How To Get out of Debt When You Are Broke

Few feelings are more helpless than trying to dig your way out of debt when you’re barely making ends meet — and you’re just one car repair emergency from disaster. Those enduring that kind of financial heat can take heart, maybe, in the knowledge that they have plenty of company.

The St. Louis Federal Reserve reports Americans are saving at about half the historic rate (4.6% vs. 8.44%), and we’re in breathtaking consumer debt, a record $1.079 trillion. Worse, according to the Philadelphia Federal Reserve, more than one in 10 of us is delinquent on our credit card bills, a 12-year high.

Nonetheless, despite the deck being stacked against you, there are ways out of this mess, even when your income is low and you’re technically broke. Know this: Others in your well-worn shoes have conquered financial troubles by understanding the strategies and diligently employing the techniques described below.

The fact that you’re here demonstrates you know how being in debt wears on you — emotionally, psychologically, spiritually, even physically. The overall personal empowerment that comes from seizing control of your finances cannot be overstated.

Let’s get busy.

1. Assess Your Financial Situation

In any journey, it’s hard to get where you’re going without knowing where to start. Navigating your way out of debt is no different. Know your starting point by taking a hard look at your current financial situation.

Pinpointing your financial location is easy enough, even if the chore is emotionally taxing: Gather all of your debts — loans of every type (car, mortgage, personal, HELOC, student, etc.), credit card statements, medical bills, and all other outstanding obligations — and organize them in a way that makes sense to you. Some examples: largest to smallest; highest payment to lowest; highest interest rate to lowest.

“For individuals with modest incomes, starting with a clear, detailed picture of their debts is essential,” says Dennis Shirshikov, Head of Growth at gosummer.com, and an adjunct professor of economics at City University of New York. “A debt inventory — listing every balance, interest rate, and minimum payment — creates an organized foundation, helping prioritize high-interest debts.

“It can feel overwhelming, but breaking down payments into achievable goals, like committing to an extra $10 or $20 a month toward the highest-interest debt, can snowball over time. Realistically, small wins matter; as each debt shrinks, motivation builds.”

Next, write down (or enter data, if you’re using a spreadsheet) the details. Name of the lender, balance, monthly payment, interest rate, and other pertinent details. Microsoft Excel remains the gold standard for financial organization, but there are plenty of other online tools that can help you get started, as well as guide you toward success. Type “free budgeting tools” into your favorite search engine.

The key ingredient in establishing your starting line: Be absolutely honest with yourself regarding your spending habits and your sources of income. The bottom line — how much really is (or isn’t, if you’re truly broke) left over at the end of the month — doesn’t care about your feelings.

“Many people end up accumulating debt from emergencies, bad lifestyle choices, or a lack of financial wisdom,” says Lyle Solomon, principal attorney at Oak View Law Group in North Auburn, Calif. “You should take time to understand the root of the issue for you. Properly take into account what led to your situation and take accountability. Being honest with yourself about how the debt accumulated will allow you to avoid similar pitfalls later.”

“In terms of practical steps to reduce debt without borrowing more money,” adds Adem Selita, CEO and co-founder of The Debt Relief Company, “you really only have three viable options: You can increase your income, cut back on expenses, or renegotiate payback terms with creditors.”

Below, we’ll discuss all three … and more.

2. Prioritize Your Debts

Organizing your debts is the first step toward being able to prioritize them. As you may already have learned, scatter-shooting — paying down debts haphazardly, based on which one is in crisis this pay period — is not an effective long-term solution. Instead, you need a go-to strategy, one that serves as your pole star keeping your journey out of debt on track.

Two of the most effective action plans borrow their names from snow-capped mountains: the snowball method and the debt avalanche.

The snowball method takes its name from the momentum gained by paying off smaller debts first. While striving to keep all other bills current, the debtor puts extra effort into paying off the debt with the lowest balance. When that balance is cleared, the money spent on that one goes toward the next lowest balance, and so on, until the last – and largest – balance is paid off.

The debt avalanche method targets the debt with the highest interest rate, no matter what its balance. The avalanche strategy is nearly identical to the snowball: Keep current with all debts, but put extra money toward paying off the highest interest debt. When that debt is eliminated, use the money freed up to attack the next highest-interest debt.

The snowball method provides small victories early in the debt payoff process, encouraging the practitioner to continue. The debt avalanche may not provide the satisfaction of early triumphs, but successfully completed, it generally saves time and money.

There is no right or wrong strategy for paying off debt; rather, there is what is right for the individual debtor. No matter which method you prefer, remember that while you are concentrating your extra effort on a single balance, it is vital to keep all other debts current, which means paying the minimum amount due on each of them.

As you’re deciding which strategy best suits your situation, weigh the potential impact of these three factors:

• Allowing extremely high-interest debt to linger
• Which lenders have the toughest late or over-limit penalties?
• Which of your debts is at risk of going into default?

Part of being honest with yourself about your debt journey is embracing a modified — that is, more modest — lifestyle. Neither the snowball nor the avalanche is going to serve its purpose if you’re not truthful about setting attainable goals. Otherwise, you’re setting yourself up to fail.

3. Create a Budget That Works for You

Your journey toward debt-payoff nirvana may take you into uncharted territory. You’ll need a roadmap, or, better still, step-by-step navigation tips to reach your goal. A realistic, and sustainable budget — properly drafted and carefully followed — will keep you on the straight and narrow.

First and foremost, if money is ultra-tight but you’re still determined to pay down your debt (good for you, by the way), you must accept — indeed, you must endorse — the difference between needs and wants.

Now is the time to focus on the essentials: housing, food, transportation, utilities, insurance, taxes. Even in these categories of necessity, however, it’s entirely likely you can be thriftier. Consider downsizing your home, which could cut your mortgage and save on property taxes; buying store brands at the grocery; trading for a less expensive car or exploring public transportation opportunities; and shopping your insurance coverage requirements.

See? Even needs can fall, ever so slightly, into the realm of wants. Who knew?

Back to the lower-hanging fruit, which can be harvested immediately and with little more than a commitment to alter your ways.

Begin by eliminating (given your dire circumstances) frivolous spending: coffee shop runs; fast food; convenience store snacks; subscriptions for anything, from premium cable channels and streaming services to mobile phone extras to video games to magazines to gym memberships to bouquets-of-the-month; mindless online shopping; unnecessary insurance (retirees may be able to save if they’re still carrying disability or life insurance); impulse purchases.

Otherwise, commit to tracking your spending. Keep a purchases journal or download (and use) an expense-tracking app. In almost no time, you’ll begin to spot the trouble spots that keep you behind the budgeting eight-ball.

“Money leaks,” says Andre M. Aran, managing partner at Regency Wealth Management in Jupiter, Fla. “Record daily expenses for two weeks and review what is discretionary and what is essential.”

By actively stanching these outflows, you’ll have more money to steer into debt repayment. And the more you’re able to pay down debt, the faster you’ll get your personal finances into the black.

Keep in mind, that the system you choose must be one that works for your lifestyle. It must be sensible, sustainable, and survivable, one you can stick with for a fairly long time — 36 months or more.

“Debt reduction isn’t instant; it’s a marathon,” Shirkashov says. “Celebrating milestones, even small ones, like reaching 25% of a debt paid off, reinforces commitment.

“Psychology plays a role here—when the process seems to drag, I recommend clients visualize the relief they’ll feel once debt-free and remind themselves regularly why they started.”

4. Increase Your Income (Side Hustles, Freelance, etc.)

No journey is worthwhile without at least a dash of adventure. Because even a small increase in income can make a substantial difference when you’re serious about paying off debt, spice up your expedition with a foray into an income-boosting experience or two.

Begin by considering your current work situation. Are you paid a competitive rate compared to others in your company with your skills and experience? Are you lagging behind your peers at other companies? Develop an argument for why you deserve (not need or want, but deserve) a raise, and present it to the proper decision-makers.

Do not stop there.

No doubt you have witnessed in your community lots of examples of others turning spare hours into extra income. The gig economy seems to have something for everyone, from walking dogs or delivering groceries to assembling furniture and simply waiting in line. Stuck for suitable ideas? Type “side hustles near me” into your favorite search engine and get some ideas that fit you.

For professionals whose skills are underutilized, consider seeking freelance work. Writers/editors always have been favorite freelance territory, but opportunities abound in web development, graphic design, marketing, social media, tutoring, and photography. In the Information Age, just about anyone with a computer and a reliable internet connection is a candidate for a freelance contract.

If your skills run to crafts, consider marketing handmade goods. If you’re more of a traditionalist, investigate part-time opportunities at nearby businesses. And if you have an abundance of stuff you no longer need, sell it (eBay, Facebook Marketplace, Poshmark, Craigslist, consignment, yard sale) and plow the proceeds into slaying your debt.

There never has been a better time to tap your inner entrepreneur, especially for low-income earners or those feeling broke by burdensome debt.

5. Negotiate With Creditors

Consumers battling to keep up with their payments should consider attempting to negotiate with their creditors. You may be able to reduce your interest rate, restructure your payment schedule, or even settle your debt for less than you owe.

“Negotiating with creditors is often achievable and can make a significant difference,” says Josh Katz, founder of Universal Tax Professionals in Beachwood, Ohio. “Start by calling your creditors and explaining your situation. Ask about lowering interest rates or even getting fees waived.

“Sometimes, creditors may offer temporary hardship plans with reduced payments, especially if you’ve been a consistent payer. When approaching these calls, keep a professional tone and emphasize your willingness to pay— you’re looking for a mutual solution, which most creditors appreciate.”

That said, ironically, individual negotiation rarely works when, despite your struggles, you’ve managed to keep your accounts more or less current. You’re oddly better off in negotiations if you’re behind and at risk of default. Still, it’s worth a shot: Draft a repayment plan that reflects the real-world condition of your income and expenses and propose a repayment plan that works for you.

When you’re barely making ends meet and eager to make things right, communication with your creditors is a key tool. However, if going it alone seems daunting, consider contacting a debt counseling agency; debt relief programs usually include someone who has the expertise to negotiate on your behalf.

Provide actionable tips on how to negotiate lower interest rates, payment plans, or even settle debts for less than the original amount.

6. Consider Debt Relief Programs

Debt relief is a massive industry offering a variety of options: credit counseling, debt management plans, or debt settlement.

A reputable credit counseling agency employs trained and certified consultants who can advise you about managing your income and debts, guide you through the development of a rational budget, offer free educational materials and workshops, and even help design a debt repayment plan.

After a detailed review of your finances and customized advice about managing your money, a credit counselor might recommend you enroll in a debt management plan to corral and subdue your unsecured debt (credit cards, personal and/or student loans, medical bills).

If you sign up for the program, your counselor will develop a payment schedule with you and your creditors, who may agree to lower your interest rates and/or waive certain fees or penalties. You deposit money each month with the credit counseling agency. The counselor distributes your deposits to your creditors, according to the payment plan.

Customarily, the program lasts 36 to 48 months. At its conclusion, you will be free of your unsecured debt.

Debt settlement is the most radical and riskiest of these options. In debt settlement, a (typically) for-profit company attempts to resolve your balance(s) for a lump sum that is some fraction of the amount you owe. While the negotiations are going on, you deposit a chunk of money each month into an account equal to the amount that will settle the debt, plus the company’s cut.

Meanwhile, you stop making payments to your unsecured creditors, piling up interest charges and late fees, causing damage to your credit score. Worse, the entire process comes without guarantees; your debt settlement company may be unable to resolve some or any of your debts.

Of all these options, credit counseling is the least risky or confining. You are free to accept the advice and act on it or go on your way.

“Outside coaching or working with a debt counselor can be a transformative step, especially when financial challenges seem insurmountable,” Shirshikov says. “Professional counselors from nonprofits can offer insights, budgeting tools, and sometimes even creditor negotiation assistance, all without the pressure of selling additional financial products.

“For some, a counselor provides the structure and accountability that self-directed plans lack. There’s value in this guidance, and for those who feel overwhelmed, it’s a route worth exploring.”

Consider the latter two — debt management and debt settlement — only when you are feeling especially squeezed, and the evidence of your trouble (missed payments, for instance) is beginning to pile up.

Weigh your options carefully.

7. Avoid Taking on New Debt

Now is the time to stop adding to your debt load. With precious few exceptions, you must avoid opening new credit card accounts to pay off older credit card balances. This is “robbing Peter to pay Paul” written for modern times.

As for those credit card offers that come in the mail advertising reapprovals and low, low introductory rates, proceed cautiously and strategically. Being maxed out on your existing cards is the worst possible reason to add to your credit card arsenal.

This is a good time to remind you about your commitment, made above, to freeze, stop, cease, and otherwise abandon unnecessary spending.

The only possible reason to consider accepting a new credit card is if it has a balance transfer option, a low transfer fee, and a prolonged — 18 months or more — 0% introductory interest rate.

To help avoid temptation, consider cutting up your cards, unsubscribing from shopping emails, and setting strict rules about new borrowing. The best rule: No more new borrowing.

Creating new debt while trying to pay off existing debt is like using the dirt from a freshly dug hole to fill the hole you dug yesterday. Instead, put away the shovel. Break the overspending, debt-creating cycle by employing a debit card or cash-only payment system.

8. Stay Committed and Be Patient

Most likely, you didn’t tumble into overwhelming debt all at once. Chances are you got there one purchase at a time. Getting out is a process, too.

“Unfortunately, there is no magic pill,” says The Debt Relief Company’s Selita. “It really is that straightforward.

“Patience and commitment are key with debt-based issues. … You didn’t get into debt overnight so you shouldn’t expect to get out of debt overnight. These things take time and require gradual change. If you optimize your budget and cut expenses where possible you can look toward contributing any excess cash you have towards debt repayment — in turn — further reducing your monthly expenses.

“Hold yourself accountable and ask your family to hold you accountable.”

Occasionally, it’s going to seem like a grind — slow, tedious, and overwhelming. Times such as these will test your commitment to being patient and having perseverance. But if your goals are SMART (specific, measurable, achievable, relevant, time-bound), you’ll find it easier to stay the course.

Remember to celebrate small victories along the way. If you’re tracking your progress using Excel or some other digital spreadsheet, you can see your progress in the built-in graphs and charts. Look how they’re shrinking! And when you cross a milestone —You paid off your smallest balance! Hooray! — celebrate. Take some of that extra cash and splurge on a pizza.

Paying off debt when you’re technically broke can be slow and painstaking. But you’re working toward financial freedom and reduced stress.

Achieving Debt-Free Living

Debt-free living is within your grasp, but only if you take action. Begin today by assessing and organizing your finances. That will put you on the path to creating a budget and figuring out whether you need professional assistance.

Consider your options, whether it’s applying for a debt consolidation loan, credit counseling, debt management, or even debt settlement.

The most important action you can take today is to get started.