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Getting Out of Debt

Step 1: Stop Taking on New Debt

Once you realize that you are in a debt trap, stop borrowing money today.  Hide from yourself all the tools you use to borrow money. 

Step 2: Make a list of all of your debt

Collect all of the documents that you have related to your debt. Make a list of all of your debt.  Write down the creditor, the balance owed, the interest rate charged, the payment you owe and when it is due, and other important information.

Step 3: Contact your creditors

Contact all of your creditors and ask them if they will renegotiate the debt, either by lowering the interest rate, reducing the balanced owed, or reducing the monthly payment.  They may say no, but it does not hurt to ask.

Be aware that when you settle a debt, the creditor is making an arrangement to take less than you owe. This may have negative affect on your credit reports and scores.  You may also end up owing income tax on the portion of the debt the creditor forgave.

Step 4: Choose a strategy

You can pay down your debt in one of two ways:

  • The avalanche method or
  • The snowball method. 

With the avalanche method, you list all of your debt in order from highest interest rate to lowest interest rate.  You begin paying off the highest interest rate debt first and then proceed to the lowest.  This method will save you money in interest payments over the long run. 

With the snowball method, you list your debt in order of balance from smallest to largest.  You begin paying off your smallest balance first. Once pay this debt, you continue making the payment amount, but add it to the next smallest debt.  This increases the payment to the next smallest debt.  Once the next smallest debt is paid off, you take the amount you paid to the first debt and the amount to the second debt and apply it to the third.  And so on. This method will give you the psychological boost of accomplishment that may propel you through the process. 

With either strategy, you pay the monthly minimum required on all debt and make the largest payment you can to the debt that you are focused on.

Step 5: Start paying off your debts one at a time

Once you have chosen a strategy, pay down your debt each month until it is gone.