So, there are lots of strategies on the internet for getting out of debt. As a Bankruptcy attorney for over twenty years, I've heard all of the stories. Let me start by saying that any attempt to get out of debt is a good thing, but you have to be realistic at the outset, or the whole endeavor will be a waste of money.
The snowball method of paying down your debt actually can work, but here's what the internet geniuses won't tell you…it only works if your debt is below a certain threshold compared to your income. Let's start by describing the snowball method of debt reduction.
- Make a list of your debt, from smallest to largest in terms of balances.
- Make all of your minimum payments each month.
- Take whatever is left in your budget and pay extra on the smallest debt until it is paid off.
- As each small balance is paid off, move up the chain, and work on the next smallest debt.
- Repeat until you are debt free.
Now this process intentionally ignores your interest rates. There is a similar system called the “avalanche method” that operates exactly the same way, except you organize your debts according to the interest rates, and you pay extra on the debt with the highest interest rate.
Personally, between the two, I prefer the snowball method, because it is important to stay positive and see results, and if you try the avalanche method, you might get discouraged because it will take a long time to see anything positive happen.
Now here is the problem that most people don't effectively take into account. Both of these systems assume that you will have no problem making your normal monthly minimum payments AND (this is the part that they don't tell you) you won't need access to emergency credit during this process.
Here is where many people who try these methods end up in my office for a Bankruptcy consultation. You have to be realistic about your monthly income vs. your monthly expenses. Most people try these methods when they have an artificial influx of income, such as getting a bunch of overtime, doing rideshare or food delivery on the side in addition to full time work, or getting a second job. These are not long-term successful strategies. They work in the short term, but eventually fatigue sets in.
Neither of these methods start with the most critical step…make a budget. You need to look realistically at what your normal monthly take home pay is. Then make a list of all of your regular monthly expenses. Then add in some expenses that only come up periodically (such as car repair/maintenance). Then you know how much you have at the end of the month to work with. This figure needs to be able to cover all of your monthly minimum debt payments AND have enough to realistically pay down on the smallest debt over a reasonable period of time.
That last part is often overlooked. If your debt repayment plan is going to take five, six, or seven years, you are much better off doing a Chapter 7 Bankruptcy and wiping out the debt and then using the surplus for savings over the next fix, six, or seven years. This is often why debt consolidation plans don't work. They promise some immediate relief in terms of lowering monthly minimum payments but what they don't tell you is that your debt is not being reduced at a reasonable rate so you will be stuck in this limbo for years.
Let me conclude by saying that any debt reduction plan is a good thing. You are embarking on the first steps to taking control over your life, but you have to be realistic about how these systems work. If they will not significantly reduce your debt over the span of a couple of years, you need to consider total debt elimination in the form of Bankruptcy as the proper solution to your problems.