The Process of Getting Out of Debt

Many debtors make the mistake of assuming that once they’re out of their current debt spiral, they somehow won’t end up in another one. Getting out of debt means resolving your current debt and taking steps that will prevent you from getting into debt again. Those steps are covered in this guide.

Perhaps the best way to deal with debt is to design your own budget and payment plan that ensures you’ll pay off your debt within a specific time frame. Unfortunately, this approach rarely works for people with serious debt problems. Instead, often the only way to put a stop to a debt spiral is to use one of the three most common debt management strategies:

These approaches can help you pay off your existing debts but won’t necessarily help you avoid getting back in debt. The strategy you choose depends on the amount of your debt and the urgency of your financial situation.

Bankruptcy is a legal proceeding that wipes away most bad debt entirely and gives you a fresh start. If you’ve tried the conventional approaches to getting out of debt that this guide covers and have not had success, or if your debt is causing a financial crisis in your life that you need to resolve immediately, it might be best for you to consider bankruptcy. Keep in mind, though, that bankruptcy is only a last resort. (For more on the bankruptcy process, see Should You File for Bankruptcy?)

Once you settle your debts, prevent future ones by tracking your spending and abiding by a monthly budget that prevents you from spending more than you earn or can afford.

Debt problems almost always lower your credit score, a numerical assessment of your reliability as a borrower. Lenders examine your credit score in determining whether to lend you money and at what interest rates. After getting out of debt, you should try to improve your credit (see How to Repair Your Credit After Debt).

Saving and then investing a certain amount of money each month is the most effective way to prevent getting back into debt. In time, the money you save and invest will grow to become a “safety cushion” you can draw upon to pay bills or cover unforeseen expenses. Over the long term, you can also invest to save money for major life expenses, such as a child’s college education or your own retirement.