Certain types of debt, like mortgages and student loans, can help build a strong financial foundation. However, others, like high-interest credit cards, can quickly spiral out of control.
If you’ve found yourself with a mountain of less desirable debt you’d like to pay off as soon as possible, here are seven steps financial experts recommend you take.
1. Tally Up Your Debts
Before creating a strategic plan to get out of debt, you need to fully understand the problem.
“Take a moment to list out every debt you have — credit cards, loans, personal debt — and write down the interest rates, balances and monthly minimum payments,” Hillary Seiler, a certified financial educator and personal finance expert at Financial Footwork in Boise, Idaho, wrote in an email.
Seiler says this will give you a clear picture of your debt and help you determine the best way to pay it down.
2. Review Your Budget
With a thorough understanding of your debts, the next step is to review your budget. “Track your income, your must-have expenses and what’s left for debt repayment,” Seiler said.
Ensure everything is up to date so your estimates are as accurate as possible. The difference between your income and expenses is your disposable income, which is the money you can use for extra debt repayments.
[Read: How to Make a Budget — and Stick to It.]
3. Maximize Your Disposable Income
Experts recommend reviewing your budget and finding ways to maximize your disposable income by increasing your income or reducing your expenses.
“Sometimes there is nothing you can cut, but it never hurts to check. For example, can you find a cheaper cell phone bill or car insurance?” Ashley Morgan, debt and bankruptcy lawyer and owner of Ashley F. Morgan Law in Herndon, Virginia, wrote in an email.
She added that this step is difficult if you’re low income as you may already be running lean.
Higher-income individuals can also face challenges, though, such as needing to reverse lifestyle creep and sacrifice creature comforts.
[Related:What Is ‘Lifestyle Creep’ and Should You Try to Avoid It?]
“When trying to get rid of debt and reduce expenses in your budget, getting rid of convenience items can be difficult if you are used to them. But if you’re set on getting rid of debt, being realistic about what you can reduce and eliminate is important,” Morgan said.
You’ll also want to consider if you can increase your income while you’re repaying the debt.
“Working an extra job or doing a side gig can be the best way to make additional money,” Morgan said. But burnout is a real risk so it’s important to be honest about what’s sustainable. “Working 80 hours per week can typically happen for a period of time, but you will burn yourself out.”
4. Dangle the Carrot
Paying off debt is not nearly as fun or easy as accumulating it. The process often requires prolonged sacrifice, which can test your discipline and patience.
Morgan recommended setting goals beyond just getting debt-free. “For example, if you have a goal to be debt-free in a year, you should also be thinking about what you want to do after that year,” she said.
Take time to think about how you want to spend the extra money once the debt is gone. Would you take a celebratory vacation, build your emergency fund or invest more in your retirement?
“Having a goal makes it easier to continue when things get difficult,” Morgan said. It reminds you of the actual, tangible benefits that will come from paying off the debt.
5. Pick Your Payoff Method
Next, decide how you’re going to pay off your debt. Two popular DIY approaches are the snowball method and the avalanche method. With both, you make the minimum payment on all your debts and put all your extra money toward one debt at a time. The difference between the two, however, is which debt you prioritize.
With the snowball method, you prioritize the smallest debt to gain momentum and get quick wins. With the avalanche method, you prioritize the highest-interest debt, saving you more money in the long run.
“These methods both work, but the avalanche method is usually geared toward someone who is motivated most by saving interest each month, and the snowball method is geared towards someone who wants to see quick progress,” Morgan said.
On the other hand, if you’d like support and guidance with your debt payoff, you can consider a debt management plan (DMP). DMPs are structured payment plans, often managed by credit counseling agencies.
A credit counselor typically assesses your situation and contacts your creditors to try to negotiate lower payments and interest rates. You then make monthly payments to your credit counselor and they pay your creditors for you.
6. Consider Debt Consolidation
Debt consolidation is also worth considering. “If you’re juggling a bunch of debt, consolidating all of your credit cards and personal loans into one single loan could simplify the debt-payoff process,” Morgan said.
For example, if you have three credit cards with APRs of around 30%, paying them off with a personal loan that has an APR of 12% would eliminate two monthly payments right away. Additionally, it could cut your costs — although that’ll depend on the repayment term of the personal loan.
If you go this route, shop around and compare the interest rates, fees, monthly payments and total costs of your current credit products to the debt consolidation options you can get. The monthly payment amounts or APRs alone won’t tell you the whole story.
[Read: Best Debt Consolidation Loans.]
7. Know the Last Resort Options
If you’re overwhelmed and can’t afford to pay off your debt using the above methods, you may want to consider alternatives like debt settlement or even filing bankruptcy.
Debt Settlement
Debt settlement involves negotiating with creditors to pay off debts for less than you owe, often with the help of a debt settlement company.
While debt settlement may sound like a good option, it comes with some serious drawbacks. The process often involves skipping payments to save up a lump sum, which hurts your credit. Plus, there’s no guarantee that a creditor will agree to settle your debt in the end.
“A creditor can accept or reject any settlement offer a borrower makes. Additionally, it’s important to calculate any fees for debt settlement companies and the tax implications,” Morgan said.
She explained that most debt settlement companies charge between 15% to 25% of the total debt as their fee and borrowers face tax consequences for any settlements.
[Related:Could You Owe Taxes on Forgiven Debt? How to Find Out]
File for Bankruptcy
To file for bankruptcy, you file a petition with the bankruptcy court. That starts a process that varies depending on whether you qualify for Chapter 7 or have to file Chapter 13.
Chapter 7 involves a trustee gathering and selling all your non-exempt assets to pay off your creditors and discharging the remaining eligible debts. Chapter 13 can also result in eligible debts getting discharged, but only after you’ve completed a three- to five-year payment plan. In both cases, you don’t have to claim the discharged debt as income on your taxes.
While filing bankruptcy can help to wipe the slate clean, it will stay on your credit report for seven to 10 years. Further, Chapter 7 involves the seizure of assets. You’ll have to carefully weigh the pros and cons to decide if it’s the right move for you.
“I recommend considering bankruptcy when you cannot realistically pay off most or all of your debt in three years or less. If you cannot work and budget your way out of debt in 36 months, you typically need to consider other options,” Morgan said.
Pitfalls to Avoid as You Pay Off Debt
As you start your debt payoff journey, here are three pitfalls experts recommend you avoid.
Ignoring the Root Problem
“Many individuals who pursue debt consolidation or debt settlement find themselves back in debt soon after going through these processes. This happens when these individuals do not address their current spending habits,” Daniel Goldfarb, certified financial planner and senior manager of advisory and planning at Empower in Cleveland, wrote in an email.
He recommended taking time to understand the decisions you made that led to the accumulation of your current debt and establishing money habits that will prevent you from accumulating additional debt.
Mindless Spending
Once you decide to pay down your debt, it’s important to stop adding to it. You don’t want to make the problem worse.
Cynthia Campos Delgado, founder and financial advisor at Campos Wealth Management in McAllen, Texas, said in an email that it’s important to be mindful about every purchase you make while paying off debt.
“Is it essential? Is it necessary? Can it wait? Just because you have credit available does not mean you should use it. It is easy to swipe but remember, there comes a repayment schedule for that swipe,” she said.
Bailing Early
Last, commit to seeing your plan through to the end.
“Most people go at it for a few months and lose traction. This is the biggest pitfall I see people make when starting their debt-payoff journey,” Seiler said.
She recommended viewing it as a long game and keeping the goal in mind. “Don’t give up, you are making progress even if it doesn’t feel like it. The first few months will be tough, no denying that. Stick with it,” she said.
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7 Steps to Paying Off Debt originally appeared on usnews.com
Update 04/17/25: This story was published at an earlier date and has been updated with new information.
