Paying Down Debt

Paying down debt can be a daunting task, and there are no”one-size-fits-all”solutions. Having the right information is an essential first step as you work towards debt repayment.

Learn about these related topics, or keep scrolling to read about how to pay off debt.

Paying Off Debt 101

Certain debts are unavoidable, and some are even beneficial to the consumer. Many types of debt are needed to improve your life, provide basic necessities, or even create a larger income. These include:

• Student loans for higher education
• Buying a home to build equity and for housing
• Credit card debt for necessary purchases and emergencies
• Car loans for purchasing a vehicle

Some of these debts may not be difficult to keep current. However, unmanageable consumer debt can quickly take on a life of its own if you struggle to make payments. Carrying a balance on credit cards will generally cost you added interest each month, making it more and more difficult to pay off. Missed and late payments incur additional fees and will likely damage your credit score. As interest and fees pile up, it can overwhelm your finances.

How To Pay Off Debt

When you want to control your finances, you must prioritize certain debts above others early in the process. Your first step should be gathering your financial information. This should include your income, outstanding loans, credit cards, medical bills, child support payments, alimony, tax debt, and any other required payments.

It’s a good idea to get a free copy of your credit report to examine credit score as you start. This can give you a baseline of your financial situation and is available free of charge once per year.

Your credit report will list every debt you have. Take the time to carefully inspect it for any inaccuracies you can dispute. Your credit score is an indicator of the state of your financial affairs. A healthy credit score should be part of your financial goals.

Review the differences in your debts. Varying interest rates and consequences for default need careful consideration before you start paying. When you can’t eliminate debt immediately, choosing which debts to tackle can impact how quickly you become debt-free and how many problems arise.

Tips for Paying Off Your Debts

You are not the first person to experience financial difficulties, nor will you be the last. We can use successes and failures of those who dealt with debt before to figure out the best path forward.

Handle Your Necessities Before Repayment

First, ensure that you can pay for necessities. Falling behind on a mortgage, car loans, or utility payments could result in foreclosure on a home, repossession of a car, or utility cuts.

Payments toward child support and taxes should also be a priority. Failure to pay your legal obligations has serious consequences. Defaulting on paying these obligations can result in:

• Wage garnishment
• Raised interest rates
• Jail time
• Loss of driver and professional licenses

Missing a single payment won’t cause these measures to be imposed immediately, but missing multiple payments likely will.

Decide on a Debt Payment Strategy

There are many debt payment strategies you can follow. Try to find a method that works for you and that you feel comfortable with. Two popular strategies are the snowball and avalanche methods. Here’s how they each function:

• The Snowball Method: The snowball method isn’t a complicated plan. You start by paying off your smallest debt first. These usually go away quickly, which feels effective and gives you the momentum to keep going. Often, this means paying credit card debt first to avoid the late fees. This will also prevent accrued interest from creating additional financial strain. Make only the minimum payments on other credit cards to keep them current, and avoid using them if possible.
• The Avalanche Method: This repayment plan first focuses on paying off debts with the highest interest rate. You’ll continue to pay minimum payments on your other debts while you focus on putting more into these higher-interest cards.

These are not the only methods available, but the offer good starting points for comparison.

Consider Debt Consolidation Options

A debt consolidation loan is another option. Debt consolidation may help you access better interest rates and simplify debt administration. You can start this process yourself or go through a professional company. After securing a personal loan, you will use it to pay each debt in full. Once these are paid off, you no longer have to keep track of multiple lenders, due dates, interest rates, and communications.

This is common practice with student loans. If you are considering consolidating your student loans into one, do your research to see which lender’s offer is the best for your situation. Government student loan administrators have many options if you struggle to pay. Explore the options available to you with your loan administrator.

Refinancing Your Debt

Refinancing is one way to manage debt. It can help a homeowner take advantage of lower interest rates or improved credit scores. You could also tap into your home equity to consolidate higher interest rate debt to a more reasonable rate.

Refinancing your auto loan to a lower rate may reduce your monthly payments. A lower interest rate will save you money over the life of your auto loan.

Explore credit cards offering lower interest rates. A balance transfer credit card usually offers low interest rates for a period of time and help you save on interest fees. You can consolidate credit card debts and save money in interest with the right credit offer.

Options When You Can’t Pay Down Debt

Even if you cannot stay ahead of your growing debt, you still have options. There are debt management plans (DMP) and options for student loan debt. These options mainly deal with unsecured debt, such as credit cards. Possible options include:

• Professional credit counseling: Credit counseling is a good option for anyone struggling to manage their financial situation who wants to learn money management skills. Find a reputable, nonprofit credit counseling agency that offers comprehensive financial education and management services. Research your agency to avoid scams and understand your rights.
• Debt management plan: A debt management agency will negotiate a payment plan over a three-to-five-year period. You pay the agency, which then distributes funds to your creditors. This is like a Chapter 13 repayment plan without going through bankruptcy court.
• Debt negotiation programs: A debt negotiation program will work with your credit card companies to lower the amount of debt you owe. Often, these programs require a lump sum payment for your debts.
• Debt settlement: You may work with a debt settlement company to resolve your debts for a lower amount. These companies do charge fees for their services, and you should take care to avoid scams.

Other methods may be available as well. Remember that any deal that sounds too good to be true probably is. Beware scammers who prey on those struggling with debt.

Bankruptcy: The Last Resort

You may consider filing bankruptcy if getting out from under your debts and making payments simply isn’t possible. Bankruptcy is a last resort that can offer a fresh start for individuals and couples. You need to complete an approved credit counseling program before you can file and a second debtor education program before you receive your discharge. Bankruptcy will not discharge your child support, alimony, recent tax debts, or judicial judgments. It also won’t erase your student loan debts unless there is undue hardship.

There are two types of bankruptcy available for individuals. Chapter 7 and Chapter 13 bankruptcy are markedly different from one another. Which one is a better fit for you will depend on your unique situation:

• Chapter 7 bankruptcy is more difficult to qualify for. Chapter 7 is a liquidation bankruptcy. You must meet a means test to be eligible. A bankruptcy trustee sells your eligible assets, and your creditors receive the funds. The bankruptcy judge terminates your remaining dischargeable debt.
• Chapter 13 reorganization bankruptcy creates a repayment plan that you must follow for three to five years. You make one payment to your bankruptcy trustee, who distributes payments to your creditors.

While both types will have a negative effect on your credit score, Chapter 13 often allows for a quicker recovery in your credit rating.

You Don’t Have To Do It Alone: A Debt and Bankruptcy Attorney Can Help

Having debt doesn’t eliminate your rights. There are still protections against harassment from debt collectors, and you need to stay vigilant against debt scams. A bankruptcy attorney is often the best person to step in if you face harassment or lawsuits from creditors or don’t know where to turn for serious debt help.