If you’re falling behind on debt, you’re not alone. During this inflationary time, 27% of Americans across the top 100 largest US metros are experiencing delinquency.  While it can be overwhelming, ignoring the problem can make things worse. It’s best to attempt to salvage an account while it’s still with your creditor because things are more complicated once your account is sold and in the hands of a debt collection agency. 

1. Assess Your Debt Situation

• List all debts, including credit card balances, loans, or other non-essential living financial obligations.

• Note the total amount owed, interest rates, and minimum payments required.

• If you have debt in collections, you might want to create two categories: debts still with creditors and debts now owned by someone else. 

2. Create a Budget

• Develop a detailed budget that outlines your income and basic living expenses.

• Ensure your budget includes all essential expenses like housing, utilities, and groceries.

• Once you have established your baseline of daily living expenses, identify how much money you have left over to pay your non-living expenses debt. This will be your baseline for what you have to allocate across all your debts. 

3. Create a Debt Payoff Strategy 

• For debts still with creditors, call your creditors to see if you can reduce your interest rate or fees to lower the overall balance and ask for a hardship repayment plan, which will allow you to reduce what you need to pay monthly for some time.  

• For debts in deep delinquency or charge-off status, decide if you plan to repay all or some of the debt. While it’s better to repay credit-related debt in full for credit scoring, settling is better than having the debt remain outstanding, as there’s a potential you can be sued. 

• For debts at the late stage, it may make the most sense to look at the pool of money you have to repay all your debts, determine how much you can afford to pay for each, and negotiate to settle those debts at the desired amount you determined. 

• If you have debts that are not in delinquency, make timely payments and, where possible, pay a little more than owed to keep those accounts active and reduce the balance. 

• Consider a debt consolidation loan if you can qualify.  This will enable you to pay off some or all of your debts. However, this only works well if you won’t use this as an opportunity to take on more debt. Many people take out debt consolidation loans to repay credit cards but end up in more debt when they keep using those credit cards. Only use your credit cards if you can pay them in full monthly. 

4. Update your Budget and Track Spending.

• Make sure your overall budget includes all your monthly debt payments. 

• Look for expenses you can reduce to increase your debt payments or make small splurges so you don’t feel deprived. Subscriptions to various products and streaming services, a less expensive phone plan, etc., may be good places to start. 

• Stay on budget. 

5. Increase Your Income

• If your income doesn’t provide much room for paying down debt, consider boosting your income by taking on a side hustle, asking for a raise, or selling unused items.

• Allocate any extra income to accelerate your debt payoff.

6. Stop Using Credit Cards

• To avoid increasing your debt burden, refrain from using credit cards for unnecessary expenses you cannot fully repay each month. 

• Work to reduce your utilization rate on revolving credit cards by paying more than the minimum each month, which will help your credit score. 

• Focus on using cash or debit cards for purchases to limit additional debt accumulation.

7. Celebrate Small Wins

• Acknowledge and celebrate each milestone and progress towards reducing debt.

• Stay motivated by recognizing the positive steps you are taking towards financial freedom and find inexpensive ways to treat yourself so you don’t feel deprived.

You can seek professional advice if you’re struggling with where to start.  Consult a nonprofit credit counselor for expert guidance on managing and reducing debt. They can help you set up a debt management plan to consolidate payments and negotiate lower interest rates. However, you should avoid debt settlement because while severely eliminating your debt load, you will destroy your credit score for seven years.

Tackling debt can be difficult and discouraging, but following these steps can help you achieve debt-free financial freedom.