How To Get Out Of Debt

By Joe Star - Jul 23, 2009

It has happened to millions of us. Life is going good. You feel invincible. You allow your debt to grow beyond what you should. Then things take a turn for the worse and you realize you can no longer afford to pay your obligations. And now you feel there is no way out. I understand what you are feeling. I have been through it as well. Just know this - there are ways out. Life is not over. Money is not everything. Take a deep breath and resolve to find the right path back to financial independence. Here are 5 options to getting out of debt:

1) Debt Stacking. You may have also heard it called the Debt Snowball. This option is more suited for the individual/couple that is wanting to get out of debt but is not necessarily in dire straits. The concept is rather simple but requires discipline. It is a basic accounting principle. List all your debts on a piece of paper. Now order those debts from highest interest rate to lowest (an alternative is to order your debts from lowest balance to highest). Next to each account write the minimum payment required. Now determine how much more you can afford to pay towards your debts above the sum of the minimum payments. Now continue paying your debts but put the entire additional amount that you have budgeted to pay towards your debt towards the debt at the top of your list and pay just the minimum towards the rest. Continue to do so until you pay off the first debt. Now take the entire amount you had previously been paying towards that 1st debt and put that amount towards the second. Continue this process down the list until your debts are entirely paid off. It may sound simple, but the concept is extremely powerful. By using this option you will take years off the time it would take to pay off your debt and save you thousands in interest.

2) Debt Consolidation. This is an option where you take all of your debts and combine them into one loan with a lower interest rate. This option has it's advantages as well as disadvantages. The advantage is that doing this will typically not hurt your credit and if disciplined, allow you to pay off your debt sooner. The disadvantages are that 1) many of us are not discipline enough and often just go out and borrow more compounding the problem, and 2) often the consolidation loan is secured against your home. This means that you will most likely convert unsecured debt (ie credit cards, medical bills, etc) that is more easily discharged through bankruptcy or settled through debt settlement into secured debt that puts your personal home at risk if you default.

3) Debt Management Plan. Debt Management typically involves a third-party company (usually non-profit) negotiating a lower interest rate and/or longer payment term on your debt. This helps you to lower your monthly payment. The company is paid by your creditors directly for their services. The advantages to this option is that you are able to pay off your debt without excessive creditor harassment or without the risk of getting sued for non-payment of debt. The disadvantage is that it will typically take longer to pay your debts off, hurt your credit score, if you miss a payment the creditors often have the right to revert back to the old terms of the agreement and the company helping you often is beholden to their boss - your creditors.

4) Debt Settlement. Debt Settlement involves you (or a third-party company you hire) settling your debt for an amount 40-60% less than what you owe. With Debt Settlement, you stop paying your creditors and begin setting aside funds in a settlement account you own to settle with creditors. As the account grows, creditors will be settled one by one. The advantages to debt settlement are that you typically pay off your debt in a shorter amount of time and pay less than your initial principal. You also maintain control of your settlement since funds are placed into a settlement account owned by you rather than sending them to your creditors. The disadvantages are that it will hurt your credit (since creditors typically will not settle until you are at least 6 months late), that you will have to deal with creditors' collection practices, and, if you hire a company to help you, you will have to pay that company anywhere from 10-20% of your debt amount.

5) Bankruptcy, Chapter 7 or 13. I will not get too in depth here since this option is legally complicated. Basically a chapter 7 involves the court liquidating your assets to pay your creditors. Chapter 7 allows for you to exempt some personal property and so depending on your situation this may be the best option for you or may be the worst option.  A Chapter 13 involves the court ordering your creditors to accept a court generated payment plan. 

It is important to seek legal advice prior to choosing any of these options and especially prior to contemplating bankruptcy. Being deep in Debt can feel like a scary thing with no end in sight. However, there are options and your not alone. Seek help and put it in perspective. Good luck!