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What Is the Best Way to Get Out of Debt when Income Is Less than Debt?

written by: AlexisW•edited by: Rebecca Scudder•updated: 12/23/2010

There is no one best way to get out of debt when income is less than debt. Here are a few options so you can choose the method that is right for you.

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    Debt Repayment Options

    Debt is always a hard thing to deal with, and the situation becomes even worse when your debt exceeds your income. The best way to get out of debt when income is less than debt can vary depending on your situation, but your options include:

    • Trying to renegotiate your debt
    • Consolidating or refinancing debt so your payments become more affordable
    • Creating a debt repayment plan and trying to generate extra cash to make payments, or chipping away at the debts slowly.
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    Negotiating Your Debt

    Trying to negotiate the terms of your debt can be a good option because, depending on exactly what method of negotiation you choose, you may be able to either lower your payments or even reduce the balance owed. The simplest and easiest way to renegotiate the terms of your debt is to call up your creditors and ask them to lower your interest rate. This can lower the monthly payments you are making and can also result in you repaying a smaller amount over time. Not all creditors are going to do this in every case, but it is worth a phone call- especially if your debt is credit card debt and you've been a good customer for a while.

    Another method of negotiating debt actually involves trying to get your lender to reduce the amount owed or to "settle". This method can hurt your credit, both because creditors usually aren't going to agree to do this until you're behind on payments, and because the debt will show up as settled. Still, if you are able to negotiate and get your creditors to agree to let you pay back less, this is a better alternative to declaring bankruptcy.

    Settling debt is the process used by many credit counseling agencies, but you don't need an agency to do this. You can learn how to write a "hardship letter" to the creditors yourself and let them know that you'd like to work something out but that you really don't have the money and might be in danger of bankruptcy if they won't help.

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    Debt Consolidation

    Debt consolidation can also be a good option that will make your payments more affordable and reduce the amount owed. Instead of renegotiating the terms of your debt with your existing lender, with consolidation you get a new lender and use the money you borrow to pay off the old debts. This will allow you to combine a bunch of different debts into one big debt so you don't have tons of small monthly payments to keep track of. Furthermore, if the new consolidation loan that you get has better and more advantageous terms, this too can help make the debt you have more reasonable on your income.

    Be careful of debt consolidation, because there are some dishonest companies that will try to take your money or give you loans that put you into a worse position than you were in before. You need to carefully consider whether any new loan to consolidate your debt is actually going to improve things and make financial sense.

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    Debt Repayment Plans

    Another option when you have seemingly unmanageable debt that is below your income is to just create a plan and start tackling it. You don't have to pay it off all at once, so you can just devote as much of your income as you can to repayment and eventually over time you'll start to make headway and your financial picture will begin to improve.

    There are a number of different debt repayment plans to consider, and choosing which one is the best way to get out of debt when income is less than debt is a personal decision. One popular method, for example, is the debt snowball method, which is financial guru Dave Ramsey's debt repayment plan. In this method, you begin by paying as much as possible to the smallest debt first. When that debt is paid off, you combine the money you were paying for that debt with the money paid to your next highest debt, and work on the next one until all the debts have been paid off in full.

    An important part of any debt repayment plan, however, will be making sure you can stick to it and that you actually have cash to pay towards your debt. To that end, you should generally start by creating a budget. It may also budget be a good idea to try to consider increasing your income if possible. Take a side job, offer to do overtime, and even sell unused items on the Internet or the classifieds and use all of that money towards repaying the debts you owe.

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    References