What to Do When You're in Debt?

Excessive debt can be a crushing financial situation, and there are simple (but not easy) methods to get out of it.

Budget to Pay Off Your Debt

There's only one way to get out of debt: Spend less money than you make, and apply those savings to your debt load. Unfortunately, this is as difficult as the maxim to "eat less and lose weight." Your debt represents a period of time when--for whatever reason--you spent more than you made. The interest on your debt means that you're still paying charges on those past excesses; the only way to bring your debt under control is to reduce your expenditures and use your newly excess income to pay off your old debt.

The advantage of doing this: Once you have paid off your debt, you'll be accustomed to living within your income. Stick with that financial plan, and you'll never be in debt again.

You should pay your debt off as quickly as you can; focus on higher-interest debt first, as this costs you more money every time those charges are applied. At the same time, however, don't try to radically reduce your circumstances to a spartan lifestyle unless you are forced to do so--the easier you make this transition, the easier it will be to maintain it. The budgeting book "Your Money or Your Life" by Joe Dominguez and Vicki Robin has tips on how to do this.

Negotiate with Your Creditors

Your creditors are the people you owe money to--such as issuers of your credit cards, or banks that provided you loans. Call them and find out if you can negotiate a lower rate of interest, or a payment arrangement that reduces your principal. Your principal is the amount you owe; sometimes you can make an offer to reduce this total amount.

Do not mistake these for an offer to lower your monthly payments--this makes it easier on your bottom line, but leaves more debt for a longer period of time, during which it continues to earn interest charges. These "offers" are really opportunities for your creditors to leave you deeply in debt, and to have you pay more interest to them in the long run.

Consult a Credit Management Nonprofit

Many nonprofits offer to help you create a budget, or work with your creditors to reduce your interest or principal. If your debt situation is truly untenable, they can work with you to determine whether declaring bankruptcy is a good way to get out of debt. If your financial situation is overwhelming you to the extent that you can't get started without help, begin by calling one of these agencies and getting their assistance and support.