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Overwhelmed with debt? 6 ways to dig yourself out

Creating a debt management plan can help you find relief

couple creating a debt management plan

Hardships like job losses and medical expenses can lead to insurmountable debt and become an overwhelming problem. If you’re scrambling to pay down multiple credit card balances, medical expenses, student loans or other debt—and keep up with everyday living expenses—creating a debt management plan is the first step to easing the burden and getting your finances back on track.

Depending on your financial situation, here are six ways to manage your debt, and when it makes sense to use them.

Assess and set a plan

When it’s the best option: When your collective debt is mounting and you’re no longer able to pay more than the minimum credit card payment each month. If you’re chipping away at your balance by paying only the monthly minimum, your debt will rise over time due to the effects of compounding interest.

What it looks like: The first thing you need to do is to get a clear picture of exactly how much you owe. Make a list of all your debts by creditor, plus the balance, interest rate and monthly due date. This view will help you prioritize and figure out the best payment strategy. Some people start by attacking the balances with the highest interest rates—the higher the rate, the more money you will save by paying the debt off as soon as possible. For others, it makes sense to immediately pay down the smallest balances first, so you can redirect those payments towards accounts with higher balances.

Contact a credit professional

Quick tip

Make sure the credit counselor you choose is reputable. Trusted resources like the Federal Trade Commission and the National Foundation for Credit Counseling can help you find a certified agency.

Negotiate or defer

When it’s the best option: Your loan holders may be more amenable to negotiations or forbearance if you ask before you’re in serious trouble. For example, if you can no longer make minimum payments on unsecured debt but think you could manage a less aggressive payment schedule.

What it looks like: While every creditor has different guidelines, you may be able to negotiate on the payment schedule or interest rate for your balance. If you have medical debt, for instance, it helps to proactively seek a payment plan with your medical provider before the first bill is due. Likewise, if you can’t afford the monthly payments on your student loans, you may be able to delay payment through deferment or forbearance.

Quick tip

Due to the coronavirus, the U.S. government has provided relief to federal student loan borrowers, allowing most to temporarily stop making monthly payments.

Consider debt consolidation

When it’s the best option: If you have tried negotiating with creditors but they were unable to modify payments, and you have high-interest credit cards carrying balances month to month. It’s also a good idea to do it before your debt-to-income ratio reaches 36 percent.

What it looks like: Debt consolidation, which lets you combine different debts into one payment, might be a good idea if you have several big balances with high interest rates. With the help of a credit counselor or on your own, you may be able to consolidate credit card debt. Or you could look into formal debt consolidation using a personal loan. There are many companies that offer student loan consolidation programs, too.

Research debt forgiveness

Quick tip

Beware of debt settlement programs that advertise forgiveness for credit card debt or personal loans. Contact your state Attorney General and local consumer protection agency before working with a debt settlement company, and always read the fine print before entering into an agreement.

File bankruptcy

When it’s the best option: When you’ve exhausted the options learned about in credit counseling, and you owe more than you can pay. It might be the only option if you’re dipping into retirement savings to pay debts or rent, third-party collections agencies are garnishing your wages, or you’re underwater on your mortgage.

What it looks like: Filing for bankruptcy or bankruptcy protection because of debt should be a last resort. All of your assets will be evaluated and may be used for repayment, and it can have significant negative effects on your ability to access credit in the future. You may be required to attend credit counseling before filing. Of note: bankruptcy does not automatically discharge student loan debt.

It’s possible to break the cycle of debt with a commitment to the above strategies, and it’s important to seek help to improve credit scores and make way for future savings or investment goals. Even if your debt has gone to collections, you can restore your credit history, though it will take time and patience.

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Understand what could happen when debt is paid late

>> Debt is incurred

>> 30 days late
reminders from creditors and fees likely

>> 60 days past due 
penalties, delinquency officially reported and credit score damage

>> 90 days late 
goes to collections agency and long-lasting credit score damage

>> 120 to 180 days past due 
garnishing of paycheck possible, ongoing debt collector contact and mortgage foreclosure

>> Court proceedings 
Hearings, with the potential sale or seizure of assets in dispute

Sources: Bankrate.com, Business.com

Close Disclaimer

The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.

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