Quick Answer: Getting out of debt requires first understanding the root cause of the debt problem, whether excessive spending habits or insufficient emergency savings. The key takeaway is that addressing only the debt without fixing underlying issues like emotional spending or lack of emergency funds will likely result in falling back into debt again.
As a consumer debt expert I deal with questions from readers on a daily basis about how to get out of debt. It’s a short and simple question that becomes easily overpowered with a lot of emotions and information that clouds the issue.
Getting out of debt can be broken down into these major steps:
Understand How You Got Into Debt
The secret to beating back debt for a lifetime is to take what you can learn from your current situation and apply it moving forward. There’s no sense wasting a perfectly good mistake I always say so the more introspection and understanding you can get about why you got into debt, the better you will be able to do to avoid that situation in the future.
Each weekday I send one short email: one money story that caught my attention, why it might matter to you, and one manageable thing you can do with it. A couple of minutes, and a dad joke.
In the latest issue (Oct 9): Does Financial Literacy Make Financial Sense?
Free. I sell nothing. Unsubscribe any time.
Here are a couple of common introspection examples.
The Daily Money Brief — Free, at 10 AM
Money you may be owed, scams to dodge, and the fine print decoded — the consumer money news that affects your wallet, every weekday.
Maybe your debt is due to excessive spending. In that case you need to examine the underlying issues that caused you to spend unconsciously. Maybe you use shopping as a way to reduce stress and improve self-esteem. Tackling the debt alone does nothing to deal with what got you into debt in the first place. Without addressing the underlying spending issue you’ll just land back in debt again.
Let’s say your current crisis is the result of an unexpected financial demand. In that case the underlying problem was an insufficient amount in savings in an emergency fund to help you in your time of need. Unless you are able to increase your income in order to save you’ll have to reduce your expenses to build that cushion. But without building that safety net you’ll probably wind up in trouble again.
Remember this: debt is the symptom, not the problem.
Decide With Knowledge What You Want to Do to Get Out of Debt
Before you launch into a panicked path of getting out of debt, take a deep breath. I need for you to make some good educated decisions about how to best deal with your debt that are both informed and not based on assumptions.
A typical knee-jerk reaction people have is to start a long path of paying back their creditors using every penny they can muster. This path may take five years or more in a credit counseling program. But what about bankruptcy, debt settlement, or a debt consolidation loan. Those are realistic options as well when appropriate.
Bankruptcy for most people discharges their debt in a few months, they get back to building up their credit quickly and they do better financially with the legal relief and knowledge they gained from the process. Should it simply be discounted as an option then?
The most important question you can ask yourself as you investigate your options is if you have a greater responsibility to repair the past or repair the future?
Implement the Plan
Once you’ve done your research and looked at available options the time to implement the solution is when you are confident that the solution is right, and affordable for you. You need to be able to implement the solution and not look back and feel as if you made a mistake because you grabbed at the first promised solution that came along that sounded like it would make the immediate pain of the debt go away.
When you feel you are ready, implement the your solution to deal with your debt with confidence and the comforting knowledge that you made an educated decision about what was right for you.
Know Your Rights: If a debt collector is contacting you, you have legal protections. See the complete list of FDCPA violations collectors commit most often. Use the free Debt Validation Letter Generator to demand proof of the debt, or check this collector’s complaint history with the Scam-O-Meter.
Dealing With Debt? Before you pay a collector, understand all your debt relief options — including ones the collector won’t tell you about. If the debt feels unmanageable, take the 2-minute bankruptcy quiz to see if the math favors a fresh start. Federal Reserve research shows filers recover faster than those who don’t file.
