When you can’t keep up with your debts, work through the ways to repay them in full before you consider debt settlement or bankruptcy. Those two cut what you owe but can stay on your credit reports for seven years or longer, so use them only for debt you couldn’t repay within about five years.
Which move fits depends on how far behind you are and on what’s left of your take-home pay once housing, food, utilities, and transportation are paid. Missed payments narrow your choices, since lenders that see them on your credit reports are less likely to offer you a low rate. If you’re keeping up and just want to be out of debt sooner, the ways to pay off credit cards faster fit better.
Settlement and bankruptcy have costs beyond the years they can stay on your credit reports. The Federal Trade Commission warns that settlement programs often have you stop paying your creditors while you save, so late fees can grow and you can be sued. Bankruptcy brings a court filing fee, plus a lawyer’s fee if you hire one. And the IRS can tax whatever a settlement forgives, while debt erased in bankruptcy isn’t taxed.
Repay what you owe in full
1. Rank your bills by what you'd lose
Start here this month, before you call anyone. Knowing which bills you can’t let slip tells you how much you can offer the creditors you do call.
When you can’t cover every bill this month, pay in order of what you’d lose. Keep your housing, utilities, and car current first, since an eviction, shutoff, or repossession is far harder to undo than a late card payment. Then call each creditor you can’t pay in full before its due date.
Read more: Can't Pay Every Bill? Housing, Utilities, and Your Car Come Before Credit Cards
2. Call each lender's hardship team
This suits a setback you expect to end within months, like a job search or a medical leave. Asking costs nothing, and every other option on this list stays open.
If a layoff, medical bill, or pay cut means you can’t make a loan or credit card payment, call your lender before the payment is late and ask for its hardship team. You don’t need to be behind to ask, and calling first can keep a late payment off your credit report.
Read more: See a Missed Payment Coming? Call Your Lender for a Hardship Plan Now
3. Ask your card issuer for a lower rate
For a cardholder who is stretched thin but hasn’t missed a payment yet, a lower rate cuts the interest that keeps the balance from shrinking.
If you carry a credit card balance, call your card issuer and ask it to cut your interest rate. Issuers grant most of these requests, and each percentage point off saves about $10 a year for every $1,000 you owe. Lead with your on-time payment record and a better offer from another card.
Read more: Your Credit Card APR Is Negotiable - Most Cardholders Who Ask Get a Cut
4. Roll your card balances into one loan
While your credit still qualifies you for a lower rate than your cards charge, a loan can turn several card payments into one payment with an end date.
A debt consolidation loan saves you money only when its APR, the yearly rate with the origination fee counted, is lower than your cards’ rates. Stretching the term adds interest that can outweigh what the lower rate saves, so prequalify with several lenders and choose the shortest term with a payment close to what you pay now.
Read more: Debt Consolidation Loans - A Lower Rate Can Still Cost More Than Your Cards
5. Have a nonprofit counselor negotiate your rates
Even after missed payments have put a low-rate loan out of reach, this way to lower your rates can still work, since a counselor’s repayment plan isn’t a loan.
If card rates above 20% keep your balances from shrinking, ask a nonprofit credit counseling agency about a debt management plan. The agency asks your card issuers to lower those rates, often to single digits, and you pay off the cards with one monthly payment instead of a new loan.
Read more: Nonprofit Debt Management Plans Can Cut Card Rates to Single Digits - No Loan Needed
6. Trade your car payment for a cheaper ride
Unlike a new loan or a new plan, this frees cash by cutting a bill. It fits when the car’s payment, insurance, and upkeep are what leave too little for the rest of your debts.
Selling your car can free cash for your other debts when the sale clears the auto loan and whatever replaces the car costs less each month than the car does now. Check both before you list it, then send every freed dollar to your highest-rate debt.
Read more: Selling Your Car to Pay Off Debt - Only If Getting Around Costs Less
Pay back less than you owe
7. Offer creditors a lump sum to settle
You don’t need a company for this. Once you’ve saved the cash, you can offer it to the creditor or collector directly, and a deal you strike yourself carries no fee.
Debt settlement can shrink what you owe, but it costs months of missed payments, a fee that typically runs 15% to 25% of the debt you enroll, and often income tax on what’s forgiven. Use it only when your accounts are already in collections and you can’t repay them even on a lower-rate plan.
Read more: Debt Settlement Is for Debts You Can't Repay - Count the Fees and Taxes First
8. File for bankruptcy when no repayment plan fits
The day you file, a rule called the automatic stay halts most collection calls, lawsuits, and wage garnishments, where a creditor takes money straight from your paycheck. Settlement offers no such pause while you save.
Filing for bankruptcy makes sense when your credit card and medical debt couldn’t be repaid within five years, even on a credit counseling plan. Multiply what you can spare each month by 60. If that falls far short of what you owe, stop cashing out your 401(k) to keep up and talk to a bankruptcy attorney.
Read more: The Five-Year Test - When Bankruptcy Beats Trying to Repay Your Debt
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