly expenses and all of your monthly income. If your goal is to get out of debt, you want to maximize the money that you have to pay toward your debt by trimming expenses and maximizing income. Trim all unnecessary expenses; limit things like eating out and premium cable channels; clip coupons; drop expensive habits like smoking, drinking and expensive coffees; the internet is a great source for ideas to help limit expenses.
Next, maximize your income. The more income you have, the more money you have to pay down debt. Work overtime; sell things you don’t need; get a side job; get a roommate. Watch for “found money”, such as a bonus, tax refund, or inheritance, and use it only to pay down debt. Any additional income that you have means you can pay down your debt faster.
Then, decide on a plan to repay your debts. There are a couple of methods that are used. The first is the snowball method. List all of your debts smallest to largest (ignoring the interest rate). Pay the minimum payments on everything but the smallest debt. Pay as much as you can toward the smallest debt. When it is paid off, use all of what you were paying on the smallest debt to pay on the next smallest debt, and so on. You get the psychological reward of paying off something, and ultimately, you have larger amounts available to pay toward the larger debts.
Another method is called laddering. This method will save you the most money over time because you pay off higher interest debt first. You pay as much as you can toward the debt with the highest interest rate and maintain minimum payments on everything else. Again, when one debt is paid, you use those funds to pay toward the debt with the next highest interest rate.
With either the snowball method or the laddering method, contact your credit card companies and try to negotiate a lower interest rate. It is a common practice, and if you have a good history of paying on time, there is a good chance your interest rates can be lowered.
Sometimes debt consolidation can be a good option. You take out one personal loan and use it to pay off multiple debts to give you a more affordable monthly payment. You want to be careful with interest rates and repayment terms. The good thing about debt consolidation is that you get a fixed payment and fixed term, and at the end of the term it is paid off.
Whatever plan you choose, make sure that you are not getting new debt while you are paying off the old debt. You have to stop spending and borrowing.
Other Repayment Options
Sometimes you need professional help to get your debt under control. Credit Counseling Agencies can help you prepare a budget, make a plan and, will sometimes negotiate with your creditors. It can often be helpful just to have another set of impartial eyes to evaluate the situation. However, be cautious when choosing a credit counselor and make sure that you are dealing with a reputable organization. Look for the National Foundation of Credit Counselors or the Association of Independent Consumer Credit Counseling Agencies. Credit counseling plans can take a few years to complete, but at least you are making progress and getting rid of your debt.
There are also companies that specialize in debt management plans (DMP). In a DMP, you make one payment on your debts each month to the agency handling your plan. The agency negotiates with your creditors on a payment arrangement, and the agency pays your creditors. DMPs can have very high fees, potential tax consequences, and can be very detrimental to your credit. Make sure you fully research any agency you work with and understand clearly how the DMP works before signing up.