Raise your hand if you too have been the lucky recipient of the red envelopes of shame in the mail.
They’re not fun, right?
It’s especially tough when you’re not making much, if any, money compared to the amount of debt you have. How the heck are you supposed to pay off your debt if you can’t even afford to pay for your daily living expenses?
Fear not, my friends. It is possible. I’m not gonna lie and paint rosy pictures for you, though.
It’s gonna suck. In fact, it’s probably going to be an extended suck, because it’ll probably take you longer to get out of debt than someone with a high income. I’ve been working to pay off my debt for years, and I’m still just making the minimum payments.
But, one day, it’ll all be worth it. You can finally keep all your money, instead of paying it to stinky creditors.
Here’s how to get there.
Step One: Speak With a Credit Counselor
This step is optional, but highly recommended.
Credit counselors are a lifeline for people in financial trouble.
I’ve worked with credit counselors and they’re amazing, compassionate, understanding people. When I couldn’t afford my home anymore, it was credit counselors who came to the rescue and helped me make a financially-sound decision—and today I’m a lot better for it.
Credit counselors can help you assess your situation. They can even help with simple things like budgeting, or even develop and run a debt management plan for you (to be discussed below). Best of all, credit counseling is free, or extremely low-cost—so, take advantage of it!
Make sure you look for a National Foundation for Credit Counseling-certified nonprofit agency—these are the folks who can really help you. You can call them up at 1-800-388-2227, or make an appointment here.
Step Two: Create a Plan
You can’t go somewhere if you don’t have a road map. (I know, I’ve tried and ended up in Nenana, Alaska.) The first step is to create a plan. Luckily, you have many options.
Refinancing your debt is simple.
It works like this: you take out one loan (yes, another loan, sheesh!) at a lower interest rate and use it to pay off your higher-interest-rate debt. You can refinance all of your debt together, or just refinance certain loans, such as student loans or credit card debt.
Guys, I’ll be honest. Debt refinancing usually won’t make a huge dent in your monthly payment. If your minimum debt payments are $1,000 per month, it’s not gonna cut it down to $50 per month. But, over the long run you can save a lot of money in interest payments.
For example, let’s say you are paying off a $50,000 loan over a 10 year period with an interest rate of 12%. If you can refinance that debt down to 5%, you can lower your monthly payment from $717 per month to $530 per month, and you’ll save $22,443 in interest payments over those 10 years.
Here’s the harsh truth though: Often, refinancing lenders want to see that you have a higher income and/or a good credit score. Still, it doesn’t hurt to check to see if you can get a better rate. LendEDU is one of my favorite lender comparison sites for student loans in particular.
Debt settlement agencies will promise to get rid of your debt so you only have to pay off a fraction of it.
If it sounds too good to be true, it probably is. These companies are often shady AF.
The way it works is this: you send them a check every month for a long time, and they’ll pile it up in an account (that they’ll probably earn interest on). Meanwhile, your creditors have no idea what’s going on, so they’ll keep calling you, they’ll record late payments on your credit report so it’s totally trashed, and they’ll probably refer you to a collections agency.
Then, when you have a big enough lump sum in your account, the debt settlement agency will try and negotiate with your creditors to accept the lump sum of cash now in place of the full amount you owe. Who the hell knows if they’ll accept it or not; it’s up to them.
If they do accept, then the settlement agency will charge you a large fee. Even worse, that forgiven amount of debt is considered taxable income by the IRS (I know, they can be huge dicks), and so you’ll owe taxes on that forgiven amount.
Who the hell would sign up for that smarmy nonsense? Not I, thank you.
Debt Management Plans
These plans are actually set up by a credit counseling agency, like I mentioned above. These people will charge a small fee to set up and manage your plan each month.
It works like this: the agency will contact the creditors for you to negotiate a lower interest rate so you can pay off your debt faster. They’ll let them know what you’re trying to do (so, you know, the damn collection calls and negative credit marks stop). Each month, you send the agency a payment, and they’ll fan it out to all your creditors.
You’ll have to go through financial counseling, which means they’ll sit you down on the phone for an hour or two to go over your budget. They’ll help you come up with a plan so you can afford the payments, and don’t get into more debt.
All you have to do is keep sending the monthly payments in (don’t stop, or they might drop you from the plan) until the debt is paid off, and Bob’s your uncle.
DIY Debt Payoff Plans
You can also try to pay off the debt yourself, without any outside help. The two most common plans are the debt snowball, and the debt avalanche.
They both work like this: you draw up a hit list of your debts. The debt snowball has you list them from lowest-to-highest balance. The debt avalanche has you list them from lowest-to-highest interest rate.
Then, you pay off your debt until the first one is gone. When that cash is freed up, you send it in as an extra payment towards the next debt on your hit list. When that’s gone, you take those two payments and pay off the next one, ad infinitum, until all the debts are gone.
There’s a lot of hubbub about which plan is better. Psychologically, the debt snowball lets you get quick wins, and so theoretically you’re more likely to keep up with the plan. The debt avalanche plan makes more sense from a math perspective, since you’ll get rid of your most expensive debt first.
If you go this route, I recommend using a planner to keep track of all the weird details. My favorite free tool is Undebt.it. It even shows you your debt-free date and how much you’ll save by choosing the different plans!
OK, so this is a last-resort option, but it is an option.
Bankruptcy will trash your credit for a while and costs a ton of money in legal fees, not to mention the stigma surrounding it and what it might do to your mental health. Plus, you generally can’t get rid of student loans in a bankruptcy.
But, if you’re truly facing a huge stinky pile o’ debt that you will never get out of for realsies, bankruptcy can be a great option that lets you hit the reset button.
Plus, you can get over a bankruptcy. It’ll take a while—seven to 10 years, to be exact, for it to drop off your credit report. But, you can get over it, and move on to a normal life after a bit.
Step Two: Cut Back Your Expenses
Alright, so you probably already knew this, but I’d be remiss if I didn’t say it here as well. I’m not your dad and I won’t wave my finger at you and lecture you, but let’s be honest.
You probably already know your problem spending areas, and have tried cutting back in them.
But, there’s other areas you can probably cut too. If you haven’t already started a budget, I highly recommend it. In fact, I’ve got a multi-part series on budgeting to help you out.
Having a budget allows you to identify the areas you really can cut, and which are necessary. Our budget helped us halve our dining out spending, and that’s really allowed us to turbocharge our financial situation.
It’s gonna suck for a while. (See a theme here?). Honestly, you don’t have to cut back your expenses. But if you can put up with that pain for a little while, you can get out of debt waaay faster, even when you have no money.
Step Three: Earn More Money
Since you have no money right now, there’s actually an easy way to fix that…make more money!
It’s not as hard as you think. Even a little bit can go a long way towards helping you out.
The easiest way is to sell some of your stuff. You’ll get immediate cash now, and you’ll declutter your home. It’s a win-win!
I recommend Decluttr, especially if you don’t have enough time to sell each item individually. You round up all your things, enter their information into their website (or use their scanner app), ship them in (free shipping!), and get paid the next day. Easy peasy!
I’ve negotiated a special offer with Decluttr. If you use the coupon code LindsayVS5 in your basket while checking out, they’ll throw in an extra $5!
After you’ve done that, you’ll need some more sustainable options to earn more money long-term. Getting another part-time job can be a great way to earn extra cash.
You can also start a side hustle, which I always recommend. It’s more flexible, you can do it on your own terms, and you’re free to hop around to different types of side hustles if one isn’t working. Here’s an epic list of side hustles, and my favorite post about getting over your own fear when starting to side hustle.
Step Four: Save Up An Emergency Fund
It’s a soul-crushing feeling when despite your best efforts, Murphy’s Law takes over and something happens causing you to go back into debt (that Murphy guy is such an asshole).
So, let’s guard against that.
It seems a little counterintuitive that a savings account can help you get out of debt, but it’s true. The best way to stop going back into debt is to have an emergency fund for when life tries to punch you in the face.
Now, you might be saying, I can’t even afford my debt right now, and you want me to SAVE? Yup. It is possible to save money while paying off debt. This is where earning extra money can really come in handy, and why I stressed it so much above. It’s your ticket to stop getting back into debt.
Dave Ramsey recommends a baby emergency fund of just $1,000 while you’re still paying off your debt. If you think that’s enough to cover you for emergencies, then go for it. As for me and my husband, we’re not comfortable with that amount, so we’re shooting for three months’ worth of living expenses. Debt begone, dammit!
Related post: How big should my emergency fund be?
You Can Do This
Getting out of debt sucks, period. Getting out of debt when you have no money sucks even more.
But, you’re not chained to this forever. It won’t be easy, but if you make sacrifices, get a plan together, and earn more money, it is possible to get out of debt when you have no money.
If you can do these things, you will get out of debt. Thousands of people have done it before you, and you can do it too.
What tips do you have for getting out of debt with no money? Have you done it? Leave a comment below!