Things to Do When You’re Deep in Debt

What it means to be deep in debt

Americans are carrying a lot of debt. According to the Federal Reserve Bank of New York’s Center for Microeconomic Data, total household debt increased by $266 billion in the first quarter of 2022, making it so that everyone owes a collective $15.84 trillion, and credit card balances were $71 billion higher than a year earlier.

What’s too much debt on the individual level? Try to never let your debt-to-income ratio reach 30%, suggests Peter Casciotta, owner of Asset Management & Advisory Services of Lee County in Cape Coral, Florida. In other words, if you’re making $100,000 a year, you’d want no more than $30,000 to go toward the debt (good or bad).

Don’t panic if your debt-to-income ratio is higher. Some experts suggest 35% is OK. But everybody generally agrees that if 50% or more of your income is going to debt, you need to take action, now. Here are some expert-backed suggestions on what to do if you’re deep in debt.

Analyze your situation.

Whether you’re deep in debt, or just struggling, this is the first logical move. Take a hard look at what you owe and to whom. This is especially important if you have a family with multiple spenders in the household, says Larry Hendrickson, founder and managing partner of G&H Financial Group, a financial planning and wealth preservation firm in North Canton, Ohio.

“How does a family chisel away the debt to become debt free? The first recommendation I have is for a family to sit down to discuss the monthly budget. Without knowing how much is being spent monthly, it is a hard to determine what can be allocated towards the family debt,” Hendrickson says.

“Debt is a difficult subject for many families, especially young families just out of school. With inflation at an all-time high since the early 1980s, and increased gas prices, we all are potentially racking up some additional debt,” Hendrickson says.

Consider bankruptcy.

Nobody wants to hear that suggestion, but bankruptcy exists for people when there’s just no feasible way to climb out of a debt hole. Yes, your credit score will be in tatters, and it may be a while before you can get the best or decent offers from credit cards and lenders. But if you’re truly deep in debt, that’s probably already the case.

In 2021, 413,616 Americans took the bankruptcy plunge, compared with 544,463 in 2020, when the pandemic was running rampant and ruining a lot of financial portfolios.

If you need a fresh start, a bankruptcy attorney can help you get one.

Consider going to a credit counseling service.

A credit counseling service can be useful if you believe you can pay off your debts, if only you just had a little professional help. Credit counseling agencies can help, for instance, negotiate lower interest rates with credit cards, says Amy Maliga, a financial educator with Phoenix-based Take Charge America, a nonprofit financial counseling agency.

You would want to work with a nonprofit credit counseling agency that is affiliated with the National Foundation for Credit Counseling or the Financial Counseling Association of America. The United States Department of Justice has a helpful list of approved credit counseling agencies.

“If someone is making only minimum payments on multiple cards, has reached their credit limit on one or more cards, they’re missing payments entirely, and worrying about debt is affecting their physical and mental health — or some combination of these scenarios — it’s time to reach out to a credit counselor,” Maliga says.

Prioritize the debt you need to pay.

If you’re really struggling and can’t pay off each debt every month, it’s important to prioritize what entities you’re paying, says Andrea Williams, a Northwestern Mutual wealth management advisor based in Chicago.

“Prioritize debts secured by a house or car, necessities like utilities and debts that can’t be discharged, including student loans and unpaid federal taxes. Then focus on unsecured debt, like credit cards,” Williams says.

The credit card companies may not love hearing that, but if you have to choose between making payments, your home and car should come before your credit card debt.

Talk to your credit card issuers.

You don’t have to work with a nonprofit to help you negotiate with credit card issuers. A candid phone call that you yourself make to your credit issuer could pay off.

“Many credit card companies offer short-term hardship programs that will temporarily lower your interest rate to allow more of your monthly payment to go toward the principal. This will help you make progress quickly and motivate you to keep going,” Maliga says.

That said, understand that the moment you start talking to your credit card company about how you’re struggling to pay off the debt you owe, you may see your credit limit reduced — or you might be denied any more purchases.

Pay off the debt with the higher interest first.

If you’re not working with an attorney to get them discharged or a credit card counselor to get them paid off, you may want to adopt this debt elimination strategy.

The avalanche method of paying off debt works this way: Let’s say you have three credit card accounts, all of them with a lot of revolving debt. With the avalanche debt-killing strategy, you would take two of those credit card accounts and make the monthly minimum payments on them. The third card, the one with the highest interest rate, you would pay off with as much money as feasibly possible (without hurting your ability to pay bills and buy food and so on).

Once that third card is paid off, you’d then take the money you were spending on the third card, and you’d put that money toward the next card with the highest interest rate. After that’s paid off, you’d put the money toward the last card.

Or — pay off smaller debts first.

The avalanche method makes more sense mathematically, but it can take a while to see results. Because of that, many financial experts instead recommend focusing on the credit card with the smallest amount of revolving debt, while still making minimum payments on the rest of your credit cards.

“There is some evidence that the snowball method, where you prioritize by smallest balance first, helps some people because it creates the potential for quick wins that help maintain momentum,” says Sophie Raseman, head of financial solutions for Brightside, an employer-sponsored financial care benefit for employees. “It matters less which method you pick than that you pick something and stick to it.”

A lot of credit cards will offer 0% interest on balance transfers deals, for periods of 12 to 18 months, as a way to attract new customers.

Transfer your credit card balance.

Once the card with the smallest balance has been paid off, then you focus on the credit card with the next smallest amount.

It can be a useful way to kill off debt — you put, say, $3,000 onto a credit card that charges no interest for about a year, and you spend that year or so paying it off. But there are a lot caveats that go with this strategy.

For starters, you can generally only get credit cards with 0% interest on balance transfers if you have stellar credit. You also want to pay attention to the balance transfer fee, which is usually 3% to 5% of your balance. Also, if you buy a bunch of things on the old credit card and don’t pay down the debt you’ve transferred to the new credit card, you could soon wind up almost doubling your debt.

Refinance debt.

Refinancing debt can be a formidable strategy to reducing what you owe. “While it can take time to receive approval, refinancing can help lower your monthly payments long term,” says Williams.

“Any extra money you save from refinancing can be put toward repaying high-priority debts — i.e., house or car payments, student loans,” she says.

Of course, keep in mind that with some types of refinancing, you might be looking at extra costs or extending a loan so that the loan is more expensive in the long run.

Accelerate payments.

Ron Tallou, founder and owner of Tallou Financial Services in Troy, Michigan suggests this.

This can work to bring down debt — if you have extra money that doesn’t need to go to bills, food or an emergency fund. Having extra cash, of course, can be quite a hat trick when inflation is running rampant. But Tallou is correct: Accelerating payments can end your debt faster. There is no rule that says you only have to make, for instance, one monthly car payment or one house payment or one payment to a credit card balance that you’re trying to whittle down.

“Try to pay at least twice a month. That way more is going toward the principal,” Tallou says.

Stop creating new debt.

This strategy may require dramatic changes. “You can’t dig out of debt if you continue to rely on credit cards for expenses. Stop accruing new debt and focus on a cash-only lifestyle. Lock up your credit cards or hand them over to a trusted friend or family member to hold on to them for you,” Maliga advises.

“Let them know your goal is to get out of debt and ask for their encouragement and support. Sharing your goal with someone who can hold you accountable is a powerful tool to make changes that stick,” she says.

Create an emergency fund.

Unexpected events, like your car breaking down, can really destroy your finances. Therefore, you should save for emergencies, even when you’re buried in debt, Raseman says.

“This habit is key because it’s what you’ll build on to prevent yourself from getting into more debt in the future,” she says.

After all, why did you go into debt in the first place? You didn’t have enough in savings, and so you relied too much on credit cards and taking out loans.

Set up an automatic savings account.

If you never have money to draw upon for purchases that you know are coming, like holiday gifts, birthday presents and one-offs like paying for your kid’s school photos, you’ll probably find yourself relying more on your credit cards. Doing that, of course, can put you further in debt. So one of the first things you should do, if you want to get out of debt, is get in the habit of saving money.

If you set it up through your bank, so that the moment a direct deposit hits your checking account, some of it is diverted to a savings account, a few months from now you’ll have a small pile of your own money that you can raid, instead of turning to a credit card.

Use cash as much as possible.

Paying in cash isn’t practical for a lot of expenditures. But with some purchases, using cash can be a practical and smart way to manage your money, says Scarlett McCarthy, the founder for LiterallyBroke.com, a personal finance platform dedicated to artists and creatives.

“My No. 1 tip for people paying off a lot of high-interest debt is to adopt a cash budget for groceries and fun money,” McCarthy says. “Using cash forced me to realize how seemingly small purchases add up. I had to become much more intentional with my spending and plan ahead for things like birthdays and events.”

Pay your bills on time.

When you’re deep in debt and struggling to get out, it’s so easy to fall into a habit of making payments when you can, rather than when they are due.

Better late than never, but late fees can do a lot of damage. Late fees for your mortgage payment, your car payment, your utility bills, phone bills, student loans and credit cards can add up. If you can manage to pay them all on time for a month, you’d probably have quite a bit of extra money to go toward debt, savings or day-to-day expenses.

Create a bare-bones budget.

This is as much fun as it sounds. Still, it should be effective.

“One key strategy is to cut back to a bare-bones budget, which frees up more funds to devote to paying down debt. That means a budget focused on just the basics — housing, food, utilities, transportation and bills. Eliminate all discretionary spending, such as entertainment, travel, clothing and gifts,” Maliga says.

And within those basics, Maliga advises that you are as “economical as possible.”

“Prepare all meals at home, keep a close eye on when and how you use water and electricity, and try to negotiate lower rates for essential services such as insurance. If you start feeling discouraged, remember, your bare-bones lifestyle won’t last forever,” she says.

Reduce your debt using these strategies:

— Analyze your situation.

— Consider bankruptcy.

— Consider going to a credit counseling service.

— Prioritize the debt you need to pay.

— Talk to your credit card issuers.

— Pay off the debt with the higher interest first.

— Or — pay off smaller debts first.

— Transfer your credit card balance.

— Refinance debt.

— Accelerate payments.

— Stop creating new debt.