In this guide I want to talk about how to get out of debt, because for a lot of people, the path to happiness is blocked by a mountain of debt. More often than anything else, when I ask people having issues in life whether they have debt, the answer is yes.
So, to help you overcome that debt, I want to share my 7 step plan to get out of debt fast and attain financial freedom.
It’s a simple plan to payoff debt fast– one that can help you immediately recognize where the biggest stumbling blocks in your life are and remove them one at a time.
#1. Know Your Debt.
To reduce or payoff debt fast, you must first understand where that debt is coming from. That’s why the first step I recommend is to sit down with a pad and pencil and analyze why you owe money.
- Write it All Down – Be thorough and write down every potential source of debt in your life. This includes your credit cards, car or home loans, personal loans to family or friends, medical debt, and any collection accounts you currently have active.
- Record Interest Rates – Record the interest rates on all open accounts, especially credit cards. Additionally, record the amount of time it will take to pay each debt off according to the amount you are paying. By understanding the impact of interest on your debt we can prioritize which debts get paid first.
- View Your Credit Report – Don’t just record current debt. Review your credit report from all three major credit bureaus. Look for signs of errors or debts that have already been settled.
- Report and Remove Inaccuracies – If there are inaccurate statements on your credit report, now is the time to have them removed. A call to the creditor will often take care of this problem immediately, either through a payment or removal from your history.
- By really looking at your debt, you quickly begin to understand where you are in the repayment cycle. You can see how long it will take, what steps may be necessary to speed up repayment, and finally, whether you may need professional help.
2. Negotiating or Reducing Debt.
A lot of people are uncomfortable with this next step, but it can help you a lot in lightening the burden of debt on your life. Think of it this way: if your creditor is willing to accept less in lieu of nothing, why not take advantage of it?
To start, determine if there are any debts that you simply won’t be able to pay. If there are, these are the debts that deserve your attention immediately.
Commonly, credit card companies and store cards are much easier to negotiate with than something like a car loan or student loans – the larger the loan, the less likely someone will negotiate a pay off with you.
Once you have determined which debts may be beyond your means, it is time to call your creditor and explain your situation.
Many times, a creditor will accept a lower payment if you can prove to them that you will not be able to pay off the full amount of your loan.
Show them your monthly income, assets, and anything else that demonstrates that you won’t be able to pay what they’ve requested.
Keep in mind that messing with your income numbers to get debt cut down is a felony in most countries. If you can pay your debt, you should admit it and ask the creditor to work with you on a more reasonable repayment plan rather than requesting a reduction in the volume of debt.
One thing I want you to avoid at all costs is the risk of bankruptcy. In reality, bankruptcy comes with a number of large fees and some lenders will refuse to accept your bankruptcy and will continue to demand payment.
This is especially true for large debts like car or home loans where you will face repossession and foreclosure before bankruptcy is even an option.
3. Keep Records and Prepare Your Calls.
Calling a creditor is more than just a hassle. It can be a stressful experience all the way around. They know exactly what they are doing and you have no clue what to say.
So, before you ever call someone and ask for a reduction in your debt, I want you to sit down and prepare some paperwork. First, write down every question you would like to ask.
Many times, in the midst of a stressful phone call, we forget what we want to say. You might be transferred multiple times, asked to hold, or simply rushed to get off the phone.
If you have a list of questions that you cross off as they are asked, you will be far better prepared when the time comes to ask them. If you have a problem in which someone is particularly hostile on the phone, ask for their supervisor.
However they try to make you feel, a creditor is obligated to at least answer your questions about what you owe.
Of course, simply because you talk to someone else doesn’t mean you should be rude if you don’t get what you want.
Sometimes a creditor is simply unwilling to work with you. It is frustrating, but it’s a part of the process we must deal with.
Another thing you should do is keep records of all phone calls. Write down the names of who you talk to, when you talk, and what is said.
Many times those calls are recorded on their end and it will be easier to reference later if you provide details on a second call. If they give you a reference or transaction ID number, write that down as well.
4. Special Forms of Debt.
Now, I want to move on and talk about a few special forms of debt that require different attention than simple credit card debt. This includes things like student loan debt, your home loan, and medical debt – the big three for most people in debt.
A single household can have upwards of a million dollars in debt owed to these three sources. If this is you, there are some things you can do to alleviate the problem.
If you owe money on student loans, start with consolidation. Student loan rates are almost always variable after graduation.
They can be as low as 3% and as high as 8%. Those higher interest rates are going to add up over years and make them much harder to pay off. Luckily, there are federal programs to help with consolidation.
Use them liberally. Another fantastic way to reduce or payoff debt is through forgiveness programs.
Programs in the United States like Teach for America or the Peace Corps will offer partial or even full loan forgiveness when you dedicate a year or two of your life to their cause.
Some employers may also provide forgiveness programs if you sign on for a long term career.
In the United States, nothing is more devastating than medical debt.
A single surgery can cost you hundreds of thousands of dollars and take decades to pay off. That kind of stress can hang over your head for most of the rest of your life – no matter how healthy you are.
So, if your insurance likes to reject claims, start by having all procedures preapproved. A simple phone call and a reference ID can save you thousands of dollars.
Another trick here is to negotiate with your doctors up front. Doctors need to get paid too, and you’ll be surprised by how willing they are to accept whatever you can afford in lieu of dealing with a stingy insurance company.
In recent years, home loan debt is the biggest culprit for financial problems. And it can destroy a family right along with all the financial headaches – tossing you out on the street. If you have mortgage problems, contact your local housing authority.
Many local governments and even the federal government offer programs to help reconsolidate before your mortgage moves to foreclosure.
If you do face Foreclosure, contact a lawyer and learn your rights before you’re evicted. Many times, you have weeks if not months to handle your affairs before you can be removed from your home.
5. Reorganizing Your Finances.
I certainly hope that your financial situation isn’t so dire that you might lose your home or face bankruptcy. But, if you do face this level of debt, it’s time to rethink how you handle your finances.
To start with, it is a good idea to gain money wherever you can. If possible, ask your employer for overtime, get a second job, start selling off old items from your home, and collect on any outstanding debts.
Go through your attic, basement or garage and start compiling anything that can be sold on eBay or craigslist, and while I know it is hard, consider asking your family or friends for help. You should also take a look at what you currently spend money on.
For many people I talk to, this is the hardest step of all. Sit down, write up your monthly expenses and cut out anything that is not necessary.
Things like your daily Starbucks coffee or an expensive Cable TV subscription. If it’s not food, clothing, housing, or something for your children or pets, you probably don’t need it.
6. Pay Off Your Debt.
When it comes time to pay off your debt, I want you to breathe deeply and think in the long term.
I know it’s hard, but if you can visualize success in repayment of your debt over the course of three or four years, and then follow through on the steps we’ve been working on, it will happen – even if it doesn’t feel like anything is happening beyond a caffeine headache and far fewer shopping trips.
When paying off your debt, avoid spending any money you have set aside for retirement or your children’s future.
That money will help you live your life in retirement. If you take it out of there now, you’ll be left with nothing to live on in twenty or thirty years.
7. Avoiding Additional Mistakes To Get Out of Debt.
At the end of the road, you’ll have done a LOT of work to reduce your debt and restructure your life.
Tell yourself honestly whether you’re willing to mess all of that up because a new TV or sofa looks really attractive to you when you go to the mall.
This is the single hardest part of the process. Keeping up with all the changes you’ve just made will be the single most effective way to reduce debt, though.
Follow through is the one ingredient missing from most debt reduction programs.
Here are some additional tips for paying off your debt and maintaining your new lifestyle.
- Maintain Your Credit, but Use it Sparingly – To rebuild your credit score, you need to keep some credit accounts. However, you should use it only sparingly. That means only using credit when you have the cash to repay the balance immediately.
- Don’t Accept Adjustable Rates – If you get a new credit account, car loan, or mortgage, don’t accept an adjustable rate. They can go up without notice and leave you unable to fulfil your obligation at any time.
- Prioritize Payments – When you owe debt, always pay off the highest interest rate first. Here’s an example. If you have one credit card with a 15% interest rate and $500 in debt and another with a 25% interest rate and $4,000 in debt, always pay off the 25% interest rate card first. It may be tempting to pay down the lower balance card because it will be paid off first, but the result is more interest paid over the life of that larger card.
Finally, live within your means. I have always found that the happiest moments in my life were those when I didn’t feel the urge to run out and buy all the things I wanted.
With my wife and son and a beautiful home, I have all that life could give me.
Buying material things and incurring debt is the quickest path to creating new worries and stress that put a severe dent in happiness.
And that’s what life is all about – finding true, unequivocal happiness. When you clear your life of debt, that road will be smoother and shorter than ever before.
Thanks for reading and best of luck in cutting down on that pesky debt!