How to deal with debt when you’ve already cut back everywhere
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When credit card and other high-rate debt starts consuming too much of your monthly income, cutting expenses from your budget is often the first line of defense. You may opt to cancel the subscriptions you barely use or eat at home more often, or you may decide to put off certain purchases. In fact, many people with debt say they have already cut back on discretionary spending and are now trimming necessities, according to a new study from Accredited Debt Relief. Among respondents, 35% cut back on groceries and 42% cut clothing or personal care spending.
Still, there’s a limit to how far that cost-cutting strategy can take you. Housing, utilities, groceries, transportation and other necessities have to be paid for, and after several rounds of cutbacks, there may simply be nothing meaningful left to trim from the budget. As the high interest charges tied to your unpaid debt continue adding to what you owe, it can be difficult to make much progress — even if you’re consistently putting money toward your balances.
Reaching that point can leave you with a difficult question: What are you supposed to do when spending less can’t fix the problem? If you’ve already squeezed as much as you reasonably can from your budget, the good news is that there are other ways to approach the debt.
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How to deal with debt when you’ve already cut back everywhere
Once you’ve eliminated most discretionary spending, cutting another $20 or $50 from your monthly budget may not meaningfully change your financial situation. At that point, it can make more sense to focus on reducing what the debt itself costs or restructuring how you repay it. Here are some options to consider:
Ask your creditors for a hardship plan
If the minimum payments on your credit cards have become unaffordable, contacting your credit card issuers directly can be a good place to start. Many card issuers offer hardship programs to qualifying cardholders who are experiencing financial difficulties.
The available assistance varies depending on the issuer, but enrolling in one of these programs could result in a temporarily reduced interest rate, lower minimum payments, waived fees or a structured repayment plan. You may have to close or stop using the card as part of the agreement, though, so ask about the terms of the hardship program before enrolling.
The goal with this approach isn’t necessarily to reduce what you owe, however. Rather, a hardship plan may make your monthly payments more manageable and reduce how quickly interest accumulates, giving you more room to make progress on paying down the balance.
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Consider consolidating your balances
Debt consolidation can also make sense if high interest rates are preventing you from gaining ground on your balances. With this approach, you typically use a new lower-rate loan to pay off multiple high-rate debts and then make one monthly payment on the new balance.
This strategy tends to be most useful when you qualify for a loan with an interest rate that’s meaningfully lower than what you’re currently paying. For example, replacing credit card debt that’s carrying an interest rate above 20% with a personal loan at a rate of 12% could substantially reduce the amount of the payment that’s going toward interest each month.
Approval isn’t guaranteed, however. You’ll also need enough room in your budget to comfortably afford the new loan payment, so be sure to do your homework before applying to borrow.
Look into a debt management plan
A credit counseling agency may offer another path to getting rid of your debt through a debt management plan. Under one of these plans, the credit counseling agency you work with will try to secure reduced interest rates and waived fees from your creditors. You then make a single monthly payment to the agency, which distributes the money to participating creditors.
You’re generally still expected to repay the full principal you owe, but taking this approach streamlines the repayment process and makes it easier — and more affordable — to pay off what you owe. In turn, a debt management plan may be worth exploring if you have enough income to repay your debts but need lower rates or a more structured repayment process to make the payments workable.
Explore debt settlement if the numbers still don’t work
If you’ve already cut expenses and still can’t realistically afford to repay your unsecured debts in full, certain types of debt relief, like debt settlement, may be worth considering. When you enroll in a debt settlement program, the debt relief company you work with will attempt to negotiate with creditors to settle qualifying debts for less than the full balance owed, often lowering your balances by 30% to 50% in return for a lump-sum payment on the account.
That can provide a different type of solution than budgeting or consolidation because the goal is to reduce the debt itself rather than simply reorganize it. However, there are important trade-offs to consider. Debt settlement can damage your credit and creditors aren’t required to negotiate, either. There are also fees to consider, and forgiven debt may also be taxable in some circumstances. So, it’s important to understand the costs and risks before enrolling.
Consider whether bankruptcy needs to be on the table
If you’re facing debts that you have no realistic way to repay, filing for bankruptcy may also warrant consideration. It’s a major financial and legal step, and it can have long-lasting credit consequences, but it can provide you with protections and a path forward when other strategies aren’t sufficient.
Before pursuing bankruptcy, though, you should consider speaking with a qualified bankruptcy attorney about how filing would affect your specific debts, assets and financial situation. Bankruptcy rules and exemptions can also vary depending on where you live, so make sure you’re well-informed before moving ahead with this option.
The bottom line
When you’ve already stripped unnecessary spending from your budget, continuing to look for increasingly small expenses to eliminate may not solve the underlying problem. If your debt payments simply require more money than your budget can support, it may be time to focus on the debt itself.
That could mean asking creditors for concessions, consolidating your balances, entering a debt management plan or exploring debt relief or bankruptcy when repayment in full is no longer realistic. Each option has drawbacks to weigh, but the right strategy could create substantially more breathing room than another round of budget cuts.
