How to Pay Off Debt

How to pay off debt
BY Tammi Huang
Jun 28, 2022
Key Takeaways:
  • The best strategy to pay off debt depends on your recourses and how much debt you have.
  • Strategies include debt acceleration, debt consolidation, debt management and debt settlement.
  • Of those strategies, only debt settlement reduces your debt payoff.

If you’re in debt and trying to determine the best way to pay it off, you have several different options. In addition to a couple do-it-yourself strategies, your other choices include a debt consolidation loan, credit counseling, debt settlement, a cash-out refinance, or bankruptcy.

If you’re wondering “which one is right for me?”, the answer depends on how much you owe, what type of debt you have, and a few other factors. Keep reading to find out which option is best for your particular situation.

Strategies to Pay Off Debt

Since everybody has a unique situation, the debt solution that may work for you may be the wrong choice for someone else. Below is a brief overview of six of the most common solutions for paying off debt. Which ones seem like they might be the right options for your type of debt?

How It WorksDebt RangeDebt TypeProsCons
BankruptcyUndergo a legal process where your assets are examined and used to pay off debts or a debt repayment plan is designed.>50% of your incomeCredit card, personal loan, medical, utility, business, taxesRelief from collection activity Discharges or wipes out your debts Short process (3 – 6 months for Chapter 7)May put your assets at risk (Chapter 7) Long-term, negative impact to your credit score Strict qualification requirements (Chapter 7)
Cash-Out RefinanceRefinance your mortgage and borrow money to pay off debt simultaneously.>$10,000Credit card, personal loan, medical, business, private student loan, auto loanLower interest rate Lower monthly payments More time to pay off debtHome ownership is required Required fees Increases risk of foreclosure
Credit CounselingWork with a credit counselor to create a debt management plan (DMP) that reduces your credit card interest rates.<$10,000Credit card, personal loan, medical, business, taxes, student loan, mortgageMinimal credit score impact One, convenient monthly payment Relief from collection activityLong-term commitment Credit card accounts will need to close No reduction in principal debt
Debt Consolidation LoanRoll multiple debts into a single, lower payment with a loan.>$5,000Credit card, personal loan, medical, business, taxes, student loanCould get you out of high interest debt sooner Fixed payment schedule Easier to track paymentsUpfront costs may be involved May not provide a long-term solution if you have a spending problem Good credit required
Debt Settlement (What We Do!)Hire a company to negotiate with your creditors and reduce what you owe.>$10,000Credit card, personal loan, medical, business, department storeMay significantly reduce your total debt Affordable program payments Faster than minimum paymentsCollection activity may escalate Negative impact on your credit Fees are involved
Do-It-YourselfFocus on paying off one debt at a time, creating a budget that allows you to have extra cash each month to do so.<$5,000Credit card, personal loan, medical, business, taxes, student loan, mortgage, auto loanNo required investments No impact on your credit Complete control of the processRequires motivation and persistence No interest rate or principal reductions Takes time and energy to plan and execute

Choosing the Right Solution for You

Once you’ve narrowed down your choices, take time to dig deeper into the details of each debt solution. Doing your research will help ensure that when you finally decide on how you’re going to pay off your debt, you’ll have a better chance of success.


Although Chapter 7 and Chapter 13 bankruptcy are two different debt solutions, they are both legal options that may help you if are over your head in debt. If you have little to no disposable income (money left over after you’ve paid your taxes and necessary expenses), Chapter 7 may be an option. Chapter 7 bankruptcy involves selling most of your possessions so that your existing debts can be repaid.

Chapter 7 bankruptcy could discharge your debt so that you no longer have to pay it back and provide you with relief from debt collectors. However, understand that Chapter 7 bankruptcy may cause you to lose some assets such as your home or car.

In the event you have sufficient income and do not qualify for Chapter 7, you may have to file for Chapter 13 bankruptcy. Chapter 13 bankruptcy may allow you to make a single, consolidated payment toward your debts through repayment plan that typically lasts three to five years. While Chapter 13 may put a stop to collection activity and the foreclosure process, it could strain your budget.

It’s important to note that certain types of debts cannot be discharged in bankruptcy. These include student loans, child support and alimony, and tax debts. Bankruptcy can, however, assist you with credit card debt, medical bills, and other unsecured debts.

Since bankruptcy may cause you to lose your valuable assets, will remain on your credit report for 7 to 10 years, and make it difficult for you to borrow money and get approved for a loan, you should consider all possible alternatives before filing for it.

If you’re putting basic necessities such as groceries and gas onto credit cards, paying one credit card with another, are facing interest rates that have increased due to missed payments, and/or wages that are going to be garnished, bankruptcy may be the way to go.

Cash-Out Refinance

If you own your home, a cash-out refinance lets you replace your existing mortgage with a new one with a higher balance. You use the new, higher mortgage to you pay off your previous lower balance mortgage and keep the cash difference between these two loans. Then you use that cash to pay off your debts. Essentially, a cash-out refinance is a strategy that could allow you to cash out on some of your home equity at a relatively low interest rate and apply it toward your high-interest debt. Sometimes, you could even lock in a lower interest rate than your original mortgage loan.

Keep in mind that if you go this route, you’ll need to pay the various costs associated with refinancing. These include home appraisal expenses, closing costs, and other fees, which may add up to thousands of dollars. So before pursuing ta cash-out refinance, do the math and make sure the fees still make it worth it.

If you have high-interest credit card debt, debts from personal loans, student loan, or auto loans, and are confident you’ll be able to make your payments, this may be a good option. However, if you are not a homeowner and/or are worried you won’t be able to make your payments on time and do not want to risk foreclosure, a cash-out refinance probably isn’t right for you.

Credit Counseling

Credit counseling agencies are typically non-profit organizations that help consumers learn about budgeting and money management, among other things. If you’re in heavy debt, a credit counseling agency may offer a Debt Management Plan (DMP) to help you get out of debt and save on interest.

When you enroll in a Debt Management Plan, the credit counseling agency works with your creditors to lower the interest rates on your debts, making it easier for you to pay down your balance. Then, you make monthly payments to the credit counseling agency and they send the money to your creditors on your behalf.  

If you opt for a DMP, you may have to pay an enrollment fee plus monthly fees to the credit counseling agency. However, since credit counseling may protect you from becoming delinquent on your payments, these fees may be worthwhile.

If you’re able to afford more than your monthly payments, have less than $10,000 of debt, and/or one credit card, credit counseling may be a good option. However, if you can’t afford to pay more than your monthly minimums, you may want to consider an alternative solution for paying off your debt.

Debt Consolidation Loans

The purpose of debt consolidation loans is to combine multiple debts into a single, manageable, low interest payment. This solution involves obtaining a fixed-rate loan and then using the money from the loan to pay off your debts and then pay back the loan over a set period of time. Debt consolidation loans could streamline the debt payoff process, giving you a clearer path to when you could pay off your debt.

Since a debt consolidation loan allows you to make one single payment to take care of all your debts, it could reduce your risk of missing or being late on payments, which could help improve your credit score. It could help you pay off unsecured debts like credit card debt and medical debt as well as secured debts like student loan debt.

While debt consolidation loans offer many advantages, they also come with a few drawbacks. The most notable drawback is the fact that it won’t prevent you from continuing bad money habits. Instead, it enables you to continue using credit cards that may have been the cause of your debt in the first place. Another drawback is that you typically need to have good credit to qualify for a debt consolidation loan at an interest rate low enough to make it worthwhile.

If you have a large amount of debt (at least $10,000), are looking for a way to organize your debt, want to simplify the process of paying it off, and feel confident you can avoid using the credit cards you are trying to pay off, a debt consolidation loan might be right for you.

Debt Settlement (What we do)

Also known as debt resolution or debt negotiation, debt settlement is a method of negotiating with your creditors to settle for less than the outstanding balance of your debt. You can do this on your own, or use professional debt settlement services like Freedom Debt Relief to help settle your debt for you.

During a debt settlement program, you can expect to make a monthly deposit into a special account. As your account balance increases, the debt settlement company will contact your creditors to negotiate lower settlements. When your debt is settled, you’ll be required to pay a fee that typically ranges from 15%-25% of the enrolled debt.

While debt settlement could give you the chance to save big and settle your debt in as little as 24 to 48 months, it could negatively impact your credit score and put you at great risk of receiving phone calls and letters from debt collectors. Also, there are no guarantees that a debt settlement company will be able to negotiate your debt for significantly less, since some creditors simply do not negotiate with debt settlement companies as a rule.

If you are unable to make your minimum payments and have thought about credit counseling or bankruptcy, debt settlement may be a wise choice for you. Since debt settlement can only help you with unsecured debts, you should look elsewhere if you’re concerned about your mortgage or auto loans.


Not every debt solution requires you to hire a company or professional. You may be able to address your debt problems on your own through a do-it-yourself (DIY) debt solution. A DIY debt solution involves using online and offline tools and resources to understand how much you need to pay each month to save on interest and pay off your debt by a certain date.

An example of one of these methods is through debt snowball or a debt avalanche, which could help you know when you could be debt free if you use this method. With the debt snowball method, you pay off your smallest debts first, then work on paying off the larger ones. With a debt avalanche, you pay off your debts with the highest interest first, no matter what their balance is. There are pros and cons to both of these methods, but they work best if you choose one and stick with it.

If you are self-motivated, serious about becoming debt-free, and willing to put time and effort into a DIY debt solution, this may be the right strategy for you. You could use it to pay off virtually any type of debt you owe and take control of your financial health. In addition, a DIY debt solution doesn’t require any upfront costs and shouldn’t harm your credit score.

But if you are already having a difficult time paying just the minimum balances on your accounts and/or are overwhelmed with the entire debt payoff process, you may want to pursue a different option.

Get Help Finding the Right Solution for You

As you can see, there are a variety of debt solutions that could put you on the path to the debt-free life you’ve always wanted. These include DIY, debt consolidation loans, credit counseling, debt settlements, home refinances, and bankruptcy.

Frequently Asked Questions

What’s the fastest way to pay off debt?

If you want to know how to pay off debt fast, you might ask a debt consolidation lender, a credit counselor, a debt consultant, or a bankruptcy attorney. Here are the timeframes for each option:

  • Debt consolidation does not pay off your debt. But by replacing high-interest debt with low-interest debt, you may clear your balances faster. Pick the debt consolidation loan with the lowest interest rate, then choose the shortest term you can afford. 

  • Debt management from a credit counseling company typically takes four years. Note that debt management plans do not reduce what you owe. Debt management can fail when participants can’t afford the monthly payment over several years.

  • Debt settlement: According to the American Fair Credit Council, “Clients generally see initial account settlements within 4-6 months.” It typically takes two to four years to graduate from a debt settlement program. 

  • Chapter 13 bankruptcies take three to five years to complete, but most filers have to make payments for five years. 

  • You may be able to get debt-free with a Chapter 7 bankruptcy in four-to-six months after filing.

How to pay off debt in collections?

There are different strategies for dealing with debt in collections, and the right one depends on a few factors:

  • Do you owe the money?

  • How old is the debt?

  • How owns the debt? The original creditor, a debt buyer, or a debt collector?

Assuming that you do owe the money and want to pay the collection, you may be able to settle the account for less than you owe. Or you may offer to pay more if the collector agrees to delete the collection from your credit history. 

How to pay off debt in collections with a debt buyer? Note that debt buyers may have purchased your account for pennies on the dollar and be willing to settle for much less than your balance. Collection departments from your bank or credit card issuer may be much less likely to negotiate. 

Understand that debt buyers often pay pennies on the dollar and are often willing to settle for a small percentage of the original amount due. Another factor is the age of the account and how soon the debt will become uncollectible – every state has a statute of limitations for debt, and once that period has passed, creditors cannot continue to pursue you for payment. 

The toughest collectors to deal with are likely to be original creditors. If your bank’s collection department is calling, the chance of them agreeing to accept much less than the full amount is lower. 

What is the statute of limitations on debt?

Every state has laws limiting collection activity by creditors and debt collectors. Depending on the state and type of debt, statutes of limitation range from two to ten years. Once the statute of limitation of your debt is passed, creditors and debt collectors cannot sue you or continue contacting you.

However, any activity on the account, such as acknowledging that you owe the debt, promising to pay it, or making a partial payment, can restart the clock on the statute. So it’s important that you do not do those things until you are sure that you owe the money and that you want to repay it. If your debt is very old, you might choose to ignore it and let it die.