Getting rid of your debt may feel like an impossible project.  You may feel overwhelmed or frightened by how much debt you have.  And you may not know where to start.  Here are five steps to start you on the path to getting rid of your debt:

Step 1

Set a goal.  All successful projects start with a clear goal.  You may have a goal of eliminating all of your debt.  Or, you may have a goal of getting rid of one debt in particular. Just remember to make your goal SMART.  Write it down and put it somewhere that you can see everyday.  This will help keep you focused.

Step 2

Make a list of your current debts.  In order to get rid of your debt, you need an accurate and complete list of the debt you have.  You may need to get a copy of each of your 3 credit reports from Equifax, Experian, and TransUnion.  This should give you information about current debts, including any debts you have in collections or any judgments.  Judgments are the result of creditors suing you.

Your credit reports may also tell you your last reported balances, information about the terms of the debt, and the contact information for the creditor.

But you may have debts that don’t show up on your credit reports, including:

  • Loans from family members or friends
  • Loans from payday lenders, finance companies, or pawn shops
  • Loans from individuals or businesses that do not report to Equifax, Experian, or TransUnion

Be sure to include this information, too.

Step 3

Gather additional information on debt repayment. First, learn about your state’s statute of limitations.  This is the length of time a creditor can legally collect a debt.  This is especially important if you have debts in collections.  Do not stop paying a debt because it is close to this limit.  You may want to get legal guidance regarding how to handle debts that are close to or past the statute of limitations.

If necessary, use the information you've gathered to prioritize repayment of your debt. Generally, secured debt is a priority over unsecured debt.  Why?  Because there is an asset attached to secured debt.  This could include:

  • Your home
  • Your car
  • Household appliances
  • Anything financed through a home equity line of credit

Unsecured debt must be factored into your priorities as well. When you owe money for state or federal taxes, federal student loans, child support, and/or alimony, your accounts or wages can be garnished either at higher rates than commercial debts or with no court proceeding.  In some cases, a lien can be put on your property, too. Therefore, these debts are often a higher priority than commercial debts.

Does this mean you can skip credit card payments or medical debt payments?  The answer is “no.”  Missing any debt payments can result in negative consequences.  But, it is important to understand how negative the consequences are. If you don’t have enough money to pay all of your debts, you may have to make tough choices.  Make sure you understand the risks and consequences of those choices.

Step 4

Make a plan. There are two general plans or approaches to reducing or getting rid of debt:

  • High Interest Rate Method: This is sometimes called the “avalanche” method.  With this approach, you list your debts from highest interest rate to lowest.  You make all of your regular payments. If you have any money left in your budget, you apply it to the debt with the highest interest rate.  The goal is reducing or eliminating this debt as fast as possible because it is costing you the most.  Once this debt is paid off, you continue the process but with debt with the next highest interest.
  • Low Balance Method: This is sometimes called the “snowball” method.  With this approach, you list your debts from lowest total balance to highest. You make all of your regular payments. If you have any money left in your budget, you apply it to the debt with the lowest balance.  The goal is reducing or eliminating this debt as fast as possible. Once this debt is paid off, you continue with the process, applying any additional funds to the debt that had the next smallest balance.  This method is supposed to be more motivating because you see progress faster as you eliminate debts.  Consider using PowerPay to help you manage this approach to debt reduction or elimination.

Step 5

Stick with your plan.  Each month you will be getting closer to your goal of reducing or eliminating your debt.  Like any challenging goal, at times you may experience setbacks.  This is okay.  The key is to get back on track.  Use support if you need it.  Turn to trusted friends or family members, a counselor, or even social media to share your successes and struggles.

You can also get support from a consumer credit counseling service in your community or region.  These are nonprofit organizations that are affiliates of the National Foundation for Credit Counseling. These counselors will help you make a plan.  They may even recommend a Debt Management Plan for you. A Debt Management Plan is a payment schedule to help you  repay your debts. By voluntary agreement, you deposit funds with your credit-counseling agency each month. They send those funds directly to your creditors. If collectors call, you can ask them to contact the agency you are working with. You may also receive a reduction or waiver in finance and/or other charges. When you have completed your payments, the agency will assist you in reestablishing credit.

Finally, remember that if you have more debt than you can handle, you may be able to find relief through bankruptcy.

For more information about getting rid of debt, visit: https://www.usa.gov/debt or https://www.consumer.ftc.gov/articles/0150-coping-debt.

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