Bailing out from beneath a tsunami of debt is nasty business, but it’s ultimately doable for most of us. If you’ve cut up your credit cards yet still find yourself slowly sinking under the weight of your monthly payments, you might be in too deep — and all those payments could be in danger of pulling you under.
To get a realistic picture of whether your debt load is straining the limits of what you can reasonably pay off, list off every scrap of consumer debt you owe, including car and personal loans, medical bills and credit card balances. Then use a debt payoff calculator to calculate the minimum amount you’d have to pay each month in order to pay off each bill within five years; that’s the typical length of time a bankruptcy court would expect you to pay on your debt before forgiving the balance.
Now add up the totals. Is the final tally a figure you can manage to come up with faithfully every single month? If it isn’t, your finances may be in worse shape than you thought; it’s time to look at alternatives. (More on that in a moment.) But even if you think you can swing those payments, you won’t pay them off for years and years (and hundreds of dollars in additional interest payments) if you can’t crank up the size of your payments.
Get serious about debt payoff
If you think you can manage to pay off what you owe with a little focus and effort, start the snowball rolling. That’s what we call this payment strategy: snowballing. List your debts in order of how much you owe, from largest to smallest. Then every month, pay as much as you possibly can on the bill with the highest balance, while making minimum payments on all the rest. Once you’ve paid off a significant portion of your debt, take whatever you were paying and add it to the minimum you’ve already been paying on the next largest bill. (Keep paying the minimums on all the others.) You’ve just made your biggest monthly payment that much bigger — you’ve “snowballed” it.
As you pay down your most burdensome debts, the amount of money you put into the smaller ones gets larger and larger. The payments get bigger and bigger as you pay off cards. This more aggressive method is more effective in the long term than spreading your payments out over several bills.
A debt consolidation loan offers another way to get a handle on multiple debts. Be sure you understand the pros and cons of debt consolidation loans; they’re not the right solution in every situation.
When you can’t keep up
If you find that you simply don’t have enough money to make your monthly payments or to make payments large enough to make real progress, don’t put off taking action. Every billing cycle you spend “trying harder” or hoping for a raise or gift or other saving grace to come along means another billing cycle sinking you deeper into the interest hole. It’s time to get professional help.
Contact a credit counselor affiliated with the National Foundation for Credit Counseling, or find a qualified bankruptcy attorney through the National Association of Consumer Bankruptcy Attorneys to investigate the financial options that may be right for you.