When you're buried under a pile of debt, it can be hard to find your way out. It is possible to pay off your debt, but you'll need to come up with, and stick to, a good plan. Once you're debt-free, you can move forward financially by cleaning up your credit, buying a house and making investments.
If you are a DIY kind of person, try repaying your debts using a debt snowball or similar plan. A debt snowball plan requires you to list all of your debts, from smallest to largest, and continue making minimum payments on all debts while applying extra income to the first debt on your list. Once you complete payment on that debt, you move on to the next debt until you eventually pay off all of your debts. Another approach to this plan is paying off debts with the highest interest rate first. Some people prefer the first method because paying the smallest debts first will eliminate individual debts more quickly. However, you'll get rid of your total debt faster if you pay down your high-interest debts first.
If your interest payments are out of control but you have a steady income, consider consolidating your debt. By borrowing from your retirement plan, a friend or family member, or your savings, you could pay off all of your debts at once. Plus, you would avoid yet another account on your credit report. Another consolidation option is a home equity loan, but this comes with the danger of losing your home if you can't make your payments. If borrowing the money to consolidate your debts is not an option, contact a credit counselor. Credit counselors can sometimes arrange a debt-management plan (DMP). A DMP consolidates your debts at a lower interest rate, and you make one payment each month to the credit counseling agency, which then disburses your payments to your creditors.
If your debts are so high that you can't make even the minimum payments, it's time to negotiate. Call your creditors and explain your situation. If you don't have cash for settling your debt, they may be willing to set up a payment plan or reduce your interest. If you do have cash available, ask if they are willing to settle for less than you owe. If your creditors do agree to reduce your interest or settle your debt, be sure to get their agreement in writing.
Chapter 13 Bankruptcy
When all else fails, bankruptcy is an option. If you aren't comfortable with asking the court to discharge your debt in a Chapter 7 bankruptcy, look into a Chapter 13 repayment plan. As long as you have a reasonable income and your debts aren't too high, the court will supervise the repayment of your debts for the next three to five years. While you repay your debts, your creditors can't hound you. Plus, some credit bureaus will remove a Chapter 13 bankruptcy from your credit report after seven years, rather than the standard 10 years for Chapter 7 bankruptcy plans.
- The Motley Fool: 9 Ways to Pay Off Debt
- ABC News Money: Better-Smarter-Faster Ways to Pay Off Credit Card Debt
- Dave Ramsey: Get Out of Debt With the Debt Snowball Plan
- Federal Trade Commission: Knee Deep in Debt
- MSN Money: 12 Tips for Negotiating With Debt Collectors
- Nolo: An Overview of Chapter 13 Bankruptcy
Lainie Petersen writes about business, real estate and personal finance, drawing on 25 years experience in publishing and education. Petersen's work appears in Money Crashers, Selling to the Masses, and in Walmart News Now, a blog for Walmart suppliers. She holds a master's degree in library science from Dominican University.