Trying to figure out how to get out of debt can make you feel defeated and lead you to wonder if you'll ever be debt free. There are so many debt relief options out there that it can be confusing trying to choose the right one for you and avoid debt relief scams in the process. In this blog we're sharing some answers to common issues you may be facing if you're trying to get out of a lot of debt. Here's a quick list of the questions and tips found in this blog:
Don't lose hope if you're feeling like you can't get out of debt. This blog is here to offer guidance, support, and actionable steps to help you get out of debt and work towards a better financial future. Whether it's bad credit, living paycheck to paycheck, or exploring different debt relief options, there is always a way to regain control of your financial situation.
Other Get Out of Debt Advice Doesn't Work
There's a ton of "How to get out of debt" advice out there that completely misses the mark for folks drowning in debt. If you feel like you can't get out of debt and you've been researching different self-help debt relief options, then you've probably come across this type of advice. Here's a list of some of the most common "How to get out of debt" advice that's just not that helpful if you're overwhelmed by debt:
It's true that these methods can and do work for certain folks. But that's just it, these methods all make some basic assumptions about the people who use them to successfully get out of debt. Specifically, they all assume that you can afford your necessary living expenses and your minimum payments, and all but the "reduce expenses" option assumes that you actually have money left over after you pay for your living expenses and monthly minimum payments (and the "reduce expenses" option assumes you have a meaningful amount of "extra" spending each month that you can eliminate).
If you're in a debt cycle, where you're making minimum payments on your debt but then end up using your credit cards later in the month because you're out of money...because you made your minimum payments, then this type of how to get out of debt advice simply isn't meant for you and it's not going to do anything for you except make you feel like you can't get out of debt.
This doesn't mean that there are no good options for you though. You need a more powerful method to get rid of your debt, and the good news is that you can get out of debt by paying much less than you currently owe and it may be possible to get out of debt in under six months.
It Feels Impossible to Get Out of Debt With Bad Credit
We understand this feeling and we know how frustrating it is to keep reading the endless advice on the internet suggesting debt consolidation, home equity loans, and balance transfer cards. This sort of advice can feel like a bad joke, and often it's actually really bad advice if you're overwhelmed by debt.
Why is it bad advice? There are two primary reasons why this is awful advice if you're drowning in debt.
First, this type of "debt relief" is often not a real option if you have too much debt, unless you catch it really early. If you're truly drowning in debt then you most likely won't qualify for any of these options. The reason why is because it's hard to have good credit when you have too much debt. Even if you have good payment history because you make your payments on time, you're credit utilization and debt to income ratio are taking a significant hit if you're overwhelmed by debt (your debt to income ratio isn't necessarily factored into your fico score, although many lenders consider it when deciding whether to approve you for new credit).
Second, the interest rates and repayment terms are predatory for folks who are overwhelmed by debt but find somewhere that will approve them. Taking one of these loans will almost always make matters worse.
This advice is just like the other advice that doesn't work: It's meant for folks with manageable debt, not folks drowning in debt.
But don't worry, this isn't your only option. You don't need to take on new debt to get out of debt, and it's possible to build a bright financial future even if you currently have a low credit score.
How do I Get Out of Debt Living Paycheck to Paycheck?
When most people say they're living paycheck to paycheck they usually mean that they have no extra money after they make their monthly payments and pay to make ends meet. But sometimes that's not the case. Sometimes folks say this and they do have some money left over, but maybe it's just not that much money. If this is your situation, then you may be able to benefit from the snowball or avalanche method.
If you're like many folks living paycheck to paycheck who have no money left over at the end of the month (maybe you're even in a debt cycle), it's absolutely possible to live life on better terms by getting out of debt, you're just going to have to get serious and commit to your goal of getting out of debt and giving yourself a fresh start. You're going to have to make some hard choices, but it will be worth it if that's what you want. Keep reading below to see which debt relief option is best for you and will help you achieve your goal to get out of debt.
Can a Credit Card Company Sue Me if I Stop Paying?
I'm still surprised by this question every time I hear it. But, since I hear it often enough from folks considering their options for getting out of debt, I figured I should answer it in this blog.
Yes, one-hundred percent credit card companies can sue you.
Anyone claiming you owe them a debt can file a lawsuit against you to collect the debt they claim you owe. Including credit card companies. Just by way of example, we frequently see lawsuits by Discover and Citibank, and they're not the only ones who sue on their own debts instead of sending the debt to collection agencies.
If a debt collection lawsuit is successful, the court may issue a judgment allowing the creditor to garnish your bank accounts and go after your non-exempt property-we don't allow wage garnishment in Texas, but it's perfectly acceptable to garnish your bank accounts.
What is Debt Relief?
If you're overwhelmed and feel like you can't get out of debt, then you likely need more than the get out of debt advice already described in this blog. You need debt relief.
Debt is an umbrella term for programs designed to help individuals manage and reduce their debt burden. Debt settlement, debt management , and bankruptcy are all forms of debt relief.
Tax Consequences of Certain Debt Relief Options
It's important to understand whether the debt relief option you choose will lead to increased taxes. Typically, when you reach a settlement with a creditor and the creditor agrees to forgive a portion of a debt you owe, the creditor is going to send you a 1099-C at the end of the year. That means that the IRS is going to consider the amount that was forgiven like it's your income, meaning you're responsible for paying taxes on it.
Debt Settlement & Debt Management Plans
Debt settlement and debt management are similar in how they're structured. Essentially, you hire one of the debt management or debt settlement companies and stop paying on your unsecured debt. Instead, you start paying the company you hired while you default on your debt.
The company you hired will begin negotiating with your creditors after you've defaulted (the idea here is that there's no motivation for your creditors to negotiate if you're still making payments, you have to create risk for them if you want them to cooperate). A portion of the money you pay each month is a fee that's kept by the company you hired, but the rest is saved to pay out to any creditors who reach an agreement.
The primary difference between these options is that debt settlement companies attempt to negotiate down the principal balance you owe while debt management companies try negotiating down interest and penalties. You also have to complete credit counseling as part of debt management plans.
The risk with these options is that there's no requirement for your creditor to cooperate. Many clients come to us from one of these types of programs after they've been sued by a creditor who refused to negotiate and decided to file a debt lawsuit. Additionally, there are situations where clients have completed their payment plan with the company they hired, only to discover that one or more of their creditors never agreed, but also didn't sue, and now they owe that creditor the original balance plus several years of interest and penalties. There's also the specific issue with debt management plans having zero flexibility if you experience any hardship down the road and need to renegotiate. They typically tell you to catch up your payments in 60 to 90 days or file bankruptcy.
Can I Get Out of Debt in a Year?
If you feel like you can't get out of debt you may not be asking yourself "Can I get out of debt in a year?" But you should be, because it may be possible for you.
There's only one debt relief option powerful enough to get you out of debt this quickly if you qualify. Chapter 7 bankruptcy eliminates most, if not all, of your unsecured debt and gives you a complete and total fresh start in as little as four months.
Should I File Bankruptcy?
Bankruptcy is a good idea if you feel like you can't get out of debt. Getting over the fear of bankruptcy is often the most difficult part of the process, but the relief of being debt free typically starts setting in very shortly after you make the decision. And that feeling of relief tends to grow and renew several times throughout the bankruptcy process.
When to Consider Bankruptcy if I Can't Get Out of Debt?
In a previous blog discussing how much debt is enough to file bankruptcy, we listed several signs that are common among our clients and tend to be strong indicators that bankruptcy is a good idea. Here's a quick recap of that list:
Unable to afford basic expenses without using credit
When this happens because you're making minimum monthly payments that leave you unable to afford your basic living expenses, it's called the debt cycle and it's often one of the strongest indicators that it may be time to file bankruptcy.
Overwhelming medical bills
Medical bills are the most common reason for filing bankruptcy, and with credit card debt as a close second.
Constant creditor harassment
The automatic stay stops all creditor communication immediately, and creates real penalties for creditors who violate the automatic stay.
Consistent late payments
This leads to increased interest rates and debt payments that do next to nothing to actually get you out of debt, which creates situations where you're making payments but your balance isn't going down.
When debt repayment is impossible
You feel like you can't get out of debt
Benefits of Bankruptcy
Bankruptcy offers a chance for a true financial fresh start by reducing or completely eliminating unsecured debt (and there are often options for secured debt). If you're in the debt cycle and always short on money, filing bankruptcy can be one of the best ways to free up some extra funds (i.e. meaning you can keep more of your own money) without needing to go take up a side hustle. Some of the biggest benefits of bankruptcy are:
Automatic stay
This stops all creditor communication immediately, and lasts throughout your entire bankruptcy (except for certain situations).
Get out of debt fast
Chapter 7 bankruptcy is typically over in just around four months. Imagine being debt free in four months...
Get out of debt for much less than you owe
If you're filing a Chapter 7 bankruptcy, then the cost to file bankruptcy is going to be much less than what you owe. If you're filing a Chapter 13 bankruptcy, there's a good chance you'll end up paying less than you owe as part of your repayment plan.
Reorganize your debt to make it more manageable
If you don't qualify for a Chapter 7 because you don't pass the means test, then you'll be able to reorganize your debt and make monthly payments toward it as part of your Chapter 13 payment plan. Certain benefits include reducing and eliminating interest, extending the length of time to repay certain debts, and reducing the secured amount owed to match the actual value of the property instead of the contract balance.
Stop debt collection lawsuits immediately
We work with many clients who were just served with a debt lawsuit. We help talk them through the process while we prepare their bankruptcy case, and as soon as we file debt lawsuit stops immediately. Typically, the creditor(s) suing them dismiss the lawsuit before our clients even receive their bankruptcy discharge.
Protect yourself against judgments
Already have a judgment against you. Bankruptcy will protect you against any more negative consequences.
Reset your credit sooner and get to work building good credit
That's right, because Chapter 7 is finished so quickly you're able to begin working on rebuilding your credit sooner than if you spend years in a debt settlement program or another form of debt relief.
Conclusion
There's a lot of "how to get out of debt" advice floating around out there. But what folks typically aren't saying is that some of that advice only works for folks with manageable debt, and some of the advice can actually make things worse. If you feel like you can't get out of debt then you need to consider real debt relief. Debt management and debt settlement get a lot of attention as popular options, but the truth is that both of these options are risky, can lead to you being sued, may carry tax consequences, and they don't protect your credit like you hope they might. Oh, and they also require you to participate in multi-year payment plans. Bankruptcy can be much faster, is often much cheaper, has no tax consequences, and comes with none of the same risk. If you feel like you can't get out of debt but you want to figure out how, schedule your free consultation with us today so we can discuss how we're going help you get out of debt.
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