How Can I Get Out of Debt?
If you have more than one account to pay off, you first start with the smallest balance first while you continue to pay the minimum on the remaining larger debts. Once the smallest debt is paid off, you move on to the next debt (which is now the smallest) above that, so on and so on, gradually moving up to the larger debts.
The basic steps in the debt snowball method are like this:
First, list all debts in order from smallest balance to the largest balance. If you have two debts that are very close in total balance due, then go with the debt that charges the highest interest rate.
You must commit to pay the minimum payment on every debt. Then, figure out how much extra (above and beyond the minimum due) you can pay on the smallest debt. Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
One important note: in order for the debt snowball method to work, the extra payments must go directly toward reducing the loan principal.
Once a debt is paid in full, add the old minimum payment (plus any extra amount available) from the first debt to the minimum payment on the second smallest debt, and apply the new sum to repaying the second smallest debt.
Repeat this until all debts are paid in full.
In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill and gathering more snow (thus the name “debt snowball”).
The real key to the debt snowball is its psychological effect. When you pay the smaller debts first, you start to see fewer bills and as more individual debts are paid off, you really get a psychological boost and great feelings of accomplishment. Studies have shown that individuals who tackle their smaller debts first are likelier to eliminate their overall debt than trying to pay off debts with the highest interest rates first.
Now, the math may compel you toward paying the highest interest debt first; however, in trying to reduce debt you may need “quick wins” (i.e., no more bills from creditors paid off in full) in order to remain motivated toward debt reduction and your final goal of being debt free.
What If I Don’t Have the Means To Pay Off My Debt?
The debt snowball only works if you have the extra income to dedicate to paying off your debts. However, many people have gone through hardships such as job loss, medical emergencies, or divorce. After such turmoil, it may be impossible to make your minimum payments, nonetheless paying any extra.
At this point, it may be a good idea to talk to a professional about debt relief options under bankruptcy law.
Many people have pre-conceived notions about bankruptcy law that are incorrect. There is a lot of misinformation floating around out there that people hear from family, co-workers, and friends.
For instance, you do not have to be “flat broke” to file for bankruptcy. There is no formal test or requirement about how “broke” you have to be to file for bankruptcy. Each individual files bankruptcy for his or her own reasons. In fact, bankruptcy law allows you to keep certain amounts of your belongings and property.
I knew an elderly couple that extinguished their retirement accounts in an effort to pay off their creditors. Even after doing this, they still had to file for bankruptcy. This was extremely unfortunate, because federal bankruptcy law lets you keep (with some narrow exceptions) your retirement accounts.
I understand these people were trying to do the right thing, but they would have greatly benefited from some pre-bankruptcy advice and strategy. (I’m not even going into the tax implications of withdrawing funds from retirement accounts). That way they could have taken care of their debt and also kept the funds in their retirement accounts.
Another common occurrence is that people wait too long while in foreclosure. Many people, through the loss of a job or a medical reason, fall behind on their mortgage. A Chapter 13 bankruptcy can help you save your home by catching up on the mortgage arrears. However, if you want to assert your rights in a Chapter 13, it really does you no good to wait until the last minute to file. If you wait too long, (meaning right before the forced sale) the mortgage arrears will keep on accumulating to the point where it will be impossible to pay them back.
If you are experiencing financial hardship, such as burdensome credit card debt or are facing a foreclosure – don’t wait! It can really cost you. It does not hurt to get a consultation from a qualified bankruptcy lawyer. It can really save you in the long run.
If you find yourself too deep in debt, and cannot possibly pay your bills, I can help. If you are facing a foreclosure, utility shut off, or lawsuit, I can help. Please call my office at (814) 240-1013 or email me at firstname.lastname@example.org with your questions. The first office consultation is free and payment plans are accepted.