Best Ways to Get Debt Relief

best ways to get debt relief
BY Richard Barrington
Mar 31, 2022
 - Updated 
Jun 6, 2024
Key Takeaways:
  • 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.

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: Step on the Gas and Knock Down Your Debt

Once you’ve allocated more money in your budget for paying off debt, it’s time to put the pedal to the metal. 

Knock out your most expensive debts first with a debt avalanche

Take down toughest opponent first with a debt avalanche. You’ll start by making a list of all your debts, along with their balances and interest rates. Rank them in order from the highest interest rate to the lowest. 

Make the minimum payments on your credit cards and other debts, except the one with the highest rate. Throw as much cash as you can toward that one until it’s cleared. Then, go back to your list and find the balance that now has the highest rate and laser-focus on that one. 

By eliminating high-interest debts first, you could ultimately save money on interest.

Celebrate small wins with a debt snowball

The snowball method is like the avalanche method, only instead of focusing on your most expensive debt, you focus on the smallest balance, regardless of the interest rate.

This strategy helps you get to your first paid-off account as soon as possible. Paying off a debt can be extremely rewarding. The great feeling could help you stay motivated to stick with your plan and keep working on the next debt. 

Increase your payments when you can (every little bit helps)

Your budget isn’t a set-it-and-forget it exercise. Keep an eye on it. When it comes to paying off debt, every little bit helps. If you can find even a few extra dollars each month, put it towards your debts. 

Slash your balances with lump-sum payments

When you get a windfall, resist the temptation to treat yourself to something big. Instead, splurge on your future self by taking your debt down a few notches. Do this when you get a bonus, a tax refund, an insurance payout, a lawsuit settlement, or any other one-time chunk of change. A lump-sum payment could reduce your balance, lower the total amount of interest you ultimately pay, and speed up your debt repayment journey.

Combine strategies for maximum impact

Debt payoff strategies work even better when you combine them. For instance, you could pay off your smallest debt for a quick win and then focus your attention on your most expensive debt. Any time you’re focused on using what you know to get ahead of your debt, you’re doing the right thing. 

Step 4: Consider a Debt Consolidation Loan to Lower Your Rate

If you can lower the interest rate that you’re paying on your debt, you could make more progress against the balance that you owe and clear your debts faster. A debt consolidation loan is one way to do that.

Debt consolidation means taking a new loan and using it to pay off multiple other debts. It could be a good move if you qualify for a new loan that has better terms than your existing debts.

Here are a few ways to consolidate:

  • Credit card balance transfers: These are short-term offers at low promotional interest rates. You use the balance transfer card to pay off existing cards. Typically, you then get 0% interest or a very low APR for 6-21 months. There’s usually a fee to transfer a balance, and you’ll want to have a plan to avoid running up new debt on the paid-off cards. 

  • Home equity loans: If you’re a homeowner and you have sufficient equity, you might qualify for a home equity loan to pay off your higher-interest debts. Home equity loans tend to have much lower interest rates than credit cards. There are usually fees to get a home equity loan

  • Cash-out refinance loan: This is a new mortgage that replaces your current mortgage. If you opt for cash out, that means the new loan is bigger than your current loan, and you get the difference in cash. You could use that cash to pay off your other debts.

  • Student loan refinancing: If you have federal student loans, you might be able to consolidate them into a single loan. The interest rate will be an average of your existing interest rates, so you might not lower the cost of your debt. Also, the new loan might extend the total number of years that you’re in repayment (but you don’t have to stick with the minimum payment). There is no fee to consolidate federal student loans. 

  • Personal loans: Personal loans tend to have lower interest rates than credit cards. There’s usually a fee to get a personal loan. 

No matter which strategy sounds good to you, check with multiple lenders to get a sense for what you qualify for. Stick with lenders who do a soft credit check before you’re ready to apply. A soft credit check won’t hurt your credit score. Once you submit a formal application, your score could drop by a few points.

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:

  • Payment reductions

  • 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.

How to Build a Safety Net and Avoid Debt

Life happens, and just about everyone takes on debt at some point. But you can be proactive about minimizing your need to borrow. Here are a few ideas to help you.

Build an emergency fund

Emergencies aren’t an if. They're a when. Everybody faces unexpected expenses now and then. First, save $1,000. Then build it up to enough money to live on for a month with no income. Then build it up to three months’ worth. The more you earn, the more you should have set aside, because higher incomes can be harder to replace.

Make saving automatic

Set up automatic transfers every payday into savings. When you get a raise, challenge yourself to put it all into savings while you continue to live on the lower amount.

Check in on your budget regularly

Budgets are fluid because financial needs change. Review your spending at least once a month and make adjustments as needed.

Understand needs vs wants

Challenge yourself to identify things that you’d like to have but could live without, especially while you’re paying down debt. For instance, you need a car, but you don’t need an expensive car. If you’ve got a car payment, consider selling your car and buying a cheaper one so you can dedicate that car payment money to your debt payoff plan.

Treat debt like a four-letter word

If spending freely was a problem for you in the past, consider closing down your credit card accounts, or at least freezing them so you have to take extra steps with every purchase. Debt is a tool that could help you reach big goals, like homeownership, but if yours has been a ball and chain dragging you down, it’ll feel much better to break free and avoid it altogether.

Debt relief by the numbers

We looked at a sample of data from Freedom Debt Relief of people seeking debt relief during June 2024. This data reveals the diversity of individuals seeking help and provides insights into some of their key characteristics.

Credit card balances by age group for those seeking debt relief

How do credit card balances vary across different age groups? In June 2024, people seeking debt relief showed the following trends in their open credit card tradelines and average credit card balances:

  • Ages 18-25: Average balance of $7,378 with a monthly payment of $209

  • Ages 26-35: Average balance of $10,797 with a monthly payment of $300

  • Ages 36-50: Average balance of $14,340 with a monthly payment of $405

  • Ages 51-65: Average balance of $14,364 with a monthly payment of $420

  • Ages 65+: Average balance of $14,837 with a monthly payment of $397

These figures show that credit card debt can affect anyone, regardless of age. Whether you're just starting out or nearing retirement, managing credit card debt can be challenging.

Manage Your Finances Better

Understanding your debt situation is crucial. It could be high credit use, many tradelines, or a low FICO score. The right debt relief can help you manage your money. Begin your journey to financial stability by taking the first step.

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