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Getting out of debt can seem overwhelming, whether you owe thousands of dollars or hundreds of thousands. As your debt balances go up, more and more of your income goes to eliminate debt. You rely on debt even more to cover expenses as you live paycheck to paycheck. Even on a limited income with no extra money, you can get out of debt with the right strategy. Debt.com is here to help you learn how to get out of debt with these step-by-step instructions.
The first step to get out of debt is to figure out exactly where you stand. Take a full account of every debt you owe. This doesn’t just include loans and credit cards: it can also include things like court fines, child support, and collections for utilities or in-store credit lines.
Determine who you owe, how much you owe, and where you are with your payments. Find out your interest rates and write everything down. To make things easy, we’ve provided a free debt worksheet.
Tip: For debts that are behind, note how many months behind each debt is. If a debt is in collections, take note of when it first became delinquent. This will be important later as you set priorities for repayment.
The next step to get out of debt is evaluating your budget. Learn how much capital you can generate for things like repayment plans or settlement offers. Ensure you don’t have any spending leaks: those little expenses and overspending that you might not notice until you write everything down.
What you’ll need:
Options for budgeting:
Determine where your credit score stands. This includes reviewing your credit report and your credit score itself. You can download your credit reports for free through annualcreditreport.com, if you haven’t checked it in the past year. Otherwise, you can use a credit monitoring tool to check your report and your credit score.
This step is important for two reasons:
TIP: The public records section of your credit report can list debts you may have missed, such as court fines
Options for credit monitoring:
No matter who or what you owe, there are five basic ways to get out of debt.
Depending on the status of your debt and how much you owe, you may use more than one solution. You forgive the debts you can, prove the debt that isn’t yours, then pay off or discharge the rest.
With this method, work to pay back everything you owe. This doesn’t mean stick to traditional monthly payments at your current interest rates. In fact, you probably shouldn’t. Instead, explore debt solutions that reduce or minimize interest charges, such as refinancing and debt consolidation.
You may not actually be liable for every debt on your list. Debt collectors don’t always target the right person. You may be getting collection letters for debts from someone with a similar name. Also, if your spouse incurs tax debt without your knowledge, you may qualify for Innocent Spouse Relief.
Some debts can be forgiven if you take certain steps to qualify. For example, if you have student loans and work in public service, you may qualify for student loan forgiveness. Some people also refer to debt settlement as debt forgiveness.
In this case, your debt is not forgiven without penalties. You will incur a seven-year negative item in your credit report for each debt you settle. This can negatively affect your credit score. However, if you have debts in collections, they already come with a seven-year credit penalty, so it may be best to get rid of them with settlements.
The last option for getting out of debt is to have the debt discharged by a bankruptcy court. Depending on your financial situation and which type of bankruptcy you file, you can discharge all or some of what you owe. With Chapter 7 bankruptcy, you can get out of debt in as little as 4-6 months, but you will incur a 10-year penalty on your credit report. Chapter 13 bankruptcy can take 3-5 years, but the credit report penalty only lasts seven years.
TIP: It’s possible to discharge most debts through bankruptcy, even student loans. However, in the case of federal and private student loans, you must be able to show that not discharging the debt would cause continued financial hardship even after the discharge of your other debts.
Debt collectors only have a defined window of time that they can legally pursue you for a debt. This is known as the statute of limitations on collections; the clock varies by state, but usually caps out at 10 years. When that clock runs out, collectors can no longer sue you for the debt in civil court. Once a debt is past the statute of limitations, tell the collector to stop contacting you, and there’s nothing they can do.
This applies to credit cards, utilities and medical bills that lapse into collections, and also applies to IRS collection actions. The IRS will only attempt to collect back taxes for ten years. Once that clock expires, they stop garnishing your wages or pursuing any further collection actions.
TIP: Be careful when you talk to debt collectors! If you make a statement that acknowledges that you owe the debt, then you can reset the clock on the statute of limitations.
It’s time to decide which option, or combination of options you want to use. Ask yourself these questions when determining how to get out of debt:
Keep in mind that you’ll want to consolidate before you settle any debts. Settlements damage your credit score, which could make you ineligible for many consolidation solutions. Consolidation will help you set priorities and determine the order you need to apply for solutions in the next step.
TIP: Consolidation is often the first solution you should try since it simplifies your payment schedule and won’t damage your credit.
Step 6: Set up your debt solutions
Apply for the solutions you want to use. The setup time and cost for each solution will vary. For example, getting approved for a debt consolidation loan takes about a week. The consultation for debt management programs and settlement programs only take an hour. Completing enrollment on a debt management program can take a few weeks as the credit counseling team negotiates with your creditors.
Also, you shouldn’t set up settlement offers until you’re not concerned about credit score damage. You may need to delay these solutions until you’re ready to use them.
TIP: If you’re getting a loan, avoid loans with early repayment or prepayment penalties.
TIP: For settling medical debt collections, talk to the original service provider first. They may be willing to work out a payment plan and cancel the collection account.
|Balance transfer||1 hour to apply, 3-5 business days to receive card||No upfront costs; avoid annual fees|
|Consolidation loan||1 hour to apply, 7 days to get approved||Loan origination fee, averaging 1% of amount financed|
|Debt management program||1-hour consultation, 3-4 weeks to get approved||Varies by state, capped at $79|
|Debt settlement program||1-hour consultation||2-5% of amount settled, paid upon settlement|
|Federal student loan repayment plans||2-3 hours to apply||Free|
|Student loan refinancing||1 hour to apply, 7 days to get approved||Loan origination fee, 1% of amount financed|
|IRS Installment Agreement||1 hour to apply, up to 30 days to get approved||$52 setup fee for Direct Debit, $120 setup fee for payroll deduction|
|Tax debt settlement||3-6 hours to set up, 4-6 weeks to get approved||$186 application fee|
Once your plan to get out of debt is working, take steps to increase your income. This will allow you to pay off debt faster. You can make larger payments to eliminate transferred balances or make extra payments on consolidation and refinanced loans. If you have debts you need to settle, more income will generate the funds you need faster for settlement offers.
There are several ways to increase your income:
Finally, as you work your way out of debt, don’t do anything that will sabotage your efforts. Take every step possible to avoid new debt:
Article last modified on May 9, 2019. Published by Debt.com, LLC . Mobile users may also access the AMP Version: How to Get Out of Debt - AMP.