Small steps, deep breaths: How to get out of debt on a low income

You’ve overcome tough challenges before, and you have the skills you need to tackle anything that comes your way. Including getting out of debt. As you’ve learned from getting over obstacles in the past, there's no trick. It’s just putting one foot in front of the other.

You can get through paying down debt, even on a low income. You’ll need flexibility and a plan. It starts with taking a deep breath.

What to do when you can’t afford your minimum payments

While you might feel like you’re the only person who's been caught up in not being able to pay down debt on a low income, know that you aren't alone. Many other people have been in this position before. There are programs that can help. 

Getting out of debt starts with taking action. Small steps, like making a phone call, can help you feel more in control because you’re working on a plan.

Here are a few strategies that might work for your situation.

Public assistance programs

If you have a low income, you may be eligible for certain public assistance programs. Every state has an agency that accepts applications for SNAP (food stamps) and other programs. If your income is too high, you might be eligible for assistance from local nonprofits. For example, food banks in your area may not ask for proof of income and can help you bridge the gap between your monthly expenses and your take-home pay. 

Freeing up some of the money in your budget—by getting help with groceries or any other expense—can leave you with some cash to put toward your debts. 

Community resources

Your community might offer resources that you don’t know about yet. For example, if you’re active in your religious community, a conversation with your religious leadership may point you toward free babysitting, free clothing, access to a vehicle to help lift your financial burden, or even affordable housing. Community groups online can be great sources of information about part-time work and bartering opportunities.

Again, we’re looking for ways to bring in a little more money, or to relieve your budget, so that you can direct those dollars toward paying down your debt.

Debt resolution

Sometimes, creditors are willing to forgive some of your debt. For instance, it’s not uncommon for health care providers to reduce your medical bills if you ask for financial assistance. Debt forgiveness is usually partial, which means you’ll still owe some money. You can call your creditors and explain your situation. They may offer a hardship program or other plan that considers your financial circumstances. They may agree to lower your bill to less than what you owe. Lowering your balance can lead to a faster payoff.

Resolving debts on your own can be stressful. If you’re not sure how to go about it or you aren’t comfortable doing it yourself, you can hire a reputable debt resolution company to help you.

Lifestyle adjustments

While lifestyle shifts may not make sense for all cases, spend some time considering changes that might help you free up some cash. Sacrifices don’t have to be forever, after all.

For example, could you move in with family members or take in a roommate to reduce your housing costs? Is there any wiggle room in your schedule for extra work such as babysitting, rideshare driving, or dog walking? Sometimes you can take in a little income while you’re already doing something you need to do (like walking your own dog or driving across town for another reason). 

Writing down a list of potential short-term or long-term changes can give you a feeling of control as well as a financial strategy.

Nonprofit credit counseling

An accredited nonprofit credit counselor can help you make a plan. They may suggest a debt management plan (DMP). In a DMP, the counselor helps you learn to manage your debts and build good credit while you pay off your debts in full. It takes 3-5 years. You’ll make a single payment to the credit counselor, and the counselor will distribute the money to your creditors. You’ll usually have to agree to stop using credit until your debts are paid off. Sometimes the counselor can negotiate with ‌your creditors to reduce your interest rates or waive fees. 

Fees for credit counseling are modest—and often on a sliding scale based on your income.

Bankruptcy

In some situations, bankruptcy makes sense. There are two types of bankruptcy, Chapter 7 and Chapter 13. The one you qualify for depends on how much money you have after essential expenses. 

If you don’t have enough income to repay your creditors, you might qualify for Chapter 7. This is the kind of bankruptcy that allows you to walk away from unsecured debts like credit cards (you wouldn’t be able to walk away from your mortgage if you still want to keep your home). To be eligible, you’ll have to pass a means test (a look at your income and expenses). Also, you could lose some assets. For instance, if you own multiple cars, the court is unlikely to let you keep more than one. Assets that you’re not allowed to keep are sold, and the court uses the money to repay your creditors. 

If the means test shows that you can afford a monthly payment, you can file for Chapter 13, which is a 3 to 5 year repayment plan. The goal is to repay all or part of your debts. Creditors can’t opt out and your assets won’t be seized. However, almost half of Chapter 13 filings fail, and you'll have to pay attorney and court fees whether you get any relief from your debt or not. More than half of Chapter 13 filers end up losing money. 

Other options for getting out of debt on a low income

Some of your options may depend on your credit score.

Personal loan

If your credit score is fair (580-669) or better, a personal loan might help. The interest rate might be lower than the rate on your current debts. Consolidating multiple debts into one loan can relieve your budget if the monthly payment is lower than the total of all the monthly payments on your individual debts. 

Loan applications take your income into account, so if you have high debt compared to your income, it may be harder to qualify for a loan. You can check your rate and determine whether you would be likely to be approved (and for how much) without filling out an application. 

Why a strong payoff plan is important: A lower-interest debt consolidation loan only works if you use the lower interest rate to get ahead of your debt problem. If not, you may end up with more debt and greater financial stress.

Co-signer

If you have friends and family who know you're trustworthy, they may be able to help you help yourself. Having a qualified co-signer can improve your chances of approval, and also get you a discount off your interest rate, which can lower the cost of your debt even more. 

Why a strong payoff plan is important: Co-signing a loan is a big responsibility. The co-signer will have legal responsibility for the debt if you don’t pay it back. 

Home equity loan

If you own your home, it can be part of your ‌strategy. You build equity (ownership) every time you make a mortgage payment and as your home’s value rises. A home equity loan allows you to borrow against your equity. A home equity loan may have lower interest rates and lower monthly payments than a comparable personal loan. Because a home equity loan is guaranteed by your home, credit score requirements are more flexible and you may not need a co-signer. The interest rate on a home equity loan could be low enough that your payments make a larger dent in your debt each month. 

Why a strong payoff plan is important: Your home is the guarantee that you’ll repay the loan.