Options for Dealing With Your Debt

Learn different ways to deal with outstanding debts.

By , Attorney

The path to getting out of debt can be slow and arduous but, with hard work and diligence, you can be successful. So long as you have income that you aren't putting towards your basic monthly expenses, your available options for getting out of debt trouble include:

  • creating a budget and contacting creditors yourself to arrange a solution
  • settling your debts
  • seeking help from an accredited nonprofit credit counseling agency
  • entering into a legitimate debt management plan, or
  • filing for bankruptcy, among other possibilities.

Read on to get an overview of the most common ways to take control of your debt and get tips on what to look out for when seeking help from credit counselors or debt management plan services.

Creating a Budget and Contacting Creditors Yourself

Many times, the cheapest and most effective way to deal with out-of-control debt is to take steps to fix the situation on your own.

Creating a Budget

Start by listing all of your outstanding debt. Then make a budget that includes all of your income and expenses. Explore ways to reduce spending and expenses—and, if possible, increase your income—then revise your budget accordingly. Next, using your budget as a guide, come up with a realistic dollar amount that you can devote to paying your debts each month. At this point, it might also be helpful to prioritize your debts. That is, determine which are the most important to pay. (Read Money Management 101 to learn about improving your financial situation.)

Contacting Your Creditors

Once you know what you can afford to pay each month, call your creditors. Let them know what's going on—maybe you suffered a job loss, went through a divorce, had medical problems, or other financial troubles—and ask for help. It's often a good idea to suggest possible solutions like a temporary reduction of your payments, skipping a few payments and adding them on to the end of a loan, skipping a few payments and paying them off over a few months, waiving late fees and other charges, or even modifying a loan. (Learn strategies for negotiating with creditors.)

If you decide to go this route, be sure to work something out with each of your creditors. If you negotiate a payment plan with only some of your creditors, the other creditors can sue you and essentially negate whatever benefit came out of your successful arrangements. And if you do end up filing for bankruptcy, which is not uncommon, the fact that you paid off some of your debt won't benefit you at all.

Settling Your Debts

You might be able to settle some debts, like credit card debt, by paying less than you owe in a lump sum. Keep in mind that if you settle a debt, the amount that the creditor forgives might be taxable. (Learn about credit card debt settlement.)

Seeking Help From a Consumer Credit Counseling Agency

If you're not successful in your efforts to work out realistic solutions with your creditors—or if you feel you can't handle the negotiations yourself—consider getting help from a reputable and accredited nonprofit credit counseling agency. (The National Foundation for Credit Counseling website is a good place to start looking for one.) Credit counseling agencies can provide money management education, budget counseling, debt counseling, housing counseling, and referrals to other agencies that can help. Credit counseling agencies may also be able to contact your creditors and create a debt management plan (see below).

Remember, though, if you pay an agency to help with your debt problems, you're spending money that you otherwise could have used to repay your debts. Figure out whether the amount the credit counseling agency charges for its services makes sense. If you pay more for debt assistance than you save through reduced interest rates and discounted principal, then you're essentially just adding to your debt load.

Also, before you use a credit counseling agency, do some research. Not all agencies are legitimate and some charge excessive fees, fail to perform promised services, or sign you up for a debt management plan without explaining other options.

Debt Management Plans

With a debt management plan, a credit counseling agency works with you to figure out how much you can pay each month and negotiates with your creditors to come up with a repayment plan. Often the credit counseling agency will be able to convince creditors to forgive some or all of the interest owed on your debt or to eliminate any fees or penalties that have accumulated. Eliminating the interest can greatly reduce the amount you owe each month.

How debt management plans work. For a debt management plan to work, you must have some disposable income beyond what you need to cover your living expenses. If you agree to the repayment plan, typically, you will make one payment per month or per paycheck to the credit counseling agency (or you may have the amount deposited directly). The credit counseling agency deposits your payments into a trust account. The agency pays your creditors from the trust account, and pays itself the fee for its service. A plan is likely to last from three to five years, depending on your debts and your income.

Things to watch out for with debt management plans. Companies offering debt management plans often bill themselves as credit counselors. Some are legitimate nonprofit credit counseling agencies, many are not. Among other things, some debt relief service companies offering these types of plans:

  • fail to pay creditors on time or at all
  • make promises they don't keep, like getting lower interest rates and reduced fees from creditors
  • charge unreasonably high fees to consumers
  • hide charges or take them out of deposits that are earmarked for creditors, and
  • lie about the company's nonprofit status.

Before considering a debt management plan, make sure you are dealing with a legitimate nonprofit credit counseling agency, explore all of your other options first, get everything in writing, and follow-up with your creditors to make sure they are getting paid on time. (Read about the pros and cons of debt management plans.)


Bankruptcy is a process that's designed to help people either eliminate their debts or repay them under the protection of the bankruptcy court. Most bankruptcies fall under the categories of "liquidation" (Chapter 7) or "reorganization" (Chapter 13).

Chapter 7 Bankruptcy Overview

With a Chapter 7 bankruptcy, you ask the bankruptcy court to eliminate (discharge) the debts you owe. But keep in mind that not all debts are dischargeable and not everyone qualifies to file for Chapter 7.

Chapter 13 Bankruptcy Overview

With a Chapter 13 bankruptcy, you file a plan with the bankruptcy court that details how you will pay back your creditors. You have to repay some debts fully, but other debts may be partially repaid or not paid back at all, depending on what you can afford. (Learn more about the difference between a Chapter 7 and Chapter 13 bankruptcy.)

If you're considering filing for bankruptcy, consider talking to a bankruptcy attorney.

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