Sometimes, debt can get so overwhelming that you don’t even know where to start. How can you pay it off? You need a clear plan for dealing with your debt – what needs to get paid first, how you’re going to budget for it, and whether you have other options for dealing with each account. Here’s what should go into that plan:
1. Figure Out How Much You Can Pay Every Month
Start with basic budgeting – what you’re making (and what money you have access to) minus what you’re spending. That gives you what you have to spend every month if you don’t change anything. Now, consider what you can do to make that number bigger.
When you’re in need of money, there are only two ways to get it: bring in more cash flow or reduce expenses. The more money you can funnel toward payments, the faster you’ll be out of debt. You may be able to take on a couple of extra shifts, for example, or do extra work on the side. You can go through your home and hold a garage sale to pick up some extra cash (and clear out your house as a bonus!) or decide to go without certain things for a while so you can pay off more debt. Even a few extra bucks a month can make a difference when you’re working to get out of debt.
Note: When you’re deciding what you can spend, don’t include any retirement accounts. Those are protected from collections and bankruptcy, so that money is always safe from your debts.
2. Figure Out What You Owe
Now you know what you can pay and it’s time to figure out what you owe. Gather up all the bills and statements and put together a list of your debts. You’ll need to know the amount, the status (current, delinquent, default, in collections), and the monthly due dates. You may find that after your budgeting work, you can make full payments each month. If not, you’ll still need to have all of that information so you can create a schedule and keep track of each debt.
It can be helpful to make a file specifically for your debts with all the documentation you have for each one – statements, collection notices, and other bits of information. It can also help if you put the payment due dates in your phone with reminders so you don’t ever forget.
3. See If You Can Shrink Your Payments
Now that you have a comprehensive list of your debts, a good place to start is trying to make your payments smaller. One of the ways to do that is by borrowing. It seems strange to suggest borrowing as a way out of debt, but it can be useful in some situations. For example, you can roll over credit card debt to an account with a lower interest rate, saving you a lot of money. You can also refinance your home to lower those payments. And in some cases, you may be able to settle with a creditor, paying a smaller amount of cash up front in exchange for forgiveness of the full debt. It may be worth pulling money out of a savings account in order to wipe out a debt completely that way.
A little financial maneuvering can save you a lot of money – why pay more than you have to?
3. Prioritize Your Payments
If you can’t make every payment every month, you’ll need prioritize certain debts. If you have a car payment, for example, you may want to give that first priority so you don’t risk repossession. The same goes for house payments and rent. Credit card and medical debt, on the other hand, may fall lower on the list. They can sue you for collection if your account goes into default, but you can also wipe those debts out in bankruptcy if need be. So you may decide to pay those unsecured debts only if there’s something left over from your car, rent, or house payment.
4. Secured Debts First
You don’t have much choice when it comes to your secured expenses – you have to pay them or face losing your car or home. But what if you’ve done all of your budgeting and find that you just can’t keep up with payments?
First, you should contact your lender and let them know that you’re having a hard time making payments. It seems counterintuitive to admit that to a lender, but it can be really helpful – especially if you do it before you fall behind. They want you to keep paying every month (and they don’t want to go through the hassle and expense of trying to collect in other ways) so they’ll often be willing to work with you. Explain your financial situation (and bring documentation) and ask about ways to make payments easier. They may be able to lower your interest rate or, for temporary financial troubles, defer payments for a month or two.
If that doesn’t work, you may have to look at other options. That may mean selling your home or car and getting a less expensive alternative. It may mean moving into a cheaper apartment. If you’re already behind on payments, you may be able to do a short sale to get away from your mortgage debt. Your lender will be able to give you a number of options.
5. Then Unsecured Debts
If you have money left over after paying your secured debts each month, then the remainder goes to your unsecured debts – usually credit card and medical debt. Credit card debt should probably take priority because of the high interest rates. It’s tempting to make just the minimum payment, but the interest rates will pull you deeper and deeper into debt. Pay as much as possible every month to really bring down that balance.
Even if you don’t have much left over, making a small payment can help you stay out of collections while you deal with other debts.
6. Student Loan Debts
If you’re struggling to make ends meet, student loans can seem like a serious burden. But it’s very possible that you can use a repayment program with a very low (or even 0) monthly payment. There are a variety of options for income-based repayment – just don’t let your account fall into delinquency. Your account generally has to be current in order to switch to a new repayment plan.
You Always Have Options
Paying back a mountain of debt is never easy. It may mean going without certain luxuries or working too many hours. Having a clear plan for what to pay and how to pay it can at least ease that burden a bit. But even the best plans can get derailed, or the debts may just be unmanageable. If that’s the case you may consider filing a bankruptcy. Contact a local bankruptcy attorney to talk about your debts and learn more about bankruptcy and whether it’s right for you.