What to do When you are in Debt Over Your Head

Updated: Nov 21, 2020

Maybe you got fired from your job, had unexpected hospital bills related to medical problems or needed to financially support a family member. No matter what the underlying cause, sometimes not even the best laid plans work out the way you would have expected them to and before you know if you are over your head in debt.

When you are in the middle of the problem with creditors calling and overdue bills piling up it can be tough to know just what to do. So, the suggestions that follow can give you a place to start and some good ideas for how to reduce monthly payments, increase income and increase your credit score. As you review your options and develop a plan, remember that just like you did not get into debt overnight, you will not get out that way either. Whatever plan you select will take consistent effort from you and time to work.

The first place to start is to get a copy of your credit report so that you can see where you are now. One easy way to do this is to go to and get signed up for a free account. You will be able to see your FICO score, according to Experian as well as your credit profile and debts owed. You can see if you have made any payments late, how many times and if you have any negative comments on your report.

The next thing you need to do is to get some paper or better yet, an excel spreadsheet on a computer to write down every bill you pay each month, what date you have to pay it by, how much you owe and the interest rate being charged. Do not forget to add in the amount you need for monthly spending for things like groceries, gasoline, lunches, nights out restaurants etc. No need to break them all out separately at this point. You just want to be able to get an idea of how much you need to pay all your bills and expenses each month.

Once you have your credit report and a list of your monthly expenses, you are ready to do some analysis. You want to determine how much you really owe to creditors. Then break that up into how much of that debt is made up of money owed on your house, car and student loans versus what you owe on credit cards and consumer loans. If you are like most people, you will likely have a car payment for life as it’s a depreciating asset that needs to be replaced on a regular basis and a house payment until you are close to retirement.

It is the remainder of the debts you owe that you can really do something about and that when you do, will make a real difference in your outstanding debt and quality of life. Once you have compiled all your monthly expense information including minimum payments on debts owed, you will want to arrange them from lowest amount of money owed to the greatest amount of money owed. When you have completed this list, it is likely that you quickly see that you have a lot of small debts under say $5,000 and just a few but larger debts over $5,000.

Now that you have identified the debts and arranged them in order of amount owed from smallest to larges, you can begin to take back control of your financial life. You will want to concentrate on paying off the smallest debts first because each one you pay off is money you no longer owe and will free up whatever amount of money you were paying in terms of a minimum payment each month. Over time, these small debts will get paid off and the $25 to $100 payments will all add up to an increasing amount of disposable income each month.

Do not concern yourself with the interest rates. In theory it would be better to pay off the 25% department store card before the 14% Visa or Master card because of the significant difference in interest rates. However, if you owe $595 on the department store and pay $20 per month but owe $2,500 on a Visa and pay $75 per month, your debt payoff will go quicker by paying off the lower $595 department store card first and then combining the $20 with the $60 you are already paying on the Visa to then retire the $2,500 debt.

If you paid just the minimum payment of around $18. on the department store card, it would take you about 5 years to pay it off , but if you reduced eating lunches and or dinners out by 50% and could save $60 per month in doing so then added that $60 to the $18 you are currently paying, you will now be paying $85 per month on the $595 debt which will pay it off in about 8 months saving you 52 months of payments of $18 per month. That money can now be rolled into the next lowest total debt owed and so on. Over time, your debt will pay off at a faster and faster rate because the amount of money you are using to pay off each debt will increase.

As the posts for this blog continue, we will take a deeper and deeper dive into options and little known techniques for reducing debt, increasing income and managing money so that you can enhance your financial position and enjoyment of life.

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