Digging Your Way Out of Debt

If you owe a lot of money between your student loans, your credit card, and other debts, you may feel overwhelmed or powerless. Don’t give in to feelings of despair. There is always a way to dig yourself out of the financial hole you have found yourself in.

Step 1: Figure Out Exactly How Much You Owe

Many people are so demoralized by debt that they don’t even look at their bills. If they open them at all, they look just at the minimum payment so that they can pay exactly what they are obligated to pay and no more. However, if you want to get out of debt, your first step is to figure out exactly what you’re looking at. You need to add up all your debts–all your total debts, that is–so you can begin to create a plan to get out of financial trouble. Sure, it’s depressing to think you owe $150,000 or more, but it’s far better than sticking your head in the sand, continuing to make minimum monthly payments, and wondering when you will ever be out of debt.

Step 2: Put Your Debts in Order

Once you know what you owe and who you owe money to, your next step is to put your debts in order of payment priority. Some people like to pay debts off based on which debt has the highest interest rate, while others like to pay off smaller debts first in order to feel like they are making progress and motivate themselves to continue. In any event, you should prioritize your debts and begin paying as much towards the first debt on your list as possible so that you can begin making a dent in your debt.

Step 3: Create Your Own Debt Payment Plan

Once you’ve decided which debt to focus on first, you need to make a plan to pay it off quickly. Create a budget if you don’t already have one or revise your current budget. Your budget should list all necessary expenses and expected income for the month. Then, determine how much extra money you can afford to put towards that first debt.

Calculate how many months it will take to pay off your debt using your plan. If you are only able to put a few dollars aside per month, review your budget. Look first for places you can cut–it’s easier to work with the money you already have than to create new sources of income. If you can’t find any additional savings, consider getting a part-time or second full-time job to help increase your income so that you can pay off your debt.

If you determine that there is no way to pay back your debt and you see no change to your circumstances that would allow you to be able to make debt payments it may be time seek the advice of a trusted professional like a trustee in bankruptcy. A trustee in bankruptcy can help you determine if a consumer proposal or a bankruptcy is the right step for you.

A consumer proposal is making an interest free settlement with your creditors to pay them only what you can afford on a monthly basis for no more than five years. This solution is meant for those people that can afford to pay something, but can’t afford their debts completely, particularly with the interest charges.

If you find that you can’t afford to contribute anything towards debt repayment, even after looking at cutting expenses than you may find a bankruptcy is the right choice. It would allow you a fresh start so you can rebuild your credit history and learn some better money management skills.

Step 4: Pay Your Debt Consistently

Every time you get paid, make sure you make your debt payment along with all required minimum payments. The only time you should delay a debt payment is if you have an emergency, such as emergency medical care that requires you to use the funds you’d ordinarily use for your debt payment.

If you did file a consumer proposal or a bankruptcy it is also important that you meet your obligations under these processes. While a bankruptcy option may be less costly, both a consumer proposal and a bankruptcy filing do require monthly payments. Keeping these payments up to date is a necessary part of ensuring that your debt is cleared in the end.

Step 5: Add Old Debt Amounts to Your Next Payment

When you pay off a debt, celebrate! That’s one less debt you have to pay and one step closer to your goal. After you’re done celebrating, add the amount you were paying to the next debt. For example, if you paid $116/month to your first creditor, when that debt is paid off, add that $116 to your next debt payment.

In the same way, completing a bankruptcy or consumer proposal is also cause for celebration. It may not have been your choice in dealing with your debt, but the end of the process signifies that are now free to start over. Celebrate the moment and allow yourself to move forward with a better understanding of the issues surrounding the use of credit in your future.