How to get rid of debt with no money and bad credit
By Aaron Crowe
Published on June 21, 2023
Read time: 6 min
Some strategies for getting rid of debt don’t require a minimum credit score.
A debt resolution program could lower the amount you owe creditors.
Protecting your assets can be key to deciding if you should file for bankruptcy.
Bad times can happen to anyone. But there’s a solution for every situation. Finding out what your options are is the very first step in your journey to a better financial future.
When you say you have no money, we hear you. These are real solutions for people who have a low credit score and serious debt.
Option 1: Bankruptcy
Bankruptcy is a legal process for getting rid of debts. It’s an option of last resort for some people, but the one that makes the best financial sense for others.
The bankruptcy court determines how much and in what form you repay your creditors. Depending on your income, you might be able to walk away from some or all of your debts (Chapter 7 bankruptcy). If the court determines that you can afford a monthly payment, you’ll make payments for three or five years (Chapter 13 bankruptcy).
Bankruptcy has a few advantages:
It doesn’t matter what your credit score is.
Once you file, creditors must stop collection efforts.
Creditors don’t have any choice—they have to participate.
If you qualify for Chapter 7—the clean slate bankruptcy—your eligible debts can be wiped clean within just a few months.
If you qualify for Chapter 13—the wage earner’s bankruptcy—debts that remain at the end of your repayment period are forgiven.
Debts discharged (forgiven) in bankruptcy aren't taxable.
Bankruptcy also has downsides:
You might not get to keep everything you own. Some of your assets could be sold to pay some of your debts.
You might not qualify to walk away from your debt.
Chapter 13 bankruptcy has a low success rate. Many people don’t complete the plan and remain stuck with their debt.
Some people in Chapter 13 find the court-mandated payment amount to be unaffordable.
You’ll pay court fees, and probably attorney fees, even if none of your debt is forgiven.
A bankruptcy filing stays on your credit report for 7 to 10 years.
Your private financial troubles become a public record.
Option 2: Debt resolution
Debt resolution is negotiating with your creditors to lower the amount that you owe. With patience and commitment, you could significantly reduce your debt. If you have high debt and are already falling behind on your monthly payments, debt resolution may be a good choice.
If you can demonstrate to your creditors that you can’t afford to pay off the debt, they may be willing to accept less than the full amount that you owe.
Usually, you’ll need to offer a one-time payment to settle the debt. To make those one-time offers, you’d need to have some money. If you don’t already have access to money you can use, you can save up by making a monthly deposit into an account set up for making offers.
You can resolve debts on your own, or you can work with a professional debt resolution company who can help you through the process. Most people can complete a debt resolution program in 2 to 4 years.
Debt resolution advantages
It doesn’t matter what your credit score is.
You could settle your debt for less than you owe overall.
You could get rid of your debt faster than by making minimum payments.
You could have more cash on hand each month—because the monthly deposit you make in a debt resolution program is usually lower than the monthly minimum payments your creditors require.
Debt resolution downsides
If you choose to stop making payments in order to begin the negotiation process, your creditors could start the collection process. You could receive collection calls and your credit score could be damaged in the short term.
You might be responsible for paying taxes on the forgiven debt unless you’re insolvent (your debts are worth more than your assets).
Some creditors may try legal tactics, such as lawsuits, to get you to repay your debts in full.
Option 3: Credit counseling
If you plan to pay off your debts but you feel overwhelmed by the process, you can work with an accredited credit counselor. They’ll help you create a budget and a personalized plan to solve your money problems. The monthly fee is modest and might be flexible depending on your income. There's no credit score requirement.
In some cases, the credit counseling agency might recommend a debt management plan (DMP). Like Chapter 13 bankruptcy and debt resolution, you’ll make a single monthly payment. But in a DMP, you’ll repay your debts in full. Most DMPs require that you stop using credit while you’re in the plan.
Option 4: Home equity loan
Homeowners who need money to pay off high-interest credit cards and other debts can consider a home equity loan. To qualify for a home equity loan, you'd need sufficient equity, enough income to afford the monthly payment, and a credit score of at least 640 (if you let the lender directly pay off your creditors).
If you still have a mortgage, a home equity loan is a second mortgage, so there are closing costs. A home equity loan is an installment loan—your payment will be the same every month, calculated to fully pay off the loan by the end of the repayment period. On-time payments will have a positive effect on your credit score. But make sure you can make the monthly payments, so you don’t risk losing your home if you can’t pay.
Three preliminary steps to get out of debt when you’re broke
Take a step back to gauge where you stand financially. This financial checkup can help you decide on the best path forward.
1. Check your expenses
Make a list of all your debts. Loans and credit cards are the most common but include any bills you have payment plans for, such as medical, car, and personal loans. Make a separate list of your regular expenses, such as rent, groceries, insurance, etc.
2. Compare your income to your monthly spending
You want to find out how much money you have left over to put toward debt after you subtract your regular expenses from your income. If you don’t already have a monthly budget, now is a good time to start one.
This is a good time to think about areas where you can reduce spending. For instance, if you’re spending most of your take-home pay on rent, you may want to ask a relative if you can move in with them for a while to save some money, or bring in a roommate.
3. Check your assets
Your assets are anything you own that’s worth money. In a bankruptcy, creditors want to know about anything of value you have that could be sold.
If you have things of value that you don’t want to risk losing, debt resolution might be a better path forward than bankruptcy. For instance, you generally won’t be allowed to keep a second home in bankruptcy. If you own a rental property or vacation home, even if you still owe a lot of money on it, filing for bankruptcy puts it at risk.
If, on the other hand, you don’t own much, bankruptcy might be a better choice. If you rent your home and you’re unemployed with very high credit card debt, bankruptcy might be a good option for you.
The details can get complicated and every situation is unique, so it’s important to talk to a debt consultant or bankruptcy attorney.
Frequently Asked Questions
How long does it take to get out of debt?
Most people can get out of debt through a debt resolution program within two to four years. Bankruptcy can take anywhere from four months to five years.
Can you go to jail for debt?
No. You can’t go to jail for not paying your credit cards or any other consumer debt, such as home loans and medical bills. It’s illegal for creditors or debt collectors to threaten you with arrest or criminal penalty to get you to pay.
Can you buy a house with bad credit?
Yes. A bad credit score may require paying a higher interest rate for a home loan. It can help if you:
Have a high down payment
Carry no debt or a low amount of overall debt
Have a high income
Don’t have any debts in collections
Can you still get a job with bad credit?
Yes. Not all employers check the credit scores of job applicants. And even if they do and you have bad credit, your work credentials may be so great that they’ll still hire you.
Jobs in accounting and finance may be difficult, however, if your credit reports show you have a poor record of paying off debts.