Being overwhelmed by debt can be stressful, frustrating, and even detrimental to your mental and overall health. If you're watching your debts pile up month after month, you may need to take matters into your own hands to find a solution to get rid of them and become debt free.
Of course, becoming debt free is much easier said than done. It may take a lot of hard work and effort to reach this goal, and you may have to make many tough decisions along the way.
But if you are truly determined to get out of debt and regain control of your financial life, here, you will learn about some tried-and-true methods that could help you make this dream a reality.
Stop taking on more debt!
The first step you should take to eliminate your current debt is not to add more debt. It may sound obvious, but it can be much more complex than you might think.
Much of the American economy is based on credit. In 2021, American household debt hit a staggering record high of $14.6 trillion. We are giving away our financial freedom in exchange for more debt and headaches.
Now, you may have become accustomed to living your daily life using credit and taking on debt. But if you want to regain your financial freedom, you'll have to get away from that system and learn how to go about your finances in a completely different way.
Track your spending
The next thing you should do is start tracking your spending. What are you doing with your paycheck? Where is your money going? Why can't you afford anything anymore?
All these questions can be easily answered if you manage to get a clear view of your financial situation. Plus, it will be easier for you to create a monthly budget since you will know how much money you have.
There are several methods you can use to track your money:
· Use software like Quicken, Mint, YNAB, Countabout or Money Dance.
· Or at least a Phone app that allows you to see your finances at a glance and set spending limits.
· Regularly checking your statements and receipts.
· Writing your expenses in a notebook. (though I don't really recommend this one)
Find a strategy that works for you so you can understand where your money is going at all times.
Create a budget and stick to it
If you want to get debt free it is of utmost importance that you learn to create a monthly budget and stick to it at all costs. You can use your regular expenses as a guide, and you must take into account your most essential needs.
For your budget to be adequate, you will have to cut costs strategically. By tracking your finances, you may detect many things you are wasting money on or spending too much. Now you'll be able to make the necessary adjustments without dramatically affecting your lifestyle.
Be sure to write down your budget. It's not enough to have it in your mind; you must keep track of it in a notebook or on a budget sheet so you can hold yourself accountable.
Increase your income
As you can imagine, earning more money could help you pay off your debts. It might sound silly, but for some people, this may be the best way to get the extra money they need to regain control of their financial situation.
If you have the time, looking for another job or working a side gig can help you increase your cash flow. Platforms like TaskRabbit, Upwork, and Workana can be beneficial for doing this.
However, if your primary job is full-time, you could try asking for a promotion to earn some extra cash. It may not work out, but it's worth a try.
Sell some stuff you don’t need
Many of us tend to accumulate things we don't need. Maybe you have an old TV stashed away somewhere, clothes you no longer wear, and even old books.
Instead of throwing those things away, consider having a garage sale and getting some cash for them. You may end up getting more money than you expect. After all, “one man's trash is another man's treasure.”
Alternatively, you could also sell some stuff on eBay or Facebook Marketplace. You'll be surprised how many people you'll be able to reach through these platforms.
Do a Debt Consolidation Loan
When you are saddled with multiple debts, you can choose to combine those debts into a single debt and then pay them off. The idea is that you get one large loan that has a lower interest rate than all your debts (often these are credit cards), so that you have one lower monthly payment and hopefully pay less total interest.
This approach to reducing your debt is a great one in my opinion, but only if you are planning on reducing your monthly spending habits and living within your means. The last thing you want to do is use this loan to pay off your credit cards, only to go rack up more debt back on said cards.
The downside of this idea is that you have to qualify for the loan, and depending on your financial situation and creditworthiness, you may not qualify. But there is only one way to find out if you do….apply!
There are many lenders in the US that offer debt consolidation loans, and I quickly found this handy list on US News and Worth Reports. But if you live in Australia for example, you could approach a place like jacarandafinance.com.au, to help you come up with a plan that you can easily follow.
Types of Consolidation Loans
Secured
Like with many other loans, a debt consolidation loan may ask for collateral. Meaning: The lender will want you to have something of value in order to secure the debt. The collateral can be anything such as your car, house or money in your savings account. In case you fail to pay back the loan, the collateral will be possessed. Lenders do this in two cases:
- When the loan amount is big, and your financial history shows that you don’t know how to handle your expenses
- Low credit score
Unsecured
An unsecured debt consolidation loan is the exact opposite. It does not require collateral because the loan amount is low, likely under $10,000. Since the lender does not see as big of a risk, they don’t ask for any collateral.
However, keep in mind that if you miss a single payment, the lender will have to report it to the credit bureau, which will lower your credit score (just like with defaulting on a credit card). If you plan to buy a house in the future or finance a car then you will cause problems in applying for a loan.
Bankruptcy
Many people think bankruptcy will doom their finances for life, but this is necessarily true. If nothing else works or your debts are too overwhelming, bankruptcy may be your way to becoming debt free. Bankruptcy could help you get a fresh start so you can rebuild your finances from scratch.
It's a lot more common than you might realize. In 2019, more than 700,000 people filed for bankruptcy in the United States. It's not a financial defeat; it’s simply a legal alternative to start over.
Now, if you are considering filing bankruptcy to get rid of your debts, you should keep in mind that there are different bankruptcy options for various financial situations.
The two most common bankruptcy chapters are Chapter 7 and Chapter 13. Below, you will learn some essential information about them, but if you want to know which is the best option for your case, you should consult with a bankruptcy lawyer in your state.
Chapter 7 bankruptcy
Chapter 7 bankruptcy is a good option if you want to get rid of most of your debts as quickly as possible and don't mind having to sell some of your assets to do so.
To file for this Chapter, you will first have to qualify through a means test that will measure your household income against the state median. If your income is below the average, you will automatically be eligible.
Then, a bankruptcy trustee will manage your non-exempt assets. Their job will be to sell them and distribute the money among your creditors.
After a few months, the court will issue a discharge that will wipe out most of your unsecured debts, including medical bills, credit card debt, and even personal loans. From then on, you can start rebuilding your credit and your financial life.
Now, you should know that most Chapter 7 bankruptcy filings qualify as “no-asset cases.” This means that the filer won't lose any assets but will receive the debt discharge anyway.
Chapter 13 bankruptcy
Now, if you don't qualify for Chapter 7 bankruptcy or don't want to risk losing any of your assets, you can opt to file for Chapter 13 bankruptcy instead.
In this case, you will need to create a repayment plan with the help of your bankruptcy attorney to repay your debts over 3 to 5 years. Once you complete the plan, your remaining debts will be discharged.
Keep in mind that fulfilling the repayment plan will be very complicated, and you may need the help of a legal professional to accomplish it.
Conclusion
Although debt can be overwhelming, you must remember that it is up to you to regain control of your finances. You must find the solution that works best for you and stick with it until you are debt free. If you need help, don't hesitate to talk to an attorney, counselor, or other qualified professional to understand what you should do to get a fresh start.
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