3 Things to Do ASAP When You're Overwhelmed with Debt

Everyone experiences debt at some point in their lives. Often, it's not a big deal. You pay back what you owe on the agreed-upon schedule and then you put the whole thing behind you. But other times, your debt becomes so difficult to manage that you have to seek out debt relief.

If you're overwhelmed by your debt, don’t ignore it. Take the following three proactive steps to get your finances under control again.

1. Take Stock of the Situation

Before you can chart your best course forward, you have to understand what you're dealing with. So your first step is to list all of your debts. Include the following for each debt:

• Name of the creditor 

• Debt type (credit card, auto loan, etc.)

• Amount owed

• Minimum monthly payment

• Interest rate

• Payment due date

You'll use this information to figure out which strategy is best for tackling your debts. 

You also want to check on your credit. You might be able to get a free credit score from one of your credit card providers. You can also view your credit reports for free each week at AnnualCreditReport.com. 

It’s good to know where your credit stands because some debt relief strategies involve taking out loans, which could be difficult if you have poor credit. Other strategies could be hard on your credit score, and this could give you pause if your credit score is high.

2. Understand the Available Debt Strategies

You can try several things if you're overwhelmed by debt. Some strategies work better than others for certain types of debt, but a lot depends on personal preference. Here's a look at some of the most popular debt relief strategies.

Debt avalanche and snowball methods

The debt avalanche and snowball methods could work well if you have debt across multiple credit cards and a little extra cash to spare each month. Both strategies involve making the minimum payments on all your cards each month to avoid late fees and beefing up the payment for one target debt.

With the snowball method, you put any extra cash toward the card with the lowest balance until it's paid off. The avalanche method has you focus first on the card with the highest interest rate. When that target debt is paid off, you move onto the next card on your list until they're all gone.

Debt consolidation

In debt consolidation, you take out a new loan to pay off multiple smaller debts. This could be a personal loan or a home equity line of credit (HELOC). Debt consolidation could be a useful strategy if you want to reduce the number of monthly payments and due dates you have to worry about.

It's most realistic if you have good enough credit to qualify for a loan with a lower rate than what you’re paying now.  If you’re a homeowner, you might be able to qualify with a lower credit score by opting for a home equity loan or HELOC.

Debt settlement

Debt settlement begins with a negotiation with your creditors, either on your own or with the help of a professional debt settlement company, to get them to accept less than what you owe and treat it as full payment. This only works with unsecured debt like credit cards and medical bills. Secured debts like car loans and mortgages can’t be settled. 

Debt settlement is for someone who has a financial hardship and can’t afford to fully repay their debts. 

Debt management plan (DMP)

Credit counseling agencies offer debt management plans (DMPs), which are designed to help you pay back your unsecured debt within three to five years. These programs are funded by credit card issuers and are sometimes able to negotiate lower interest rates or waived fees that can make paying back what you owe a little easier.

Typically, you pay a small fee to open a special dedicated account and then make monthly payments. The credit counselor makes sure the account sends payments to your creditors. This could work for you if you want a little help navigating debt repayment. But you may have to close your credit cards, which can hurt your credit score. Monthly payments can be high.

Bankruptcy

You can file two main types of bankruptcy. Chapter 7 bankruptcy could help you get rid of eligible debts in a few months, but you may have to sell some of your possessions. 

Not everyone qualifies for Chapter 7. If you can afford a payment, you’ll be directed to Chapter 13 instead. A Chapter 13 bankruptcy doesn't require you to sell anything that you own, but you have to make payments to your creditors for three to five years.

3. Choose a Strategy or Strategies and Stick With It

Now that you've reviewed your debt situation, one or more of these debt relief methods could feel like the right one. You may need to do some more digging before you land on the strategy that's right for you. For example, you might want to: 

• Check the minimum payment in a debt management plan 

• Compare personal loan offers for a debt consolidation loan

Once you've chosen a method, stick with it and celebrate your small wins along the way. Expect the process to take time, but know that getting rid of debt is possible, and it's definitely worth the effort.