You’ve hit a brick wall. You have run out of money and have no available credit. Everything is maxed out. You have no easy way to increase your income, and there are still bills due this month. The cable has been disconnected, and the power is next. You’re out of money and you’ve got bills to pay. You’re in a personal debt crisis and it isn’t pretty.
You might be thinking…
- How did it ever get this bad?
- Is there anything I can do?
- Can I ever recover from this?
At some point you need to focus on the past. To look back and note what mistakes you made and the decisions that led you here. But now is not the time to contemplate the past. Now is the time for action!
How to Overcome a Debt Problem
There are 5 basic steps to overcoming a debt crisis.
1. Take Stock of Everything
Before you can do anything with the mad creditors, the phone calls, and the utility company you need to take notice of what you have.
You do this for two reasons:
- to realize you are still lucky to live in a land of abundance like the United States, and
- because those items sitting on your coffee table can be turned into cash (and the coffee table can be, too!).
If you are in a desperate situation then you need cash. You’re looking to accumulate survival cash and selling your stuff at a discount is one of the fastest ways to get some quick cash.
It won’t be pretty and it will likely be painful, but desperate times calls for desperate measures.
You also need to evaluate exactly who you owe money to, and how much you owe them. We’ll need this information later in your recovery.
2. Protect Your Income
Your monthly bills, including credit cards, are currently exceeding your income. That’s bad.
Now imagine the same situation with less or no income. That’s much worse.
If you’re in crisis mode then you must protect your income at all costs. Work two jobs if you can find them. Get to work on a time, be sharp, be productive, and be valuable. (Smart companies don’t fire valuable resources.)
Your income is your lifeline out of this hole. Don’t lose it!
3. Pay Necessities Only
Once you’ve stabilized and protected your income you need to deploy it in as an effective way as possible to meet your basic needs.
Those needs include: food, water, shelter, and clothing.
Note the necessities don’t include internet access, gasoline for a car, or a cell phone.
You need to make sure the lights and heat stay on and that you have a place to live. Once you get that stabilized you can move forward with some of the luxuries of life.
4. Pay All Your Minimum Payments
Note that it isn’t until step four that we start discussing your debts and staying current. That doesn’t matter until you have the necessities of life taken care of.
But if you’re here you’ve got the basics covered. It’s time to go back to step one where you noted who you owed and what you owed them. (They’ve probably been very helpful and sent you several notices reminding you as well.)
Find your documentation and note the minimum required payment. Your goal is to now take care of the necessities plus pay the minimums on your debt.
5. Create and Implement a Payoff Plan
By step five you’ve gotten your life somewhat stabilized. Hopefully you’re able to get a little bit of sleep at night, and you no longer worry about coming home to the power being disconnected. You have the basics covered, and you’re keeping the creditors at bay by paying the minimum payment.
Now it’s time to make some real headway on your debt. Your lifestyle should be very similar to step three (necessities only). You don’t have the freedom to go get a cell phone or splurge on eating out all the time. There will be plenty of time (and money!) to do that when you’re out of debt.
For now focus your excess income on a single debt. It might be the highest interest rate debt or the smallest principal amount you owe to a creditor. Either way is fine.
Target that debt, and throw every extra dollar you have at it until it is paid off. Then target a new debt and repeat the cycle until you’ve paid everything off.
It might take you months. It might take you years. But you’ll recover… just learn from your mistakes and avoid a second debt crisis.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.