Complete Get Out of Debt Guide
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If you are here reading this article, you probably have too much debt to handle. And if you are in a financial hole because of debt, the best solution is to change your habits and look for a way out, one day at a time. Remember, you are not alone. According to an Experian report, the average debt of an American as of 2021 is $96,371, while mortgages take up the highest part of the total debt.
If you have been trying to make the bills vanish by just throwing them unopened, you need to first own up to your mistakes. Get all the bills, and loan statements, and create a budget. Think of everything you can do to handle your finances. If you need help, consider one of the various debt programs available today. In this guide, we explain all the ways you can get out of debt.
In this article
Ways to Get out of Debt
Debt settlement
Debt settlement is a process where you negotiate with the other party and agree to pay the debt back in full at a discount or with interest. However, to be successful in the process, the other party should agree to the debt settlement offer. You can seek the help of a debt settlement company to work with you and help negotiate the settlement amount with the creditors on your behalf. This helps with debt reduction.
As soon as the debt settlement process starts, you will have to stop making debt payments, hurting your credit score. The company will contact the creditors and inform them of your efforts to settle the debt. Some negotiations also help you enjoy a lower interest rate so that most of the payment goes toward the principal balance, not the interest charges.
Suitable for: Debt settlement is suitable for individuals who have fallen behind on the bills and are looking for ways to come up with money and manage the monthly payments. Creditors will only be willing to work with debtors in serious financial distress.
Pros and cons
Pros
- Avoid penalties: By settling the debts, you can save on fees and interest charges which will help avoid costly penalties.
- Improve credit score: By working with a reputable agency, you can improve your credit rating in the long run and increase your chances of getting loans in the future.
Cons
- Does not clear all debt: Through debt settlement, you will be unable to avoid paying back all the debt you owe. Hence, you will still have to continue to make payments to the creditors.
- Fees: Debt settlement companies charge a high fee for their services and it could end up costing you hundreds of dollars or more.
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Debt refinancing
You can refinance the loan and lock in the low rates if you have high-interest debt. It is possible to refinance almost all types of debts, including credit cards, student loans, car loans, and mortgages. A reduction of even half a percent can make a lot of difference to your payment. Keeping the debt payment low will help you get out of debt sooner and reduce the monthly burden on your wallet to a certain extent.
Suitable for: Individuals with a source of income can make the loan payment on time.
Pros and cons
Pros
- Frees up cash flow: When you refinance debt to a lower-interest loan, you can free up a certain cash flow. With more cash flow available, you can repay the other loans or put them in the emergency fund.
Cons
- Impact on credit score: Debt refinancing impacts the credit score as the lender will make a hard inquiry on the credit report. Since you take out a new loan, it will impact your score.
- Prepayment penalties: Lenders often impose a prepayment penalty on loan, which could mitigate the savings you have earned through refinancing.
Debt consolidation loan
Another alternative is a debt consolidation loan. It will allow you to combine all the high-interest loans into one monthly payment at a lower interest rate. This means you have more freedom and a low monthly installment which can help manage the debt. You must remember that the loan will not change the total debt burden; instead, you will make a single payment for the entire debt amount but at a lower interest rate. There is no guarantee that you will be able to pay off the entire debt, but you will have to make one monthly payment instead of paying multiple creditors every month.
Suitable for: Debt consolidation is not suitable for everyone. But it is a good option for individuals trying to control their financial situation and have less than perfect credit.
Pros and cons
Pros
- Reduces the interest: Based on how high the interest rates are on your debts, a debt consolidation loan will help reduce the interest rate and save your money.
Cons
- High APRs: While debt consolidation can help repay debt, the APRs on the loans can be high. You should keep this in mind, especially if you have bad credit.
- Fees can be expensive: If you do not do the math correctly, you could end up paying a lot more for the origination fees, and there are extra fees for this service which will be added when you take a debt consolidation loan.
Debt avalanche
The debt avalanche method is a common method for eliminating debt. It focuses on paying down the debt with the highest interest rate first. There are different steps you need to follow to get out of debt. You keep paying the minimum monthly payments on all the debts and identify the debts with the highest interest rate. Now use the extra money to pay off the debt with the highest interest and once it has been paid, look for the next highest interest rate. This is a smart way of handling multiple loans with varying interest rates, but it also requires you to make the minimum payments on all the loans.
Suitable for: The debt avalanche method is ideal for those who have consistent income and can manage to make the minimum payments each month. However, if you find it hard to make the minimum payment, this method might not work for you.
Pros and cons
Pros
- Puts an end to the compound interest: With a debt avalanche, you save the most on interest as it stops the compound interest growth.
Cons
- Needs constant extra cash: If you want to use the debt avalanche method, you need to have constant extra cash to pay for the first debt. It does not consider the possibilities of an emergency or an increased expense.
Debt snowball method
The debt snowball method is another alternative to pay off your debt. It works in a slightly different manner as compared to the debt avalanche method. Here, you handle the smallest debt first while sticking to the monthly minimum payments on all the other debts. You need to use the extra money to pay off the smallest debt first, and once that has been paid, you look for the next smallest debt balance.
Suitable for: The method is ideal for those with an emergency fund and can utilize it to repay debt. It also requires regular payment of the minimum amount each month; hence, budgeting and debt management are crucial.
Pros and cons
Pros
- Easy to start and stick to: The debt snowball method is easy to start with, and you do not need to calculate the interest rates when figuring out what to pay first. It will keep you inspired and motivated.
Cons
- Pay more towards interest fees: This method can be expensive in the long term since you will pay more. Due to these fees, it could take longer to become debt-free.
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Debt relief
A debt relief program will offer credit counseling services to help you improve your finance skills and manage your finances well. The programs are offered by non-profit organizations, courts, private companies, and government agencies. You will need to keep in mind that their services will not help eliminate all the debt but will only reduce a small part of the monthly payment.
You will work with a credit counseling agency to help build a debt management plan and teach you the right ways to reduce your liabilities by following the right money habits. Many programs are free, while others charge a fee for their service. They will also help negotiate a lower interest rate with the creditors so that a large part of the monthly payment goes toward the principal amount and less toward the interest.
Suitable for: A debt relief program is only suitable for disciplined individuals who can manage to make the repayment on time.
Pros and cons
Pros
- Helps get the finances in place: The biggest advantage of a debt relief program is that you get to work with a credit counseling agency that will get your finances in place. However, you will have to work as per the debt management plan.
Cons
- Fees: Working with a debt relief company is not cheap. They have minimum debt criteria and charge a fee for this service. The fee can be high and could wipe away your savings.
Balance transfer
If you have a high credit card debt, you can consider a balance transfer to handle it efficiently. With a balance transfer credit card, you can transfer the balances of high-interest debt on the card to a new card with a lower interest rate. This will lead to a lower monthly payment and a smaller burden on your wallet. Many financial institutions offer introductory 0% APR on their cards for a specific time period. Instead of worrying about the debt on multiple credit cards, you only have to focus on paying the debt on a single card. A balance transfer credit card will help save a lot of money on interest payments,, but they have a higher fee.
Suitable for: Ideal for individuals who have a significant credit card balance and can manage to make the regular, monthly payment before the end of the introductory period on the balance transfer credit card.
Pros and cons
Pros
- Consolidation of debt: You can transfer balances from different cards into one card if the transferred balance remains below the total credit limit. This way, you will have to make a single payment each month.
- Save money on interest: If you can find a card with a 0% APR offer, you can save a significant amount on interest.
Cons
- Time-based offer: With every 0% APR card, you will have to stick to the timeline to make the payment. Once the period ends, a regular APR will apply to the outstanding balance.
- High fees: When considering a balance transfer, you need to consider the applicable fees. Most will have a fee of 3% to 5%.
Debt management
You can manage debt effectively and responsibly with a debt management plan. It helps get the finances in order and will bring down the amount you owe. You can look at all the different ways to manage debts, and a debt management company can assist you. The company works with customers to help them manage debt and can save a lot of money by negotiating with creditors for you. They will charge a fee for their service and will work with you to build a repayment plan that helps manage the debts.
Many such companies offer a free initial consultation where you get to discuss your situation and learn about their services. However, most companies specialize in a certain type of debt, and you need to ensure that you choose the right company for your financial situation. Not all debts are suitable for debt management programs, including medical bills, taxes, and student loans. In specific cases, you will not be able to use their service for debt repayment.
Suitable for: Individuals who find it difficult to handle debt and need assistance to prepare a debt repayment plan.
Pros and cons
Pros
- Simplifies payments: With a debt management plan, you can simplify payments with only one monthly payment.
- Saves time and money: If you get a debt management plan that includes interest rate reductions, you will save your money, and it can be a time saver if you can repay the debt quickly.
Cons
- Late fees: The biggest disadvantage of debt management is the late fees you attract if you miss or fall on the payments.
- Limited to specific debts: The plan is usually used for unsecured debts like personal loans or credit cards and cannot be used for other secured debts.
Bankruptcy
If nothing else works, bankruptcy is the last resort. It is ideal for those who have many assets to protect. You can either file for a Chapter 7 or Chapter 13 bankruptcy based on your financial situation. Once you file for bankruptcy, all the collection activities will stop, and you will be able to make a fresh start. In most cases, it will protect the assets, but you will still have to pay the debts after closing the case.
A bankruptcy will remain on the credit report for 7 to 10 years and could impact your ability to borrow money. But it also gives you a fresh start and will allow you to take control of the finances and rebuild the credit from scratch.
Suitable for: The last resort when you are drowning in debt.
Pros and cons
Pros
- Keep your home safe: With Chapter 13 bankruptcy, you can keep the home safe since it stops the foreclosure procedure and ends the collection activities.
- Debts are discharged: Filing for bankruptcy will help discharge unsecured debts and give you a fresh start with your finances.
Cons
- Expensive: It is not cheap to file for bankruptcy. The fees cost upward of $300, and this excludes the lawyer’s charges.
- Impacts credit score: A bankruptcy will stay on your credit report anywhere from 7 to 10 years, depending on the type of bankruptcy you file for.
Home equity loan or HELOC
Apart from the strategies mentioned above, there are other options to tackle debt. If you have a home, you can take out a home equity loan or a home equity line of credit (HELOC) and try to tap into the equity potential of your home. The loan lets you borrow money and begin repayment immediately. With a HELOC, you have a certain period of time to draw the funds and then begin repaying once the loan term ends. It is usually 10 years. That said, you only repay the amount you use.
Suitable for: Only borrow against your home equity if you are confident you will be able to repay on time. If you fail to do so, you could lose your house.
Pros and cons
Pros
- Limits interest amount: You will have to pay interest only on the amount you draw, not the total equity. Since the interest rate is fixed, you can plan your finances well.
Cons
- Chances of overspending: If you are not disciplined, you could overspend and tap out the equity in your home. This could lead to a higher principal and interest payment in the repayment period.
FAQs
Is it possible to get out of debt and save as well?
Yes, you can get yourself out of debt and save too. Start by handling the high-interest debt and continue to pay the minimum balance on the loans and credit cards. Now, save a certain percentage each month and put it aside in an emergency fund. Stay consistent and do not touch the emergency fund unless there is an emergency.
How can I get out of student debt?
You can consider the right strategy to dig yourself out of a student loan. Consider debt consolidation in the case of multiple loans and roll the loans into one at a lower interest rate. Look for loan forgiveness programs and reach out to lenders to work out a payment plan at a lower amount.
Can bankruptcy clear all the debts?
The type of bankruptcy and the type of debt you owe will decide whether all the debts will be cleared. If you file for Chapter 7 bankruptcy, it will clear almost all of the debts except for some student loans. And if you file for Chapter 13 bankruptcy, you will have to repay a part of the debt over a period from three years to five years. When you have completed the payment plan, the balance is forgiven.
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- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
The bottom line
Drowning in debt can become stressful for your health, and it is not the right financial stage to be in. The struggles and worry over how to pay the bills can impact your future. Subsequently, it could become even more difficult to save and budget. If you are in such a situation, consider all the options and weigh their pros and cons before you proceed. The right debt repayment plan will help with debt payoff and make a fresh start.
Debt can wreak havoc in your life, and it is important to look for a way out and build a secure financial future. Besides that, you must also learn to handle your spending habits. Avoid overspending and prepare a monthly budget. Going debt-free is only the beginning; if you do not want to drown in debt in the short term, look for the right ways to handle your finances.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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