How to Get Out of Debt

In this comprehensive guide, we’ll show you how to get out of debt using a proven step-by-step strategy. If you’re overwhelmed with debt right now, it can be hard to know where to start. By breaking it down into smaller steps, you can make progress on your balances and take control of your financial future. 

Here’s how to get started.

7 steps to get out of debt

If you’re in debt, you’re not alone. According to the latest Federal Reserve data, cumulative household debt in America has increased since last quarter and now stands at $17.94 trillion. Whether you have credit card debt, a car loan, or another type of debt, the steps below can help you to pay off your balances.

1. Add up all your debt

The first and most important step when you want to get out of debt is to add up your debt total. Take out a sheet of paper or open a spreadsheet and write down your creditor’s name, the amount you owe them, your interest rate, and your monthly payment.

Recent research shows nearly half of Americans don’t know the interest rate on their credit cards. Finding this information is important because it can help you with the next step, which is to identify a debt repayment strategy.

2. Identify a strategy

The two most common debt repayment strategies are the snowball method and the avalanche method. With the snowball method, you pay off your debts from smallest to largest, which builds momentum and allows you to get quick wins early in your debt repayment journey.

The avalanche method is when you pay off your debts from the highest interest rate to the lowest interest rate. When you do this, you save money in the long term because you’ll spend less in interest. To decide which method is best for you, use an online calculator to compare the debt payoff timeline and the total amount you’ll spend in interest.

3. Negotiate with creditors

Interest costs and late fees can add time to your debt repayment journey, so another step you can take is to negotiate with your creditors. If you have debt in collections, call the debt collection company and offer a settlement. If you have debt with high interest rates, call your credit card company and ask whether it can lower your interest rate.

4. Consolidate or refinance

Another strategy that can accelerate your debt repayment journey is to consolidate or refinance your debt. Consolidating is when you combine several debt payments into one. You can do this by getting a balance transfer credit card, taking out a personal loan, or consolidating your federal student loans. 

Refinancing is similar; its goal is to reduce your interest rate by moving your balance to a new loan. Refinancing has several pros and cons, especially when it comes to student loans. It’s important to take the time to research whether this method would work for your personal situation.

Read more: 

• Best Student Loan Refinance Companies
• Can You Refinance a Personal Loan?
• 5 Ways to Refinance a HELOC
• Best Mortgage Refinance Companies
• Best Auto Loan Refinance Companies and Rates 

5. Credit counseling

If you need assistance with paying down your debt, you can work with a certified credit counselor. A credit counselor can help create a payment plan for you. The National Foundation for Credit Counseling is a nonprofit that has more information about the process and can connect you with a counselor who can help you.

6. Assess spending and budget

While you are developing your debt payment strategy, it’s also important to assess your spending and create a budget. If you’re trying to cut your expenses, the three areas to focus on are housing costs, vehicle costs, and food costs. These three categories tend to be the biggest drains on a budget. 

When you’re reviewing your spending and creating a budget, ask yourself whether there are ways to reduce your expenses. For example, can you move into a smaller home? Is there a more affordable car you can drive? Can you order out less? When you cut costs, you can reallocate those funds and accelerate your debt payoff journey.

7. Additional income

In addition to creating a budget, cutting expenses, and consolidating or refinancing your debt, find ways to earn more income. Whether you start a side hustle or take on additional hours at work, remember you don’t have to work extra hours forever. However, taking on side jobs for a short period can help you achieve your goal of being debt-free faster.

How to get out of debt based on your situation

Here are some of the most common situations that people with debt experience. If you are in one of these situations, here’s what to do.

When you	What to do
Are broke and have no money	Focus on reducing expenses and increasing income
Have a low income	Use the snowball method and consider adding a side hustle.
Are getting divorced	Hire an attorney
Have high medical bills	Negotiate with providers and hospitals
Are drowning in student loans	Consider consolidating, refinancing, or enrolling in an income-driven repayment plan.
Have high credit card debt	Consider a balance transfer card or use the avalanche method
Have tax debt	Explore IRS programs such as payment plans, Offer in Compromise, or CNC status; consult a tax professional

You’re broke and have no money

Having no money and being broke is a difficult position to be in. If this is you, focus on increasing your income and reducing your expenses. Working a few extra hours can go a long way in creating breathing room in your budget.

You have a low income

If you have a low income, look for ways to cut your expenses and increase your income. The snowball method would work best for debt repayment because you can start by paying off your smaller debts, which will free up cash flow to tackle your larger debts in the future.

You’re getting divorced

If you are getting divorced, hire an attorney. An attorney can assess your current financial situation, tell you what debt you’re responsible for, and refer you to resources, such as a credit counseling service, that can assist you. The U.S. Department of Justice also has a list of pro bono legal service providers if you need financial assistance.

You have high medical bills

Many medical providers and hospitals are willing to work with people who have unpaid hospital bills. Many offer payment plans or financial assistance. What’s important is to contact them and ask what your options are.

You’re drowning in student loans

If you have federal student loans, consider enrolling in an income-driven repayment plan, which can help make your bills more affordable. If you have private student loans, you might be able to refinance them at a lower interest rate.

You have high credit card debt

If you have credit card debt, consider applying for a balance transfer card. This card offers the opportunity to pay down debt with an introductory 0% balance for a set period of time. The avalanche method is also a solid technique because credit card debt has a high rate, which means you’ll likely tackle it first before other debts.

If you’re feeling overwhelmed by high-interest debt, remember: You’re not alone, and you shouldn’t feel bad about your situation. 

The first step is to create a repayment plan that fits in your budget while also considering:

• Negotiating with creditors
• Creating a spending plan along with realistic goals
• Considering a side job or part-time income
• If needed, consulting a debt counselor or therapist who specializes in behavioral spending (specifically if spendthrifting—spending money carelessly or extravagantly—is one of the barriers)

Erin Kinkade, CFP®

You have tax debt

If you have tax debt, start by contacting the IRS to explore available programs, such as:

• Payment plans: These allow you to pay your balance over time in smaller, manageable amounts.
• Offer in Compromise (OIC): If you can’t pay the full amount, you may qualify to settle your debt for less than what you owe.
• Currently Not Collectible (CNC) status: If paying your debt would cause severe financial hardship, CNC status pauses collection efforts.

It’s important to act fast to avoid penalties and interest from compounding further. Working with a tax professional, such as a reputable tax relief company, can also help you navigate these options and find the best path forward for your situation.

FAQ

What is the fastest way to get out of debt?

The fastest way to get out of debt often involves a combination of aggressive repayment strategies, such as the debt snowball or avalanche methods. The debt snowball approach targets your smallest debts first, giving you quick wins, while the debt avalanche targets debts with the highest interest rates first to reduce overall interest costs. 

To accelerate repayment, consider increasing your income through side gigs, selling unused items, or cutting nonessential expenses. Refinancing or consolidating debt into a lower-interest loan may also help if it reduces your monthly interest payments.

Can you pay off $10,000 of debt in a year?

Yes, paying off $10,000 of debt in a year is achievable with a focused plan and disciplined budget. This would require an average monthly payment of about $834. Cutting unnecessary expenses, boosting income, and prioritizing debt repayment can help reach this goal. Using tax refunds, bonuses, or side income to make extra payments can also accelerate progress.

Can you pay off $50,000 of debt in a year?

Paying off $50,000 of debt in a year is possible, but it requires a high income or significant lifestyle adjustments. On average, you’d need to pay around $4,167 per month to meet this goal. Strategies might include a strict budget, substantial income increases (e.g., overtime, side jobs), or negotiating lower interest rates with creditors. 

Refinancing or consolidating debt to lower your monthly interest might also help. For many, paying off $50,000 within a year might be more realistic if they can apply a large portion of their income to debt while minimizing other expenses.

Are there grants to help me get out of debt?

Few direct grants are available for paying off personal debt; most grants are for specific needs, such as education or housing. However, some organizations, charities, and local programs offer financial assistance for certain types of debt, including medical bills. For general debt relief, credit counseling, debt management plans, or nonprofit financial assistance might offer resources to help manage or reduce debt, even if they don’t provide direct payments to eliminate it.

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