When people are struggling to pay off debt, their thoughts may naturally turn to filing bankruptcy as a solution. It’s understandable, since filing Chapter 7 can mean a discharge of most unsecured debts and Chapter 13 can result in having debts restructured into a more manageable payment plan. But bankruptcy should be a last resort, rather than a first option since it has long-lasting effects on credit. Let’s look at the many ways to get out of debt without filing bankruptcy.
Follow a Strict Budget
It may seem obvious, but planning and following a strict, bare-bones budget is often overlooked as a first step for getting out of debt. A bare bones budget is one that cuts out nearly all discretionary spending — such as entertainment and travel — and puts funds only toward essential expenses and making larger credit card payments.
Many people think they’re strapped for cash each month when it’s really a matter of not knowing where their money is going. Once they get a handle on their expenses, they’re surprised to find there’s more money than they thought to begin to aggressively tackle paying off debt.
Choose a Payoff Strategy
Once there’s a strict budget in place, it’s time to choose a payoff strategy. Two very popular methods of paying down debt are the snowball method and the avalanche method. The one you choose depends on your overall debt level, interest rates and what you personally find motivational.
Snowball Method
The debt snowball method is designed so you pay off your debts from smallest to largest. It’s a helpful strategy if you have multiple credit cards with relatively low balances on each card.
Once you pay off the smallest balance, you put the money for that monthly payment toward the next balance until that’s paid off and continue that process. Eventually, you’re paying a significant amount on your largest balance every month until it’s paid off. You gain momentum as you go, just like a snowball rolling downhill.
If you’re someone who needs frequent, small wins to stay motivated, the snowball method should work well for you.
Avalanche Method
The avalanche method focuses on saving money over time by paying off credit cards in order of interest rates, from highest to lowest. List your interest rates from highest to lowest, then pay as much as you can on your highest interest card, while continuing to pay the minimum payments due on all your other cards. Once you pay off the highest interest card, you move the bulk of your payment each month to the card with the next highest interest rate and continue the process until you pay off the final card. You probably won’t pay off cards as quickly on the avalanche method, but you will save money in interest.
Regardless of which payoff method you choose, it’s important to stop charging on all your accounts during the pay-off process. You don’t want to continue adding new debt.
Learn more about the debt snowball method and the avalanche method.
Try a Balance Transfer
If you’re carrying balances on just one or two high-interest credit cards, transferring those balances to a new card with a low or zero-percent interest rate can help you pay off that debt quickly.
For this strategy to be effective, you’ll need to find a card with a much lower rate that than average interest rate of your current cards. As you’re calculating your potential savings, be sure to consider any fees, including annual fees or balance transfer fees,
If you don’t currently have good or excellent credit, it may be challenging to qualify for such a card. Do your research before applying to limit the number of hard pulls to your credit.
Learn more about credit card balance transfers.
Consider a Consolidation Loan
Debt consolidation loans are personal loans designed to help consumers pay off debt and ideally, save money on interest, too. The idea behind these loans is simple. You use the cash from the loan to pay off multiple high-interest debts, then you’re left with just one monthly loan payment at a lower interest rate. In addition to saving money, you’ll also save time and gain peace of mind from making just one monthly loan payment rather than several credit card payments.
But, just as with a balance transfer, your credit needs to be in good shape to qualify for a debt consolidation loan with a reasonable interest rate. And there can also be loan origination fees, early payment penalties and other fees associated with these loans. Do your research before applying to find the loan that will save you the most money.
Learn more about debt consolidation loans.
Discover a Debt Management Plan
Debt management plans are another option to get out of debt without declaring bankruptcy. These plans are managed by nonprofit credit counseling agencies and allow clients to pay off debt in a fraction of the time it would take to do it on their own. The secret is the lower interest rates the agencies get by working with hundreds of creditors.
Clients on a debt management plan enroll their eligible accounts in the plan and make one fixed monthly payment to the credit counseling agency. The agency then disburses the payments to the creditors. Thanks to lower interest rates, more of each monthly payment goes toward paying down the principal and you can pay off debt more quickly. Many clients find themselves free of credit card debt in as little as two years.
Once clients are enrolled in the plan, creditors and collection agencies can no longer contact them. Plus, there’s no minimum credit score required to qualify like there is with a balance transfer or consolidation loan.
Get started now to see if a debt management plan is the right solution for you.
