Best Ways to Get Debt Relief
- The best ways to get debt relief depend on how severe your problem is.
- Replacing bad habits with good ones can provide debt relief for life.
- You may need professional help to get rid of unaffordable debt.
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If you’re looking for the best ways to get debt relief, your finances are probably not what they should be. What should you do? If you find yourself in a hole, stop digging. Did you have a medical emergency or ugly divorce? Have you developed a habit of spending money you don’t have? Once you know why you’re in trouble, you can work to get yourself out.
Best Ways to Get Debt Relief: A 6 Step Plan
Do you want to get out of debt fast? You probably know that’s easier said than done. A problem that may have been building for years won’t be solved overnight.
You can make the whole thing easier by breaking the process into separate steps. Don’t be overwhelmed by trying to pay off debt all at once. Start with the first step, and then move on to the next one.
By taking a series of steps in the right direction, you’ll soon be on track to pay off debt and keep debt from becoming a problem in the future.
This article lays out a six-step plan toward a debt-free future. Many people don’t even need all six steps. So start with the first one, and see how far you have to go to get control of your debt.
If you’ve gotten into serious debt trouble, it may take all six steps to get out of it. That’s okay. This plan will walk you through it one step at a time so you can get your debt problem under control.
Step 1: Changes to Lifestyle
As noted in the introduction, the first step is to keep the hole you’re in from getting any deeper.
Take a look at why you’re so heavily in debt. Was it due to a one-time setback, or has borrowing money become a routine part of your lifestyle?
In either case, better spending habits can help you stop adding to the problem. If you’ve had a one-time setback, your everyday habits may not have been the cause of your debt, but you’re still going to need to make some changes to solve the problem.
Of course, if the problem is that borrowing money has become necessary to support your regular lifestyle, you need to change that lifestyle. Borrowing should mainly be used to pay for purchases with long-term benefits -- things like education, a house, or a car.
Otherwise, if the debt lasts longer than what you’re buying, don’t borrow to pay for it.
This doesn’t just mean loans. Most borrowing takes place without people thinking much about it every time they use a credit card.
According to financial information company Nilson Reports, 43.85 billion purchase transactions were put on credit cards in the United States during 2020. That means the average American adult used a credit card nearly 172 times in the space of a year.
Routine use of a credit card becomes a problem if you regularly carry a balance. Carrying credit card balances means you’ve turned a short-term purchase into long-term debt. That’s a habit you’ve got to stop.
Changing that behavior starts with a simple money management plan. You need a budget that you can support with your regular income without further borrowing.
Step 2: Budget for a Debt-Free Future
A budget that points you to a debt-free future has to do two things:
Get you from month to month without any new borrowing
Reallocate funds to pay down debt faster
To start, get in the habit of saving your receipts. Go through a month’s worth and separate the necessary purchases from those that were not.
List the dollar amount of the necessary purchases that are likely to occur repeatedly. Add to that list any bills you have to pay from month to month, including payments on existing debt. Total up the list, and this should be your budget for monthly expenses.
Now compare that amount to your regular take-home income. If your expenses exceed that number, you need to cut some costs. The goal is to get your cash flow to where there’s more money coming in than going out.
Once you get your budget down under your after-tax income, focus on the remaining amount. If you have debt, devote most of this extra towards paying it down.
Too often, people only pay down debt with what’s left after they’re done spending. That means there may not be anything available for debt reduction, and balances will creep up. Make paying off debt a budget priority, or it just won’t happen.
Step 3: Accelerate Debt Repayment
Once you’ve allocated more money in your budget for paying off your debt, it’s time to figure out how to do that as efficiently as possible.
One of the best ways to get debt relief is to attack your most expensive debt (the account with the highest interest rate) first. Professional debt counselors often call this the “avalanche method.” By getting rid of the debt with the highest interest rate first, you ultimately pay all of your debts off faster and spend less on interest.
Of course, you should stick with the payment schedule and continue to make the minimum payments on all other debts. That way, you avoid penalties and bad marks on your credit history.
To begin, list all your debts and rank them by interest rate. Direct as much as you can afford after paying your other bills toward the account with the highest rate. Once you clear that balance, attack the balance with the next-highest rate, and so on.
Note that even though minimum payments on your credit cards may be smaller than your other monthly debt payments, you should pay more towards credit card debt whenever possible.
Step 4: Look for Debt Consolidation Opportunities
One way to reduce interest costs even faster is to shift debt from higher- to lower-interest loans.
For example, balance transfer cards can help you move balances from high-interest credit cards to those with cheaper rates. Just take any balance transfer fees into account before making this move.
If you can qualify, transferring credit card debt to a personal loan or a cash-out refinance mortgage may save you even more. This scheme could sharply reduce your interest rate, but make sure you include loan origination fees in any decision about debt consolidation.
Also, be sure to compare different sources of credit. One Federal Reserve study found that interest rates differ among credit offers, and the best offer varies at different credit score levels. So make comparisons based on your credit status, not just on the advertised rate.
Step 5: Seek Debt Relief
Suppose you’ve done all this, and you still can’t make your debt payments. You’ve tightened your belt, made a budget, and prioritized your debts according to their interest rates. Still, there just isn’t enough money in your budget to cover all your payments.
If that’s the case, don’t ignore the problem because it will only get worse. Instead, you need to negotiate with your lenders to see if you can get some kind of debt relief.
Debt relief may include any or all of the following:
Lower interest rates
Waiver of fees and penalties
A reprieve from having to make payments
Reduction of the amount you owe
If you can't qualify for a debt consolidation loan and can't afford your current payments, consider a debt management plan (DMP). Credit counselors can help you by consolidating your unsecured debts into a plan with a single payment. They may be able to negotiate lower interest rates and payments from your creditors. Note that a debt management plan does not reduce the amount that you owe.
Getting a credit card company or other creditors to reduce your balance is called debt settlement. Debt settlement is a heavy-duty solution for serious debt problems. For one thing, this will probably be the hardest to negotiate with your creditors because they would be settling for less than you owe.
Also, debt settlement affects your credit report for seven years and may have tax consequences.
To work out a debt settlement, you typically stop making payments to your creditors and put this money in a debt settlement savings account. This strategy helps you come up with a lump sum to offer your creditors and shows them that you can’t afford your payments. You may be able to speed up the process if you can add to the settlement fund by borrowing from your 401(k) or another source.
As you go through this negotiation, it helps to know your rights. The federal Consumer Finance Protection Bureau maintains resources to help you understand what debt collectors are and are not allowed to do.
Step 6: Get Debt Relief Help
Working step by step, you may be able to come up with a budget and a debt relief plan on your own and negotiate successfully with your creditors.
However, if it gets too overwhelming, help is available.
Nonprofit credit counselors give fairly low-cost advice. They can help you establish a budget or enroll your unsecured accounts into a debt management plan (DMP). While DMPs won’t reduce what you owe, they replace several accounts with a single payment. Credit counselors may also get credit card companies to reduce your monthly payments, waive penalties and late fees, and possibly lower your interest rates.
Professional debt settlement companies take the added step of negotiating with creditors on your behalf. You’ll pay a fee only if your debt is successfully settled. Typically, debt settlement fees range from 15% to 25% of the amount enrolled into the program.
The idea here is that taking this step-by-step approach to debt relief helps you recognize how much you can do on your own and whether you need outside help to get the job done.