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Americans with Holiday Debt Added $986 on Average

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Each year MagnifyMoney asks consumers how much debt they racked up over the holiday season.

See historical results here:


The holidays over, and we are back to work.

But for many of us, the holidays linger in fresh debt that paid for holiday gifts and celebrations, with bills that will start hitting mailboxes in the coming weeks.

In 2015, MagnifyMoney surveyed a national sample of 403 Americans who reported they added debt during the holidays via Survata and found:

Americans with holiday debt added $986 in debt on average.

Between gifts, hosting parties, family emergencies, and for some, fewer work hours, it’s easy for debt to add up if you don’t have savings on hand. While the $986 those surveyed added to their debt on average is a manageable amount, it can easily snowball.

At a 15% rate on a credit card making just the minimum $25 payment it would take 10 years to pay off, including nearly $400 in interest paid, almost doubling the cost of the holidays.

44% of debt holders report they are stressed out about it.


Credit cards were the most common form of debt.

52% of debt holders used a bank or credit union credit card to finance their holiday debt, while another 30% used store cards to finance, which often carry rates of 20% or more. 8% took a specific personal loan, which could yield a lower rate, while 6% relied on the worst of all – payday and title loans. Less than 5% used home equity lines of credit to finance purchases.

The payoff may take until next Christmas and beyond

Less than half of those surveyed think they can pay off their holiday debt in less than 5 months. 55% plan to take more than 5 months or just make the minimum payments,  which could extend the debt to 10 years or more.


Rates being paid are high

One third of respondents say they’re paying a rate of over 10% on their debt, with 20% of them paying more than 15%. And 14% of respondents don’t even know what rate they’re paying.

But most won’t bother to get a lower rate

Despite 28% of respondents expecting to take 5 months or more to pay off the debt, just 22% plan to shop around to find a better rate with a different bank or loan.

Yet, 47% report a good credit score above 650 that may qualify for better rates than most existing credit cards and store cards offer.

The most cited reason for not wanting to shop around is not wanting to deal with another bank, noted by 28% of respondents.

A consumer with $1,000 in debt at a 15% rate making minimum payments would shave over a year off debt repayment by taking advantage of the longest 0% balance transfer deal on the market and save over $300 in interest payments.

What can be done?

MagnifyMoney has prepared a free 45 page Debt Free Forever Guide that you can download to prepare your action plan, tailored to whether your situation needs a quick transfer, or more significant repair and dealing with collections.

You’ll learn no-nonsense ways to get your rate lower, negotiate hard with creditors, and tackle your budget to find the fastest way to get debt free.

Survey results

Average new holiday debt   $986

Holiday debt funded by a….  

  • Credit card       52%
  • Store card        30%
  • Personal loan   8%
  • Payday / title loan  6%
  • Home equity    4%


When will you pay the debt off?        

  • 1 month           15%
  • 2 months         11%
  • 3 months         12%
  • 4 months         6%
  • 5 months+       28%
  • Only making minimum payments        27%

What is your credit score?      

  • Above 700       27%
  • 650-700           20%
  • 550-649           20%
  • Below 550       10%
  • Don’t know      25%

Will you shop around for a better rate with a different bank or loan? 

  • Yes      22%
  • No- Don’t want to deal with another bank       28%
  • No – Too many traps   17%
  • No – Rate is already low          10%
  • No – Don’t know enough about it        10%
  • No – Wouldn’t qualify 14%

How stressed are you about your holiday debt?        

  • Not stressed    56%
  • Stressed           44%

What rate are you paying on your debt?        

  • Less than 5%   35%
  • 5-9%   18%
  • 10-14%           13%
  • 15-19%           11%
  • 20% or more   9%
  • Don’t know      14%


MagnifyMoney surveyed 403 Americans who answered yes to the screening question “Did you add debt for holiday spending this year?”

The survey was conducted online January 2 – 4 2015 via Survata, using a nationally representative sample age 25-65.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Nick Clements
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Nick Clements is a writer at MagnifyMoney. You can email Nick at


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What Is a Good Debt-to-Income Ratio?

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debt to income ratio

Your debt-to-income ratio, or DTI, compares your debt payments to your income on a monthly basis. It’s an important measurement of how manageable your monthly budget is, as it reveals how much of your income is being devoted to payments on debt you still owe.

But it’s even more important to be aware of your DTI if you’re planning to apply for new credit soon. Here’s what you need to know.

How debt-to-income ratios work

A debt-to-income ratio is expressed as a percentage that represents how much of your monthly income goes toward debt repayment. So a DTI of 20%, for example, shows that your monthly debt costs are equal to 20% of your gross monthly income.

The lower your monthly debt costs and the higher your income, the lower your DTI. But if you borrow more or your income is lower, your DTI will be higher.

There are two types of debt-to-income ratios that a lender might consider.

Your front-end DTI compares your total housing or mortgage costs to gross monthly income. It’s sometimes also called your housing-expense-to-income ratio. This is based on your full mortgage payments if you have a mortgage, and would include principal, interest, property taxes, homeowners association fees and insurance costs. If you rent, it would be your monthly rent amount. It doesn’t include non-fixed costs such as utilities.

Your back-end DTI compares your income to the minimum payments on your outstanding credit accounts, including mortgage and non-mortgage debt. That means your back-end DTI includes:

  • Monthly payments on installment loans such as student loans, car loans or personal loans
  • Housing expenses, such as monthly rent or full monthly mortgage costs (as outlined above)
  • Minimum monthly payments on revolving accounts such as credit cards or lines of credit
  • Other financial obligations such as child support or alimony

Your back-end DTI is more commonly considered by lenders when you submit a loan application. A mortgage application will usually consider both your front- and back-end DTIs when deciding if you qualify.

Because a back-end DTI is more commonly used, assume that we’re referring to this number unless otherwise noted.

Why lenders favor applicants with lower DTIs

Most lenders will also consider your DTI to decide if you can reasonably afford to take out and repay an additional debt. A low DTI tells them that you have room in your budget to take on and repay new debt, increasing your chances of getting approved for credit. But a high DTI could be a red flag to lenders that you’re already stretching yourself thin and pose a larger lending risk.

If you’re planning to apply for a home loan, car loan or other types of credit, it’s important to figure out your debt-to-income ratio. Knowing your DTI will clarify whether you’re likely to qualify for new credit, or if you need to take steps to compensate for a poor ratio.

Even if you aren’t planning to take out a loan soon, maintaining a healthy DTI can be a good idea. It’s a sign that you’re managing your finances well and avoiding taking on more debt than you can afford, and it will also make it easier to get a loan in an emergency or unexpected event.

What is a good debt-to-income ratio?

As you take stock of your debt payments and income, you might be wondering how good a debt-to-income ratio needs to be. When lenders assess your loan application, what is a good DTI?

While DTI standards can vary by lender and product, some general rules can help you figure out where your ratio falls. Here are some guidelines about what is a good debt-to-income ratio:

  • The “ideal” DTI ratio is 36% or less. At least, that’s the common financial advice of the “28/36 rule.” This guideline suggests keeping total monthly debt costs at or below 36% of your income, and housing costs at or below 28%. (You can calculate this number for yourself by multiplying your monthly income by 0.36 or 0.28). A DTI in this range will result in affordable debt and give you the ability to qualify for additional credit when needed.
  • The maximum DTI for most lenders is 43%. This is typically the threshold for getting a new loan, according to the Consumer Financial Protection Bureau. Borrowers with a debt-to-income ratio exceeding 43% are shown to be more likely to struggle with monthly costs. You’re much less likely to get approved for a loan with a DTI above 43%, and might need to seek alternative products.
  • The maximum front-end DTI ratio for a home loan is 31%. At least, that’s the rule set by the Federal Housing Administration for loans it guarantees. Most lenders will want to see that the total costs of your new FHA mortgage payment are equal to or less than 31% DTI. For non-FHA loans, the guideline is a front-end DTI of below 28%, according to the National Foundation for Credit Counseling.
  • The lower your DTI, the better. As mentioned, a high ratio of debt to your income could be a sign that you can’t afford to take on more debt. So the lower your DTI, the better — while a 36% ratio is good, a 20% DTI would be viewed even more favorably.

How to calculate your debt-to-income ratio

Now that you know what is considered a good debt-to-income ratio, it’s time to calculate your own. Here’s a step-by-step process to calculate your DTI.

  1. Look up all your monthly debt costs. To figure out your debt-to-income ratio, you’ll need an accurate dollar amount of every debt you pay each month. Find the monthly minimum payments for your mortgage (or rent, if you don’t own a home), student loans, car loans, credit cards and other financial obligations.
  2. Add your monthly payments together. Add up the dollar amounts of all these monthly payments to get the total you pay toward these each month. (If you want to figure out your front-end DTI, include only your housing-related costs.)
  3. Figure out your monthly income. You’ll need to use your gross income, and include all income sources, including overtime pay, bonuses and pay from a second job or side hustle. A salaried employee can divide annual income by 12 to find monthly income. If you’re hourly or your pay fluctuates, review recent pay stubs to figure out your typical monthly income.
  4. Divide monthly debt costs by your monthly income. This will give you a decimal figure, which, if you multiply by 100, is your debt-to-income percentage.

If you follow these steps, you can calculate your DTI. Here it is as a mathematical formula:

(Sum of all monthly debt payments / Gross monthly income) * 100 = Your debt-to-income ratio

You can also use a calculator to automatically generate your DTI. We like the straightforward DTI calculator from our sister site Student Loan Hero, which generates both your front-end and back-end ratios.

How to improve your debt-to-income ratio

After running the numbers on your debt-to-income ratio, you might be worried that yours is too high. Fortunately, you do have some control over your DTI and, with some time and effort, could decrease it.

The way to do that is to work on the two things that factor into this ratio: your income and your debt costs. Here are some ways you can work on each of these to improve your debt-to-income ratio.

1. Avoid taking on more debt

Any new debt you accrue will only push your DTI higher. If you’re already uncomfortable with how high your debt-to-income ratio is, that’s a sign that you need to stop borrowing until you get it under control.

Take a look at your budget to ensure you’re living within your means and not spending more than you’re making. If you’re used to spending with credit cards, consider putting these away and paying only with debit cards or cash. Save up for major purchases or emergencies, too, so you can rely on your funds instead of borrowing to cover upcoming or surprise expenses.

2. Pay off low balances first

Every time you pay off a debt completely, you eliminate the monthly payment from your budget. So making extra payments on some of your credit accounts could be a smart way to lower your monthly costs.

This can be especially effective if you follow the debt snowball method, which targets your lowest balance first to quickly eliminate your smallest debt. Each time you pay off a loan or credit card, you’ll get rid of a monthly payment and lower your DTI in the process.

On top of decreasing your DTI, following the snowball repayment method will also get you out of debt faster and save you money that you’d have otherwise spent on interest.

But if you’re looking to get out of debt faster by reducing your total interest costs so that more of your monthly payments go toward the principal balance, you could opt for debt consolidation. With debt consolidation, you can take out a personal loan to pay off existing debts. The new loan should have a lower interest rate.

Debt consolidation could also help your DTI ratio by lowering your monthly payment. If you choose a longer repayment term, your monthly payments may decrease, which positively affects your DTI ratio. But a lower monthly payment may mean you’ll be in debt longer.

If you want to explore debt consolidation loan options, you can try out LendingTree’s personal loan tool. You’ll fill out basic information about yourself, your finances and what you need out of a loan. Then you may receive loan offers from lenders you can review. Note that LendingTree owns MagnifyMoney.



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3. Refinance your debt

Another smart strategy to lower your monthly debt payments is refinancing. When you refinance debt, you use a new loan to pay off and replace a previous loan. Doing so gives you a chance to get a loan with terms, costs and payments that are a better fit for your needs.

Here are the main ways that refinancing student loans, a mortgage, credit cards or other debt can help lower your monthly debt costs and, in turn, your DTI.

You can refinance to a lower rate. Your monthly debt payments will include a payment to both your principal, as well as an interest charge. The former goes toward lowering your balance, while the latter is an additional cost you pay in exchange for borrowing these funds.

The interest costs are based on your interest rate. Refinancing can be an opportunity to replace a high-interest debt with a new, lower-interest loan. This, in turn, can help lower your monthly debt costs.

You can refinance to a longer loan term. Since refinancing means getting a new loan, it could also give you the chance to choose a longer loan term. This stretches out your debt repayment over more monthly payments, so you pay less each month.

Say, for instance, you bought a home with a 15-year mortgage but have found yourself uncomfortable with how high your monthly payments are. You could consider refinancing to a 30-year mortgage to decrease your mortgage payments and lower your DTI.

As you consider refinancing, watch out for potential downsides as well. Switching to a longer loan term will increase the total interest you pay over the life of the loan, and refinancing can also trigger new loan fees or closing costs. Weigh the benefits and drawbacks for your situation to see if refinancing makes sense.

4. Earn more at your day job

While it’s important to pay attention to your debt, don’t overlook the other side of the DTI equation: your income. One of the most effective ways to lower your debt-to-income ratio is to increase how much you earn at your day job. Here are a few strategies that can make that happen:

  • Pick up more hours. If you’re not full time, ask your manager for an extra shift or offer to cover for your co-workers. Even full-time workers can sometimes pick up overtime to boost pay, so check with your manager for such opportunities.
  • Work toward a raise. Has it been a while since your pay was bumped or have you taken on new responsibilities? Do you have other reason to think you’re underpaid for your work? Start a conversation with your manager about your pay to see if you can negotiate a pay raise now or set a performance track to qualify for one.
  • Seek higher-paying jobs. Switching to a new company can be one of the best ways to get a big pay increase. Do some research into your local job market to figure out what you’re worth and uncover employment opportunities to pursue.

5. Start a side hustle

Use your off-hours to earn more with a second job or side hustle. This can help you generate more income that can be included when calculating your DTI. As a bonus, this additional pay can be the perfect source of funds to pay your debt off faster.

Here are some side hustle ideas to consider:

  • Pick up an hourly second job. You can get a range of part-time jobs in your time off, from teaching a fitness class to tutoring on the side or waiting tables.
  • Consider freelancing, consulting or coaching. If you have specialized skills, you can apply them after hours and get paid a premium to do so.
  • Try a money-making app. You’ve heard of Uber and Lyft — and might have considered driving for them yourself. But these aren’t the only ways to make money from apps. You can use apps to earn extra money baby-sitting, pet-sitting, cleaning houses, renting out your spare car or room or delivering groceries or takeout to make extra income.

6. Look for ways to offset your DTI

If you can’t or don’t want to wait for your DTI to decrease to apply for a loan, you might still have options. Some mortgage lenders will grant you a loan with a debt-to-income ratio over 43% if you can compensate in other areas of your financial history. One way is by having large cash reserves on which you can fall back.

Applicants who can qualify on their own can also add a cosigner to their application. You and your cosigner will be equally responsible for repaying this debt, and both your incomes and DTIs will be considered as well. Adding a qualified cosigner could help you surpass DTI requirements that you couldn’t meet on your own.

Lastly, you can work to optimize other factors considered on credit applications to improve your approval chances. Building your credit to achieve a good score, for example, can go a long way toward offsetting a higher debt-to-income ratio.

Your DTI is an important measure of your health that should matter to you as much as your credit score or reports. Check in on your debt-to-income ratio whenever it might have changed, such as after paying off a loan or working a side hustle for a few months. Tracking your progress can highlight how far you’ve come and keep you motivated to continue working on your DTI.

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Elyssa Kirkham
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Elyssa Kirkham is a writer at MagnifyMoney. You can email Elyssa here


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6 Ways to Managing Money in Your 20s

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managing money

Life as a young 20-something-year-old is an exciting time. You’ve likely graduated from college, started your first real-world job, and are making decisions on your own. While your adult life has just begun and retirement seems years away, it’s important to start discussing your financial options, managing your money responsibly, and planning for your future now.

This article will walk you through six suggestions on how to manage money in your 20s.

1. Create a budget

Budgeting is the process of tracking your income, bills and expenses in order to assess how much you can spend and what you can afford each month. Creating a budget and sticking to it is the foundation for financial success as it helps you to live within your means and avoid debt.

“The first thing I recommend to most young people starting out is to understand a budget,” said Corbin Green, a growth and development director and financial advisor based in Salt Lake City. “People need to understand what money is coming in and what money is going out each month, and have it laid out in an organized fashion.”

When creating a budget, you’ll want to write down:

  • Your income: How much are you making each pay period?
  • Your expenses and recurring payments: What does your rent/mortgage, utilities, groceries and gas add up to each month?
  • Debts owed: How much do you owe for student loans, car payment, credit card debt?

Once you’ve assessed your income and expenses, you can make your budget.

2. Pay yourself first

Once you’ve outlined your initial expenses, such as your mortgage, car payment and utilities, it’s crucial to add an “expense” of paying yourself first to start building up a short-term and long-term savings account. Treat your savings and retirement account like a utility bill — it must be paid monthly and on time.

“My recommendation is to pay yourself first. The first bill paid each month should be money to your savings account, then your essential bills and anything left over at the end of the month is fun money,” Green said. “The biggest mistake I see is the younger generations make is not saving early enough. They tend to have a ‘kick the can down the road’ attitude and put off savings until their 30s.”

Let’s look at an example: Assuming you want to have $1 million in savings by the time you retire at age 65, this is how much you’ll need to invest each month:

Monthly savings to reach $1 million by age 65

Starting age

Monthly savings required







“This generation lives lavishly, so the number we coach people to save is around 20% of their income. That should help them maintain their current lifestyle in retirement,” Green said. “If you want more travel and more fun stuff during retirement, saving 30% of your income will help you live a lifestyle above what you’re currently living.”

Time is on your side when you’re young. A little bit of money saved now is going to make a big difference later. Make your savings payments consistent, sustainable and automatic.

3. Start an emergency fund

In addition to your retirement account, you’ll want to start an emergency fund. An emergency account is money set aside specifically to cover the cost of an unexpected expense. This account usually consists of three to nine months’ worth of money that is easily accessible in case of an emergency.

If something unexpected were to happen (i.e., inability to work, illness, loss of income), you’d have quick access to cash that would sustain you long enough to pay your bills and allow you to find a qualified job.

4. Pay off existing debt

The average millennial has an average of $23,064 in debt, according to a recent study by LendingTree, the parent company of MagnifyMoney. Debt — or money owed to a lender — can be crippling to your financial, and even your physical and mental health.

Large amounts of debt can seem daunting to pay off, but it’s important to make a plan, start paying it off quickly and include it in your budget as a monthly payment. If you have more than one debt, how do you know which to pay off first?

Green suggests consolidating debt to one payment with a lower interest rate when possible. You may find and compare personal loans you can use to consolidate debt using this tool from LendingTree. You’ll input some personal information before getting to review loan offers.



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But you may be more driven to try the debt avalanche or debt snowball methods of repayment.

“The financial professional in me says to put more money toward the debt with a higher interest rate and some money at the debt with lower interests rates; but never focus on just one expense at a time,” Green said. “But as a human, you may ask yourself ‘which of these debts is a moral victory to pay off?’”

If you owe money to a friend or family member and paying that debt off is a mental relief, Green suggests paying that off first and then moving on to other debts.

As a young adult, it’s important to make a plan to pay off and manage your debt to avoid heavy interest fees.

5. Build credit

A credit report is a report that shows your credit history and is used to determine your creditworthiness. Building a strong credit history and maintaining a high credit score are essential for your financial health. In your early 20s, it’s important to build your credit by paying your credit cards and utilities on time but avoiding debt in the process.

“Never live above your means and use credit for money that you don’t have,” Green said. “I never recommend buying anything on credit unless you have the means to pay it off in full at the end of every month.”

Using a credit card to build credit is a smart use case, but if you can’t afford to pay it off by the end of the billing statement, you probably can’t afford it in the first place.

6. Protect yourself financially

As you enter adulthood, you’ll want to make sure that you are protecting yourself and your finances with adequate insurance. Take advantage of the benefits offered at work — health insurance, life insurance, short and long-term disability insurance and 401(k) match, if offered. You may consider additional benefit packages outside of what your work offers.

“I always recommend you have something outside of work so you have control and coverage should you leave your employer,” Green said.

Managing your money and knowing where to get started with financial planning can be overwhelming and confusing — especially when you’re in your 20s. Finances can be complex, but it’s essential to educate yourself, find out what resources are available to you and start having financial conversations earlier rather than later in life.

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Sage Evans
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Sage Evans is a writer at MagnifyMoney. You can email Sage here


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10 Ways to Make Extra Money to Pay Off Debt

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side hustle

You keep making the minimum payments on student loans, credit cards, an auto loan — but your payoff dates are still years away. In the meantime, you’re spending hundreds on interest each month.

The good news is, you don’t have to if you get serious about getting out of debt. If you pay more than the monthly minimums, you’ll get out of debt faster. Even better, you’ll avoid paying interest and free up cash flow with each balance you eliminate.

But not everyone has extra money around that they can use to pay even more toward debt than they already do. If you’re trying to pay off debt with a low income or tight budget, earning more might be the answer.

Here’s a look at 10 ways to pay off debt faster by increasing your income.

10 ways to make more money to pay off debt

Generating extra funds and putting it toward balances is one of the most effective strategies to pay off debt. That’s because it allows you to get out of debt faster and pay less interest — without eating into your monthly budget.

Get started with these 10 ideas to make extra money and get out of debt faster.

1. Pick up more hours

One of the simplest ways to get more money is to work more. If you have an hourly job, let your supervisor and co-workers know that you’re available to cover extra shifts. You can also volunteer to work overtime if there’s a need, such as if your team is currently understaffed or is particularly busy.

These extra hours can be a big help, and you’ll see the results fast — as soon as your next paycheck.

2. Take a second look at your pay stubs

It might be worth reviewing your pay stubs anyway, to see if you can increase your take-home pay with doing any extra work.

If you usually receive a big tax refund, for example, that could be a sign that you might be able to withhold fewer taxes and boost your take-home each pay period.

You can also revisit your pay benefits, and consider scaling back contributions to a retirement savings account or other benefits to pay off debt instead.

3. Get a second job

If you’re a salaried employee or can’t get extra hours at your day job, consider getting a second job to generate some additional income. Jobs based on tips, such as waiting, bartending or delivering food, can be particularly lucrative. Many retailers also hire seasonal workers to help out during their busiest times of the year.

Check around to see who’s hiring in your area and find opportunities to pick up some extra work — and earn some extra money.

4. Offer freelance or contract services

Skilled workers and professionals can often make even more in their off hours if they find a way to leverage their know-how to demand higher pay. If you earn more for every hour you work, that will generate even more money you can use to pay off debt.

As a freelancer or contractor, you can offer your services in anything from marketing and web development to performing home repairs or remodels. Figure out what you can do that would make you a valuable freelancer or contractor and line up clients (sites such as Upwork or Toptal can help). You can then can use your off-hours to make some serious extra cash.

5. Rent or sell your stuff

On top of trading your time to make money, consider the stuff you currently possess to generate some additional income. Looking for items to sell, such as clothing, electronics, appliance, furniture or other valuable items that you don’t need or use anymore.

You might also consider renting out your items or space:

  • Rent out your car through a car-sharing marketplace, like Turo or Getaround
  • Rent your parking space or driveway through SpotHero or Spot
  • Put a spare room or your home up for rent on Airbnb or VRBO

6. Sell your own goods

Borrowers with a creative streak might consider making things to sell. Think about things you like to make, and whether you could make a version of that that people would want to buy.

If you can paint or draw, for example, you could consider making commissioned family portraits. As a photographer, you can offer to do photo shoots or upload and sell your photos on stock sites, such as Foap. You can sell your own baked goods, handmade jewelry, hand-cut wooden cutting boards, or personalized leather wallets or billfolds.

Whatever you know how to make, start creating and offer your goods to people you know or consider listing them on sites like Etsy. Then you can turn around and use the proceeds to pay off debt.

7. Teach a skill to others

Another way to leverage your unique know-how to make money is to teach others through a course, class or one-on-one lesson. With just a few hours of teaching per week, you can generate a few hundred dollars per month to make extra debt payments.

If you can play a musical instrument or sing, for instance, you could teach private lessons. Exercise buffs could find work leading a fitness class or working as a personal trainer.

You can even share your skill set online. You might consider teaching English as a second language through QKids, or tutoring on a range of subjects through Brainfuse or Or, you could create an online or video course and sell it on sites like Teachable or Udemy.

8. Make money with an app

Today’s gig and sharing economies rely on mobile apps to make it easier for enterprising smartphone owners to make money. You can make money with mobile apps such as TaskRabbit, which allows people to hire and pay you to complete small jobs or errands. GreenPal is an app to find jobs performing yard work and lawn care.

You can sign up as a driver and get paid for delivery food or groceries with DoorDash, Shipt or Instacart. And of course, there are ride-sharing apps, such as Lyft and Uber, that remain staples of side hustlers everywhere.

9. Provide care services

You can also provide care services to make some extra money to help pay off your debt. Sites like Sittercity, or UrbanSitter enable you to offer your services as a babysitter or child care provider. If you’re more of an animal lover, these sites also connect sitters with pet owners, or you can use an app such as Rover. You can also look for house sitting gigs on

10. Start your own side business

Have the entrepreneurial bug? Starting a business as a side hustle is a smart way to ease into a company with fewer costs and risks.

Many of the ideas already listed could be a jumping-off point for starting a business. But don’t limit yourself. Think of several business ideas and test them on a small scale to see if they’re profitable. You’ll quickly see proof of concept and can narrow your business ideas down to one that’s profitable and viable.

You can work your regular job during the day, and build our own business during your off-hours. You’ll get a firsthand taste of what it’s like to be your own boss working on your own projects, all while making some extra money and getting out of debt.

Strategies to pay off debt with extra income

As you start experimenting with different ways to increase your income, you’ll have more firepower and funds to throw at your debt. By ignoring distractions and focusing, you can knock out your debts months or even years ahead of schedule. In the process, you could save big by lowering interest costs and avoiding them altogether.

How you use your extra money to pay off debt will matter, however. Here are some tips you can follow to maximize your new income.

Earmark extra money for debt. Make a commitment to yourself that all “extra” income you make from a second job or side hustle will be put toward paying off your debt — and follow through.

Keep spending under control. If you start earning more only to increase your spending, this will wipe out your extra efforts and keep you in debt. In addition to looking for ways to earn more, revisit your budget and look where you could cut back and change habits to spend less. This could help you free up even more funds that you can use to pay off debt even faster.

Make regular extra payments on your debt. In addition to making your monthly minimum payments, use your extra income to pay more on your debt. You can send extra payments in yourself, or make it even easier by setting up automatic payments through your bank.

Target high-interest debt first. Extra payments will go even further if they are targeted — meaning you pay the minimum on all debts but only pay extra toward a single balance at a time. If you want to get out of debt the fastest and save the most interest, look for debt with the highest interest rates. Paying expensive debts down first will save on interest, and keep your debt payments going toward the principal (what you owe) instead of interest.

Look into refinancing or consolidating debts. Another way to fight high-interest costs while simplifying debt is debt consolidation. If you have several credit cards with balances you’re trying to pay down, for example, you could use a debt consolidation loan to combine those into one debt. Even better, you can consolidate credit card debt with a personal loan, which will typically carry lower rates and could help you get out of debt faster.

To explore personal loan options for consolidation, consider using LendingTree’s personal loan tool. It can help you find lenders after you input basic personal information. Note that MagnifyMoney is owned by LendingTree.



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Take a look at other accounts, too, to see if you could save by refinancing student loans, auto loans or a mortgage.

As you work toward paying off debt, track your progress and celebrate your wins. This will keep you accountable and motivated.

It might take months or even years of hard work and side hustling to pay off debt. But if you follow smart strategies, earn extra income and stay focused, you’ll see results. In the meantime, you might also build additional income streams that you can continue to use to build lasting financial security and wealth, even after your debt is gone.

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Debt Consolidation vs. Credit Counseling

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bankruptcy guide

If you are looking for a solution to help you manage your money and ease any financial pressure you’re experiencing, you may be wondering which of the available debt relief options you should use.

Debt consolidation and credit counseling are two solutions available to consumers in need of help with managing their bills. Both of these paths can provide relief, but they do so in different ways.

In this article, we’ll review both options to give you an idea of how they work and which one may be best for you.

Debt consolidation vs. credit counseling

 Debt ConsolidationCredit Counseling

What is it?

A debt solution that replaces multiple existing loans and credit cards with one new debt.

The process of working one-on-one with a financial professional to address multiple areas of your finances.

What costs are involved?

The cost depends on the fees associated with the new loan or credit card. Costs can include an application fee, origination fee, balance transfer fee, or prepaid interest.

It depends on your situation and your ability to pay. In some cases, there is no charge. In others, there could be a monthly fee.

When should it be used?

To reduce the amount of interest paid and lower the total amount of your monthly payments.

If you are behind on your bills and need help managing your finances, or if you want a holistic look at your financial situation.

What are the credit requirements?

You will need to meet the credit requirements of the new loan. Generally, a higher credit score will yield a better interest rate and terms.

There are no credit requirements.

Can you keep your accounts open?


Yes. (If counseling leads to entering a debt management plan, you typically would need to close or suspend your accounts.)

How long will it take?

The length of time it takes to pay off the new debt depends on the terms of the new loan or credit card, the amount consolidated, and the monthly payments.

Credit counseling could last several sessions based on your needs.

Will you have to pay taxes?

Generally, no. There may be some scenarios that could result in a tax liability, for example, if you use a 401(k) loan to consolidate and it is not paid back as agreed.


Will it hurt your credit?

Your credit may take an initial hit when the new loan is processed, but as you make on-time payments and reduce the balance, you should see your score improve.

Seeing a counselor will not have a negative impact on your score. If the counseling leads to entering a debt management plan, your credit score may be affected.

What is debt consolidation?

Debt consolidation is when a consumer takes multiple debts and combines them by paying them off with one new loan or credit card, typically at a lower interest rate than the individual debts.

“It can be done a lot of different ways,” said Andrew Pizor, a staff attorney at the National Consumer Law Center. “Some people do [debt consolidation] with a mortgage, some people do it with an unsecured personal loan and some people do it through a credit card advance.”

Even though using your home to consolidate your debt is an option, Pizor said doing so is generally a bad idea because you’re taking unsecured debt and attaching it to an asset.

“If you don’t pay your credit card bill, the worse they can do is sue you,” he said. “But if you don’t pay your mortgage, they can take your house.”

One of the main reasons consumers consolidate their debts is to reduce the total amount of their monthly payments. But sometimes the monthly payment is lower because the term of the new loan is longer.

In that case, even if the interest rate is low, you could be paying more for the new debt in the long run. “[A lower monthly payment] can be important for an immediate need,” Pizor told MagnifyMoney. “But you really have to watch out for going from the frying pan to the fire.”

Consolidating debts can also streamline your finances and make things easier to manage since you will deal with fewer payments and fewer creditors. But Pizor said that alone should not be the primary reason to pursue debt consolidation.

Consumers who are considering debt consolidation should keep in mind that this strategy does not reduce the balances of your debt. It simply moves the debt to a new loan.

How does it work?

Consumers can use debt consolidation to pay off a variety of debts including:

  • Credit cards
  • Student loans
  • Unsecured personal loans
  • Business debt
  • Medical bills
  • Debts in collections
  • Taxes

There are multiple ways consumers can consolidate their debts:

  • Personal loan
  • Credit card balance transfer
  • Home equity loan
  • Home equity line of credit (HELOC)
  • Cash-out refinance on your mortgage
  • 401(k) loan

Who is it useful for?

Since one of the perks in consolidating debt is to reduce the amount of interest paid along with lowering the monthly payment, consumers who qualify for a low rate on the new loan or credit card stand to benefit the most from this strategy.

Also consumers who can manage their payments on their own and are confident they will pay the new loan on time are good candidates for debt consolidation. It is not a good strategy if you are likely to run into trouble with the new loan.

How much does it cost?

Depending on what is used to consolidate the existing debt, costs can include a balance transfer fee, an origination fee, points, or an annual fee among other costs.

You can explore options using LendingTree’s personal loan tool. You’ll input some personal information before potentially seeing loan offers. From there, you can weigh the cost of your options. (Note that MagnifyMoney is owned by LendingTree.)

How long does it last?

The amount of time it will take to pay off the newly consolidated debt depends on what method is used for consolidation, the total amount of debt, and the size of your payments.

Consumers who use a personal loan to consolidate debt can expect their consolidation to last the term of the loan unless they pay it down faster.

When should you use it?

Again, debt consolidation is not a good strategy for consumers who have trouble paying their bills. But it can be advantageous for those looking to lower their payments and reduce the amount of interest they are paying.

What to watch out for

Debt consolidation comes with some potential pitfalls. Consumers should beware the following:

  • Paying even more interest: If you take your no- or low-interest debts such as medical bills and consolidate them with your high-interest debts, you could potentially increase the total amount of interest you pay.
  • Swapping a low payment for an extended loan term: You could be getting a lower monthly payment only because the new loan comes with a longer term, which increases the total amount paid towards the debt.
  • Consolidating unsecured debt with secured debt: Again, if you pay off unsecured debt such as credit cards and medical bills with a home equity loan, HELOC or a cash-out refinance, you are putting your home at risk if up run into trouble paying the new loan.
  • Running up your balances again: It is not uncommon for consumers who consolidate their loans to go deeper into debt by running up their balances again.
  • Giving up your rights on federal debt: If you consolidate federal student loans, you will lose any protections and options associated with them.

What is credit counseling?

Credit counseling is the process of working one-on-one with a trained financial professional. Credit counselors can help consumers work through an immediate need or crisis or can provide a holistic look at their financial situation.

Credit counseling can offer guidance in the following areas:

  • Establishing a budget
  • Reviewing and understanding your credit report and credit scores
  • Developing a plan to pay past-due bills
  • Providing education and resources to help you manage your finances
  • Helping you enter a debt management plan

How does it work?

Consumers who are interested in credit counseling would schedule an initial session. At that meeting, a counselor will take a look at your finances and determine your next steps, whether it’s to have additional sessions or to provide you with other resources.

A counselor may also recommend you enter a debt management plan, which is a program managed by the counselor to help you get (and stay) current with your creditors.

Credit counseling is offered by a variety of sources ranging from agencies to individuals. A few options include:

Who is it useful for?

“Credit counseling can provide very useful advice,” Pizor said. ”If you’re having trouble managing your money and you’re getting behind, it’s definitely worth talking to a counselor.”

Since credit counseling addresses a variety of needs, it can be a useful solution not only for those who are behind on their bills and need help but for those who are looking for education and resources on how to manage their money better.

How much does it cost?

There may be a cost associated with your counseling depending on your situation. Nonprofit credit counseling agencies are usually required to offer assistance regardless of a consumer’s ability to pay.

If your credit counselor suggests you enter a debt management program, there typically is a monthly fee associated with it, ranging from $25 to $35 at NFCC-affiliated agencies.

How long does it last?

Credit counseling can take place over one or several meetings based on your needs and financial situation. You and your counselor will discuss how many sessions you will need to have. If you enter a debt management plan, the average length is four to five years.

When should you use it?

Credit counseling can be helpful in the following situations:

  • You are behind on your bills
  • You have poor credit as a result of mismanaging your money
  • You are overwhelmed by your financial situation
  • You want to learn how to manage your money better

What to watch out for

When considering working with a credit counselor, keep the following in mind:

  • Beware of disreputable companies: There are many trustworthy credit counseling agencies in both the for-profit and nonprofit sectors, but there also many that are not. Research any company you are considering working with thoroughly.
  • Make sure the counseling agency is not pointing you toward a particular service: Some businesses might try to refer you to their debt consolidation partners or to get you to sign up for their debt management plan.
  • High fees: Fees can differ from agency to agency, so be sure to compare costs.

Should you use a debt consolidation loan or credit counseling?

When considering which type of debt relief you should pursue, give some thought to your ultimate goals.

If you are looking for a one-time and immediate solution to paying your bills, debt consolidation may meet your needs. Keep in mind, though, that you will still be responsible for paying the new loan on time and consistently.

If you have multiple issues you want to address or are looking for long-term results and advice in managing your money, credit counseling is probably the solution for you. It can also help you work through an immediate crisis, but it is not an instant fix.

Pizor said it’s a good idea for consumers to consult a credit counselor even if they think they want to do debt consolidation or another type of debt relief.

If you decide you want to pursue one of these options, take the following steps.

Pursuing debt consolidation

  1. Research your options: Look into the multiple ways you can consolidate your debt. Review what products your current bank offers, and also look at credit unions, community banks and online lenders.
  2. Seek preapproval: Many lenders offer fast preapproval online.
  3. Compare loan terms and select your loan: Review the rates and fees of all the options you researched. When looking at loans side-by-side, examine the APR to get the most accurate comparison Choose the loan or credit card with the most favorable terms.

Pursuing credit counseling

  1. Research credit counselors: Pizor advised that consumers do their homework before deciding to work with a credit counseling agency. The U.S. Department of Justice also provides a list of approved credit counseling agencies.
  2. Ask questions: To determine a credit counseling agency with which to work, the Federal Trade Commission suggests consumers ask questions about how their program works.
  3. Consider the fees and other terms and choose a counselor: Compare the fees, as well as the terms of working with multiple credit counseling agencies, before moving forward with one.

Choosing your solution

Pizor stressed the importance of thoroughly assessing where you are and what your goals are before choosing any particular path. “Know your options and understand the situation before you give anyone any money,” he advised.

Regardless of the option you choose, remember that no debt relief solution will provide an instant or permanent fix. If you are attempting to solve or work through a crisis, make sure you take the precautions to avoid repeating the same mistakes in the future.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alaya Linton
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Alaya Linton is a writer at MagnifyMoney. You can email Alaya here


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Do I Spend More Than I Earn Each Month?

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It can be difficult to know if you’re spending more than you earn each month if you’re not necessarily falling behind on any bills or financial responsibilities. But if you’re not tracking your spending, you may not be aware if you’re digging yourself into debt. In fact, 42% of Americans use credit cards to fill in the occasional shortfall in their budget, according to a survey from CompareCards. (Disclosure: LendingTree is the parent company of both CompareCards and MagnifyMoney.)

Knowing if you are spending more than you earn each month requires paying attention to your money and doing some simple math. Here’s how to do it — and figure out if you need to make adjustments to your budget and spending habits.

Getting started: Track your spending

First, you need to figure out where your money has been going.

“Actually getting the data to visualize your finances can be one of the most powerful exercises you can do to begin your journey of cash flow management,” said Dan Andrews, CFP at Well Rounded Success based in Fort Collins, Colo.

But, before you can even do that, you need to decide which tracking method you want to use. There are several strategies for figuring out what you spend your money on, and we’ve listed a few of the most popular ways to track your spending below.

The automated option: Budgeting apps

Budgeting apps make tracking your spending easy because — depending on which app you use — the app may do most of the work for you. Most budgeting apps like Mint, YNAB or EveryDollar link directly to your bank accounts, credit cards and retirement accounts. After you’ve linked all of your accounts, the app will automatically pull in and categorize your transactions.

“The apps are fantastic because they generally pull in 3 months of information, and 3 months of data is generally good to see spending habits,” says Krista Cavalieri, senior adviser at Evolve Capital Financial Planning based in Columbus, Ohio.

Once the app does its job, all you need to do is check in regularly to correct any mistakes in categorizing or add in any cash expenses, if the app allows. The apps generally learn to categorize things properly after you correct them. Budgeting apps also generally allow you to visualize your spending in charts and graphs.

Understandably, budgeting apps aren’t for everybody. If you’re in that camp, you could try tracking all of your spending manually using a spreadsheet or spending journal.


In a spreadsheet, you can simply record what you spent money on and how much you spent. If you want, you can use formulas to make the process easier and to automatically calculate sums, percentages and other parts of your spending habits you’re curious about. Several budgeting templates exist within spreadsheet programs and online to help you get started.

A written spending journal

You can also try keeping a digital or physical spending journal. Every time you spend money, record it by hand in a pocket journal or in a notes application on your phone. At the end of each day or week you can spend time reviewing, categorizing and adding up what you’ve spent.


Check in on your spending challenge regularly to get an idea of where your money went and make adjustments accordingly. For example, it may take 10 to 30 minutes to do a weekly review, so pick a recurring day and time when you know you’ll be free for about half an hour. If you notice during your period check-ins that you are overspending, make some changes then and there to correct yourself, suggested Cavalieri.

Choose the budgeting and check-in method that’s the easiest for you to manage so you can see exactly where your money is going, said Cavalieri. She recommends tracking your expenses for three months to get a good sense of your spending, but recording all your transactions for 30 days will give you a sense of how your regular expenses stack up against your monthly income. A 30-day spending challenge using one of the tracking tactics above will give you the figures you need to answer the question, “Do I spend more than I earn?”

Understand the jargon

Before calculating whether or not you’re spending more than you earn each month, you’ll need to understand the components of the equation.

  • Income — Any and all sources of after-tax income coming into your budget. Examples of income would be:
    • Salary or hourly wages
    • Tips
    • Commission
    • Income from a side gig
    • Social Security or disability income
    • Cash windfalls like a tax refund or gifted money
    • Child support or alimony
    • Any other source of money coming to you
  • Necessary expenses — Necessary expenses are the basics required in your household budget to keep you functioning and gainfully employed. Fixed expenses are non-negotiables like:
    • Rent or mortgage to keep a roof over your head
    • Groceries to cook food at home
    • Transportation
      • For example, your car payment, if having a vehicle is necessary to get yourself and members of your household to their obligations, plus fuel and required maintenance for that vehicle
      • Public transit fare
    • Insurance
    • Health care expenses
    • Child care expenses
    • Utilities necessary to live or communicate like electricity, gas, water, internet and phone bills
    • Any debts owed to the government like child support or alimony payments, tax payments and federal student loan debt. (Exclude credit card debt or collection items, as you will deal with that debt separately.)

When you are tallying up your expenses, take care to account for any recurring quarterly, semiannual or annual payments, too, so they don’t catch you off guard, Andrews said. Those may be things like your vehicle registration or tax payments. You may need to plan to save for those month to month so you will have the money on hand when it comes time to make the payment.

  • Everything else — Everything else, sometimes called flexible expenses, is just what it means: Every other thing in your budget that is — technically — optional spending. This would include things like:
    • Debts
    • Buying lunch or dining out
    • Shopping
    • Subscription payments
    • Vacations
    • Any other line items that don’t fall into the “needs” category in your budget

Now that you understand the important parts of the equation, it’s time to crunch some numbers and get to the answer you’ve been waiting for:

Do the math

    • Step 1 – Income: The question you want to answer is: How much do I make, after taxes, each month? Be sure to include all consistent income streams and any additional windfalls you are expecting during the time period. Write down that number.
    • Step 2 – Necessary expenses: Write down and add up every expense you have that’s vital to meet your basic needs. (To account for fixed annual, semiannual or quarterly payments, figure out how much you’d need to set aside each month to cover that payment when it’s due.)
    • Step 3 — Subtract necessary expenses: Now, subtract your necessary expenses from your income. The equation (so far) should look like:

Income – Necessary Expenses = Amount you have left for flexible expenses.

For example, if your salary (income) is $4,000 a month after taxes, you receive a $1,000 monthly child support payment and your necessary expenses total $3,500, then $5,000-$3,500 = $1,500 left over for flexible spending.

If the number you get is negative, that means your necessary expenses total more than your income and that’s not-so-good news.

“If we are not even making this much per month then we really need to take a look at our life and say what’s our living status,” said Colin Overweg, CFP at Advize Wealth Management based in Grand Rapids, Mich. Look to see if you can increase your income or decrease your expenses. You may be able to pick up a side hustle to increase income or ask for a promotion at work that comes with a raise.

If you realize you can’t cover your fixed expenses, take a look at your standard of living to see where you can cut back, Overweg advised. Consider the following options among other fixed expenses:

      • Can you downsize your home?
      • Can you switch to a car that won’t cost you as much to own and maintain?
      • Can you trim your phone bill by switching plans or carriers?
      • Are you spending too much money on groceries?
      • Can you lower your insurance premiums somehow?
      • Can you negotiate some of your bills down?
    • Step 4 – Subtract everything else:

This is where the math can sometimes get a little messy.

Cavalieri said the hardest part about budgeting is figuring out where the expendable income in your budget is going, because all of those little expenses here and there add up. Before you know it, the money’s gone and you may feel like you have no idea what you spent it on. But if you’ve been diligently tracking your spending, as described in the first section of this guide, this part gets a lot easier. It’s important to record our “everything else” expenses so you know you can cover your spending and not reach for that credit card.

Speaking of credit cards, this is the time to address your debt obligations and factor in the minimum payments you are responsible for paying each month in to your budget. Here’s the equation:

For “everything “else,” you may be able to insert the number you got from your 30-day spending challenge.

Ideally, the number you get in the end will be equal to or larger than zero. If it’s negative, you are definitely spending more than you earn each month.

What to do if you spend more than you earn

If you are spending more than you earn, you are likely carrying a credit card balance each month, and it’s growing. You need to trim back your spending, or else you will continue to dig yourself into debt.

“Understand the needs versus wants expenses, and cut out as many “wants” as possible to either get out of debt, or start having your expenses be less than your income,” Andrews said. “You might have to get uncomfortable for a short-term period to get on track.”

He recommended you start saying “no” to a lot of things to start the trim. “No to expensive vacations, no to expensive bars no to expensive gadgets is a start,” said Andrews.

You can try a spending freeze or other challenge aimed at cutting back your unnecessary expenses. A spending freeze challenges you to not buy anything that’s not a necessary expense for a period of time. You can do a less-inclusive version of a spending freeze and limit yourself to not spending any money at your favorite retailer, or commit to making coffee at home or in the office instead of visiting a coffee shop.

Challenge yourself to adjust your spending

Now that you know where your money is going, you may realize you need to reroute it. There are several tactics you can use to change the way you spend. In addition to using one of the tracking methods mentioned earlier (an app, spreadsheet or spending journal), try one of these exercises:

Ask, “Why?”

Look at what you spent money on and think about why you made that purchase.

“It does benefit a person to bring awareness to spending habits by understanding the psychology of impulse buying,” said Andrews.

Or, you could take a different approach: Before looking at the numbers, guess how much you’ve spent.

“Track what you think you are spending versus what you are actually spending, and check in with yourself at least once a week to see how it’s going,” Cavalieri suggested. The exercise could serve as a much-needed reality check before your spending gets out of control.

Money mantra

Andrews suggested that those who are prone to making impulsive purchases try using a money mantra — a short phrase that can help you ground yourself at the checkout line. For example, you could make it a habit to ask yourself, “Do I really need this?” before you swipe your card.

An accountability partner

Try asking a friend or professional financial planner to join you in tracking your spending habits. Andrews said this tactic may work best for people who are looking for a different perspective on their habits and don’t have an emotional connection to the way the person is spending money. He suggested that those who need a professional choose a fee-only, fiduciary, certified financial planner.

30-day cash diet with a spending journal

Try using cash instead of a debit or credit card for a while. The cash will be a physical reminder of your budget. Take out exactly what you need for a certain spending category, and you’ll be forced to spend within that limit.

What to do if you spend less than you earn but are in debt

If you have room in your budget after accounting for all of your expenses but have debt, you should plan to aggressively address your debt with the money you have left over.

Two common methods used to get out of debt are the debt snowball and debt avalanche. The method you choose will depend on your personality type and what will best motivate you to kill off your debts. Click here to view our Snowball vs. Avalanche calculator.

The debt snowball orders your debts from lowest balance to highest. You will then throw all of the money you can at the debt with the lowest balance first and keep making minimum payments on all of the other debts. The snowball method may help those who will feel more motivated by quickly paying off smaller debts before tackling the larger ones.

The debt avalanche works by listing and paying off your debts in order of highest to lowest interest rate. This method saves borrowers the most money in future interest payments, but may not be the most motivational if the debt with the highest interest rate is also a large debt that will take the a long time to eliminate.

Debt consolidation is another option. Consolidating debt into a personal loan is a good way to save money from eliminating high-interest rates. You can read more about it here.

What to do if you spend less than you earn and are not in debt

If you realize you have wiggle room in your budget and don’t have any debt, the experts suggest you funnel your extra funds into savings and investments.

This is the time to think of your future goals. Are you planning to buy a home? Do you want to start a college savings fund for your child? Would you like to travel or go on vacation soon?

The money left over in your budget can be put toward these savings goals. In addition, you could simply put even more money away for your nest egg. If you are behind in saving for retirement, Overweg suggested you send any leftover income into tax-advantaged retirement plans.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at

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Tips for Staying On Track When Paying Off Debt

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According to the Federal Reserve Bank of New York, debt in America reached $13.21 trillion in the first quarter of 2018, exceeding the record of $12.68 trillion set during the Great Recession. No matter what kind of debt you personally have, whether it’s from student loans, credit cards or medical bills, owing money can feel overwhelming. You look at the bills and can’t imagine what it will take to bring that huge number down to zero.

But, with dedication and a methodical approach, you can do it. We explore how to stay motivated and on track with your debt repayment, and how to avoid a repeat performance.

10 tips for staying on track when paying off debt

#1 Design a debt repayment plan

A great way to stay on the straight and narrow is to define attainable goals you can work toward. For example, try out the debt snowball method. This method involves ordering debts from lowest balance to highest balance and tackling the smallest debts first. Because you’re focusing on the small debts, you will start racking up early “wins,” and that positive momentum will give you the fuel you need to keep going as the debts get bigger and bigger.

#2 Set it and forget it

Based on your budget, determine how much you can afford to pay each month — paying more than the minimum is ideal — and set up auto withdrawals. This gives you one less thing to worry about, and it could make you less tempted to skip payments or pay less.

#3 Pay on time

Don’t let your loan balances overwhelm you to the point of inaction. Paying something toward your debts on time is better than paying late. On-time payment history is the single most important factor that contributes to your credit score. “Although paying extra against a principal balance can help reduce the amount of interest you pay on a loan overall, if there is nothing else you do, just pay on time,” said Mike Fanning, head of MassMutual U.S., an insurance and financial services company.

#4 Trim the fat

If paying even the minimum is difficult, you might have to make a temporary lifestyle change to reduce your spending. Take a look at what you’re spending your money on and see where you can cut back. It could be as simple as forgoing a monthly car wash and scrubbing your own car for a while, or planning grocery shopping in advance so you avoid last-minute, takeout charges. The thought of getting back to the car wash could motivate you to pay your debt off more quickly.

#5 Identify your triggers

Do you end up with a hefty bar bill when you go out with friends every week, or purchase more than you intended when you visit the mall? If this kind of overspending is putting the brakes on paying off your debt more quickly, identify the trigger, i.e. the bar or the mall, and find ways to avoid them. Perhaps you invite friends to your home instead, or establish a moratorium on the mall.

#6 Find a partner in crime

There is safety in numbers. Find a friend or relative who also has debt, and make a date to check in every month. Knowing that you have to answer to someone regularly can help prevent you from slipping. If you don’t know someone personally who can provide that support, there are online accountability groups that can help. Facebook, for example, has become a destination for many budget-conscious consumers to share their experiences and provide tips and support for one another.

#7 Create a debt bet

Do you like healthy competition? You may have heard of diet bets, where several people put money in a pot and the person who loses the most weight wins the pot. Create a “debt bet” with a few friends with comparable debt and similar salaries, like your crew of first-year doctors paying off their medical school debt. The person who pays off the most in a set period of time, wins the pot.

#8 Refinance

Improving the terms of your loan can shave money and time off your repayment. Before you shop for another loan, use a loan calculator to get a sense of how much you’ll be paying over the term of your current loan, and then look for something more favorable. See what your current lender has to offer, but look at other lenders as well.

#9 Consolidate with a personal loan or balance transfer

If you’re paying off multiple loans, you might want to consolidate your debt. You can apply for a personal loan, which is a fixed amount of money borrowed at a fixed rate over a fixed period of time. You can then use the proceeds to pay off existing debts, leaving you with just one loan balance to worry about moving forward and hopefully one with a lower rate.

A balance transfer can be a good option if you have good credit and can qualify for a solid 0% intro APR offer. This method is only useful for credit card debt, however.

#10 Forgo gifts

No one wants to skip birthday and holiday gifts, but during your debt repayment period, ask people to help you pay off your debt in lieu of gifts. To make it easy, set up a GoFundMe (or similar) page where people can contribute and see the positive effect they are making. Your family and friends will be impressed with your resolve, and they may even spend more than they usually would to help you along!

How to keep debt at bay — for good

Create a budget

If you didn’t have a budget before, create one now so you stay on track. Budgeting apps, like Mint, You Need a Budget (YNAB) and TOSHL Finance are three of our favorites. You can connect these apps to many of your accounts so the information automatically updates, which streamlines and simplifies the process, making budgeting much less of a burden than with the manual spreadsheets or Excel forms of old.

Don’t rest on your laurels

Now that you’re out of debt, it’s easy enough to start living high on the hog with all this “extra” money. Nick Holeman, CFP at, recommends that you start saving instead. “Don’t get too comfortable after you’ve paid off your high-cost debt – continue to make saving a priority by building a safety net,” he said. “Saving three to six months’ of living expenses will ensure that if you have a financial emergency, you will be able to navigate those difficult waters.

Avoid comparisons

Holeman also suggests that paying attention to how others live can be counterproductive. “Don’t compare your standard of living to those around you,” he said. “If you try to keep up with the Joneses, you will put yourself into more debt.”

Be careful with the plastic

Pay off your credit cards in full every month but to be prepared to stop using them if you are overspending.

We know tackling your debt can feel like climbing the world’s highest mountain (and not in a good way), but it’s all for a good cause. If you stumble along the way, get up, dust yourself off and keep on trucking. Being debt-free will one of your proudest accomplishments.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How to File for Chapter 11 Bankruptcy

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business owner

Business owners struggling to keep their companies afloat don’t necessarily want to close down and liquidate assets or sell the business to the highest bidder. Instead, many may want to create a plan that helps them reduce debt and deal with the issues that caused the financial distress they are currently facing, ultimately saving their company. Any rates or fees listed below are accurate as of the date of publishing.

For these business owners, filing Chapter 11 bankruptcy may be the right solution. According to the American Bankruptcy Institute, there have been over 70,000 Chapter 11 filings across the U.S. since 2009; nearly 4,000 companies have filed in the first three quarters of 2018. In recent years, you may remember hearing about large companies like Sears and Toys “R” Us filing for Chapter 11. But what about you and your company? Could Chapter 11 be a viable option?

How Chapter 11 bankruptcy works

Like Chapter 13, Chapter 11 bankruptcy is a reorganization. Unlike Chapter 13, Chapter 11 is mainly for businesses and related to business debt.

“The filer can be a sole proprietor, S corporation, an LLC,” Robert W. Dremluk, a New York-based partner at the law firm Culhane Meadows, told MagnifyMoney. “Any format is okay, but the [filer] will primarily be addressing the business-related activities of the individual.”

While many business owners file a voluntary petition for Chapter 11, creditors can also file against a debtor, which turns it into an involuntary petition. Unlike Chapters 7 and 13 bankruptcy, there isn’t usually a trustee appointed at the start of a Chapter 11 filing. Instead, after filing, the business owner becomes the “debtor in possession” (DIP), allowing the debtor to retain control over the business assets during the term of the reorganization, which can take months or years to execute. This also allows them to make decisions about what to do with assets.

As an example, Dremluk mentioned a retailer who can choose to close underperforming stores and have a sale on the inventory but to continue operating successful locations.

Once a business owner has filed a petition for bankruptcy, an automatic stay is enacted, ensuring that collection activities, repossessions and foreclosures are suspended. In some cases, however — such as when the underlying property in question isn’t necessary for the reorganization or the owner has no equity in it — a creditor may request that the court lift the stay and allow them to foreclose.

While they are the debtor in possession, the business owner has 120 days to create and submit a plan for reorganization. The plan, which will outline how each class of claims (secured and unsecured) is to be handled, must then be filed with the court. A disclosure statement is then sent to creditors to allow them to evaluate the plan. Creditors who, according to the plan, will not get the full value of the debt they are owed or whose contracts are going to be modified under the reorganization, can vote against the plan.

When developing the plan, a business owner doesn’t go it alone. In addition to having their attorney to help, there is also a creditors committee comprised of representatives of the seven largest unsecured creditors. The committee helps to develop the plan and investigates the conduct of the business owner to help ensure proper management of assets.

Generally, a business owner’s personal assets are left out of a Chapter 11, but, as Dremluk noted, that’s not always the case. “Sometimes, an individual personally guarantees or pledges personal assets on behalf of the company, in a closely held company. An aggressive lender may call collateral, it depends,” he said. In addition, if the business is a sole proprietorship or a partnership, personal assets may be at risk.

When to consider filing Chapter 11

According to Dremluk, there are a number of events that can prompt a company to file for Chapter 11. In some cases, it could be due to the company facing financial difficulties or operational issues.

“Companies [sometimes] end up considering bankruptcy because they are in financial distress, and part of the reason for that may be that management is unable or unskilled in grappling with problems the company is facing,” said Dremluk. Whether the issue is that company management isn’t proficient at solving problems or that the company has overexpanded and isn’t able to correctly operate a business this large with their current structure, Dremluk said that bankruptcy gives them the opportunity to correct their course.

“Bankruptcy gives the business a chance for a pause and to reassess what they’re doing and how to do it better,“ he said.

What debt is erased in Chapter 11?

“Secured and unsecured debt whether public or private can be discharged,” said Dremluk. Unlike Chapter 7 bankruptcy, where unsecured creditors often walk away without receiving payment, Chapter 11 allows a business to set up a reorganization that pays creditors, although sometimes they receive less than the company owed them or the debt is paid over a longer period of time than the original contract specified. While secured creditors are prioritized in the reorganization, vendors who supply services and materials that are integral to the ongoing operation of the company (called “critical vendors”) may see their unsecured debt getting paid off during the bankruptcy.

What makes Chapter 11 so powerful is that it allows a company time to get their business on the right footing. With Chapter 11, said Dremlock, “[a] company can deal with asset/secured claims and sell assets over a period of time instead of in fire sale situation.”

How to file Chapter 11 bankruptcy

The first step a filer should take is reaching out to an attorney; as Dremluk noted, it is mandatory that a business owner filing for Chapter 11 “must be represented by counsel.” In addition, because each district court may have its own added requirements, an attorney can ensure you file everything necessary.

Business debtors who wish to file will be utilizing a multitude of forms in the 200-series, beginning with Official Form 201, “Voluntary Petition for Non-Individuals Filing for Bankruptcy.”

Next, business owners need to compile a list of the names and addresses of all their creditors. This list should be formatted however the court in your district requires.

Another official form that needs to be completed is Form 204, “Chapter 11 Cases: List of Creditors Who Have the 20 Largest Unsecured Claims Against Debtor and Are Not Insiders.”

“The list of creditors is submitted to the court for purposes of selecting a potential creditors committee,” said Dremluk. “You don’t want people on that committee who are conflicted because they are an officer or shareholder.”

Finally, for those business owners required to file periodic reports with the Securities and Exchange Commission (SEC), Form 201A, “Attachment to Voluntary Petition for Non-Individuals Filing for Bankruptcy Under Chapter 11,” should be completed.

Within 14 days of filing Form 201, the debtor will need to file the rest of the forms for their bankruptcy, which are:

  • Official Form 206, “Schedules of Assets and Liabilities”
  • Official Form 206A/B, “Schedule A/B: Real and Personal Property”
  • Official Form 206D, “Schedule D: Creditors Who Have Claims Secured by Property”
  • Official Form 206E/F, “Schedule E/F: Creditors Who Have Unsecured Claims”
  • Official Form 206G, “Schedule G: Executory Contracts and Unexpired Leases”
  • Official Form 206H, “Schedule H: Codebtors”
  • Official Form 206Sum, “Summary of Assets and Liabilities for Non-Individuals”
  • Official Form 202–Declaration, “Declaration Under Penalty of Perjury for Non-Individual Debtors”
  • Official Form 207, “Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy”
  • Director’s Form 2030 (unless your court requests otherwise), “ Disclosure of Compensation to Debtor’s Attorney”

If the business owner declaring Chapter 11 meets the criteria to be considered a small business debtor, they must also include a balance sheet, statement of operations, cash-flow statement and federal income tax return. If the small business owner doesn’t have these documents, they can submit a statement under penalty of perjury that they have not prepared the documents or filed a federal tax return.

To determine whether a filer is a small business debtor, the criteria they must meet involves two elements. First, it must be ensured that the debts are no more than $2,566,050, and the business cannot be focused primarily on owning or operating real property. Second, a creditors’ committee has either not been appointed to the case, or has not properly provided necessary oversight, as determined by the court.

When filing, business owners can expect to be charged a $1,167 filing fee and $550 as a miscellaneous administrative fee. On top of that, a debtor must pay attorney fees, which can get weighty.

“Chapter 11 has become too expensive for most companies to file, and lenders have also reached the point in their analysis where they don’t want to support a company for a long time. They’d rather have a company liquidate and take their losses,” said Dremluk, who added that fee arrangements and advanced budgets for attorney fees might help a filing company’s chances of success.

Within 120 days of petitioning the court for Chapter 11 bankruptcy, the company needs to submit its plan for reorganization. The plan will generally include provisions for how the reorganization will be implemented, including how business will continue, how funding will occur, how each class of creditor will be paid, the interest paid to them and so on.

One important aspect of the reorganization plan is that it needs to be in the best interest of creditors in order to get approved. “The plan needs to be in the best interest of creditors, so treatment of creditors under the plan must be better than they’d get in a liquidation,” said Dremluk.

Dremluk added that, ideally, through the reorganization “the company will be able to discharge debt, resolve claims and emerge with a cleaner balance sheet and a lot of its other issues behind it.” Small businesses can submit this plan on Form 425A, “Plan of Reorganization for Small Business Under Chapter 11,” along with the disclosure 425B, “Disclosure Statement for Small Business Under Chapter 11.”

Initial Filing

Official Form 201

Voluntary Petition for Non-Individuals Filing for Bankruptcy

Compile a list of the names and addresses of all their creditors.

This list should be formatted however the court in your district requires

Official Form 204

Chapter 11 Cases: List of Creditors Who Have the 20 Largest Unsecured Claims Against Debtor and Are Not Insiders

Official Form 201A

Attachment to Voluntary Petition for Non-Individuals Filing for Bankruptcy Under Chapter 11 (for those business owners who are required to file periodic reports with the SEC)

Within 14 Days of Filing Form 201

Official Form 206

Schedules of Assets and Liabilities

Official Form 206A/B

Schedule A/B: Real and Personal Property

Official Form 206D

Schedule D: Creditors Who Have Claims Secured by Property

Official Form 206E/F

Schedule E/F: Creditors Who Have Unsecured Claims

Official Form 206G

Schedule G: Executory Contracts and Unexpired Leases

Official Form 206H

Schedule H: Codebtors

Official Form 206Sum

Summary of Assets and Liabilities for Non-Individuals

Official Form 202–Declaration Official

Declaration Under Penalty of Perjury for Non-Individual Debtors

Form 207

Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy

Director’s Form 2030 (unless your court requests otherwise)

Disclosure of Compensation to Debtor’s Attorney

Small Business Debtors
  • Balance sheet

  • Statement of operations

  • Cash-flow statement

  • Federal income tax return

If the small business owner doesn’t have these documents, they can submit a statement under penalty of perjury that they have not prepared the documents, nor filed a federal tax return

425A (within 120 days of filing form 201)

Plan of Reorganization for Small Business Under Chapter 11

425B (within 120 days of filing form 201)

Disclosure Statement for Small Business Under Chapter 11

Within 120 Days of Filing Form 201

Reorganization Plan

Plan of reorganization (no official forms unless it’s a small business debtor)

After filing Chapter 11: What happens next?

One of the initial benefits a business owner will experience after voluntarily filing for Chapter 11 is that an automatic stay is placed on all collection, foreclosure and repossession activities. But this is no time to relax and enjoy that removed pressure — instead, it’s time to create a viable plan for a successful reorganization.

Creating this plan is the most important part of the process, according to Dremluk, because it gives the company a target to reach for. “Without a target or exit strategy, I’ve seen companies file Chapter 11 and then flounder because they are directionless,” he said.

Dremluk said that companies creating a reorganization plan need to explore all the what-ifs, including the possibility of selling or resolving outstanding litigation. If these options are part of the plan for reorganization and they fall through, Dremluk said that the reorganization plan may no longer be viable and this could mean the case is converted to a Chapter 7 and an appointed trustee may operate the business or liquidate assets and close the case, potentially leaving the business owner without the option of emerging with their business intact.

Ideally, the goal is to emerge from a Chapter 11 successfully — of course, success can mean different things to different companies. Dremluk noted that generally, the objective is to have a company able to reorganize its business and emerge from bankruptcy with its problems behind it.

But in some cases, it may be about reducing debt so the business can be sold. According to Dremluk, in those situations, “[the] company would file bankruptcy to clean up problems and become attractive to another buyer. Soon after filing it would put itself up for sale, more often than not have a stalking-horse bidder — a buyer who is prepared to buy.” When there is a stalking-horse bidder (one who is bidding on a bankrupt company’s assets), the offer is still presented to the court and subject to higher and better offers. In the end, the successful bidder would own the company and its assets and the debtor will be out of the picture.

Is it time to file for Chapter 11?

When a business is in financial trouble, it may not immediately be time to file for Chapter 11, but it could be time to contact an attorney and start reviewing options. “As soon as signs of financial distress appear, a company should consider its options. Bankruptcy may be one,” said Dremluk.

For some business owners, however, out-of-court workouts — where a debtor works out a deal with a creditor without involving the court, filing bankruptcy or selling the company — may be better alternatives. It depends on whether the business owner wants to keep going, how amenable their creditors are to a workout and how much money they might lose selling their company as-is, with all its current difficulties.

Dremluk noted that one of the biggest mistakes he sees business owners make is waiting too long to reach out to an attorney: “Waiting until the last minute to reach out [makes successful emergence] much more difficult. If you’re an owner of a company and you’re starting to see problems, reach out sooner rather than later.”


If the individual owner of a closely-held company made a personal pledge on a debt, that could impact their personal assets during the Chapter 11. Owners of sole proprietorships and partnerships may also have some personal asset exposure.

One of the most important things any business owner can do is get all their financial documents together. As Dremluk noted: “When you plan to file, gather key documents like leases, contact financial advisors to prepare income statements, list creditors and think about key suppliers and relationships and how they will be handled going forward.”

Time is of the essence, and the more time you give yourself, the better your chances are for recovery — so it’s best to reach out to an attorney as soon as your company starts having financial problems. Bankruptcy might not be the best solution at that time, but you can also discuss alternatives with counsel.

One of the most important factors, according to Dremluk, is the attorney’s level of experience. “Look for a professional that has experience with cases as opposed to someone in another practice area that occasionally does bankruptcy,” he said.

Dremluk also said to look for an attorney willing to make arrangements, and that business owners should be careful when comparing rates because an attorney with a below-market rate who charges for a high amount of hours can cost more than an attorney charging an average rate but who charges for a smaller number of hours.


The word bankruptcy conjures a lot of different feelings for people and very often those feelings are negative. But when it comes to a business filing Chapter 11, it’s hard not to see the positive potential in allowing that company the time and space to reorganize and find effective ways to deal with the problems that helped push it into financial distress.

Still, bankruptcy isn’t the right choice for every business owner, which is why it’s important to have an experienced attorney working on your case.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Yolander Prinzel is a writer at MagnifyMoney. You can email Yolander here


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What Happens When You File for Bankruptcy?

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bankruptcy guide

If you’re struggling with insurmountable debt, bankruptcy may be an action you’re thinking about taking. In this post, we explain what happens play-by-play when you file. One thing to note is that the process of bankruptcy can vary depending on the type of bankruptcy you file and the facts of your case. The following is a general overview of how bankruptcy works for the most common forms filed by individuals. We’ll cover:

The basics of Chapter 7 and Chapter 13 bankruptcy

There are multiple forms of bankruptcy that can be filed by cities, businesses, farmers, and more. The two forms that individuals typically file are Chapter 7 and Chapter 13. Here’s an overview of both:

Chapter 7

Chapter 7 is the liquidation form of bankruptcy where your assets are taken to repay your creditors.

Some assets can be excluded from the liquidation, depending on your state and the bankruptcy agreement. Exempt items may include clothing and other household items. Unsecured debt, such as credit cards, personal loans, and debt in collections, are typically discharged.

To qualify for Chapter 7 bankruptcy, you have to pass what’s called a “means test” to prove you don’t have enough disposable income to repay your debts. You can learn more about the means test here.

Chapter 13

If you have sufficient income to repay some of your debt, Chapter 13 may be the type of bankruptcy you file. Chapter 13 establishes a debt repayment plan that lasts from three to five years.

You may be able to save your home from foreclosure through Chapter 13 by adding delinquent mortgage payments to the repayment plan. Certain debts may be discharged once you meet the conditions of your repayment plan.

What forms of debt can’t be discharged in bankruptcy?

A discharge is when you’re no longer personally liable for a debt. After discharge for both Chapter 7 and Chapter 13, creditors cannot pursue collection or legal action against you for the debt. However, the discharge can be reversed if it’s determined you were given the discharge based on fraudulent records.

Bankruptcy won’t wipe away all of your financial obligations, either. For example, you may be responsible for the following after bankruptcy:

The dischargeable debts will vary from case to case. It’s a good idea to consult with an attorney to find out what debts can and can’t be discharged. In general, unsecured consumer debts such as personal loans, loans from relatives, payday loans, and medical bills may be discharged. In certain situations, secured debts may be discharged if you’re willing to surrender the property backing the debt.

Filing for bankruptcy? Here’s what to expect

Moving on to what you can expect before filing, during the process, and after filing:

Before you file for bankruptcy

Open your mail
“I can’t tell you how many times clients have come in to my office with a big garbage bag full of unopened envelopes,” said Raquel S. White, a bankruptcy attorney based in Prince George’s County, Md. You’ll need to open your bills and understand where you’re at so you can come up with a resolution.

Get credit counseling
A credit counselor can help you decide whether bankruptcy is the right choice or if there are other options you can explore before filing — indeed, credit counseling from a government-approved credit counselor is already a requirement to file for bankruptcy. This session will help you review your money situation, and it suggests alternatives to bankruptcy that you may want to consider.

The length of the session is typically from 60 to 90 minutes and costs about $50. You’ll get a certificate that you must submit. You can check out an approved list of counselors here.

Hire an attorney
You don’t need to file bankruptcy with an attorney, but it is advised. An attorney can guide you through the process, file paperwork and represent you through proceedings. During proceedings, the trustee — the person overseeing your case — can try to squeeze as much money as possible out of you to repay debts. An attorney will work on your behalf to fight for your financial interests. You can shop around for lawyers on sites like Yelp, or riffle through attorney directories such as the one available on the American Bar Association website.

Despite the social stigma of filing for bankruptcy, White told MagnifyMoney that she no longer advertises her services — all of her clients come from referrals. If you feel comfortable, you can ask a friend or relative for a recommendation.

Gather your financial documents
Compile all of your asset and liability statements to give to your attorney. You need to have a list of your creditors, a list of your properties, your income, your debts, and your monthly expenses to complete the filing.

The attorney may ask you to fill out a bankruptcy questionnaire when you meet. The attorney will use information you provide to prepare the documents. Here’s a rundown of the documents needed throughout the bankruptcy process:

  • petition for bankruptcy
  • schedule of assets and liabilities
  • schedule of current income and expenses
  • statement of financial affairs
  • schedule of executory contracts and unexpired leases

You can review some of the forms on the United States Courts website.

During the bankruptcy process

Here’s how the filing process unfolds for Chapter 7 and Chapter 13.

What to expect in Chapter 7
Your attorney will help you prepare and file the bankruptcy petition. There are filing fees, administrative fees, and fees to be paid to the trustee. You may be able to pay the fees in installments; if you don’t have the means to pay the fees and your income is less than 150% of the poverty line, you may be able to have these fees waived.

Filing your petition puts an end to most collection calls and may even stop wage garnishments and lawsuits.

After 21 to 40 days of filing the petition, there will be a meeting of creditors that you attend with your attorney; the trustee and creditors will attend as well. At this meeting, you’ll answer questions about your finances. The trustee assigned to the case will liquidate assets to pay money back to creditors.

What to expect in Chapter 13
You file the petition for a Chapter 13 bankruptcy much like you do with the Chapter 7. There are filing fees, administrative fees, and trustee fees to pay. These fees can be paid in installments, or even waived if you make under a certain amount of income. The petition may stop the collections calls and foreclosure proceedings.

A meeting of creditors typically happens within 21 to 50 days after filing the petition. At this meeting, you’ll be asked questions about your finances. Your proposed repayment plan is filed. Afterward, there’s a confirmation hearing where creditors can raise objections about the repayment plan. Here is where having representation can come in handy. Your attorney will be fighting for your financial interests within the agreement. Adjustments may be made to the proposed plan before it’s finalized.

You make payments to the trustee. They send the money to the creditors on your behalf. There’s a hierarchy of debts that get paid through your repayment plan. Taxes and the costs required to go forward with the bankruptcy, like attorneys fees, are priority. The next debt in the priority hierarchy is secured debt. You need to satisfy payment terms on this debt because the creditor can take the property. The last debt in the hierarchy is unsecured debt, i.e. credit cards. Unsecured debt isn’t backed by collateral and may not be paid in full during the course of the repayment term.

According to White, creditors of unsecured debt can get back around $0.10 per dollar borrowed. At the end of the plan, remaining debts may be discharged as outlined in the agreement.

After filing for bankruptcy

The paperwork is in and you’ve gone to the required meetings — what’s next?

Complete a post-filing debtor education course
Course completion is required before your debt can be discharged. The post-filing debtor education course is one that teaches you how to manage money and credit responsibly moving forward. Like the pre-filing counseling session, this class has to be administered by an approved provider. The course can cost around $50 to $100 and you’ll get another certificate afterward. You may be able to do this course in person, over the phone, or online.

For Chapter 7, your debt will be discharged fairly quickly
The discharge order can take place within 60 to 90 days of the meeting of creditors unless creditors object to the discharge.

For Chapter 13, discharge happens after the repayment plan
The repayment plan agreement may be three to five years and your discharge will come after you satisfy the terms.

What happens to your credit
The credit hit is something you’re probably concerned about with a bankruptcy — but according to White, there’s a bit of good news here. Bankruptcy can have a longer impact on you if you’ve had a long history of nonpayment and credit problems leading up to filing. However, if you have great credit history and then a singular event causes you to file bankruptcy immediately, your credit will take a hit but it may bounce back faster.

“You have to remember, people are looking at your actual credit. They’re going to say, this person was doing great and then they had to file for bankruptcy — something outside of their control had to have happened,” said White. Creditors may be more willing to work with you if they see you’ve had a decent track record until this event. It often takes seven to 10 years for bankruptcy to fall off your report.

Is bankruptcy right for you?

Bankruptcy should be viewed as a final resort because of its financial ramifications. If you have a ton of equity in your home but you have, say, $30,000 sitting on an American Express credit card, White said bankruptcy is probably not the answer — your credit card debt can be resolved without resorting to it.

You can call up your credit card company and try to work out a payment plan. You could also refinance your debt with a balance transfer card or consolidate your debt with a personal loan. If you don’t feel comfortable managing all of this alone, you can contact a credit counselor to help you along the way. There are other resolutions that can come before bankruptcy, especially if the situation isn’t dire.

However, bankruptcy may be a step to consider if your debt is having a larger impact on your livelihood. Here are a few scenarios where bankruptcy could make sense:

If you’re facing foreclosure
Filing Chapter 13 bankruptcy is one way to stop foreclosure. Back payments can be included into your repayment plan so you can save the home. Other debts can be wiped out at the end of the repayment term to give you a fresh start.

If the repo man is calling
Similar to your home, filing bankruptcy could help you stop repossession and incessant collections calls when you’re in way over your head. If you set up a repayment arrangement through Chapter 13, the trustee will collect your payments and distribute to creditors for you so you don’t have to worry about communicating with collections agencies.

If you’ve experienced a life-changing event
Large unmanageable medical bills from an accident or illness could make your financial situation take a turn for the worst. Bankruptcy could be something to consider to get you back on track.

If you experienced a significant loss in income
Losing income unexpectedly can put you in a bind, and long-term unemployment can cause damage that you’re unable to repair. Filing bankruptcy could give you a clean slate.

Don’t Suffer in Silence

If you’re struggling with debt payments, don’t try to hide your bills under the rug. According to White, wage garnishments, bank garnishments, repossessions and foreclosures are all scenarios where you should run — not walk — to see an attorney or counselor for advice.

If you do end up deciding bankruptcy is the right course of action, it’s not the end of the world. The word sounds intimidating, but the steps are systematic and the overview in the post above gives you some insight into how it all works. Be sure to take advantage of the pre-filing and post-filing counseling because you may be able to learn valuable information about how to manage your finances and debt in the future.

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Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here


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Debt Validation Letters: What You Should Know

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

managing debt

Debt is serious business. Not only should you take your debts seriously for moral and practical reasons, but it’s important to know that there’s an entire industry that revolves around managing, validating and collecting on people’s debts. If you default on what you owe, rest assured that someone will come knocking.

However, it sometimes happens that debt collectors are chasing the wrong people, whether due to identity theft or mistakes in record keeping. That’s why one of the mainstay documents in the world of debt collection is the debt validation letter, which serves as an essential bulwark against errors and fraud in debt collection.

What is a debt validation letter?

Borrowers who have defaulted on debts should keep an eye on the mailbox. Once a debt collector contacts you for the first time — usually via a phone call — they have five days by law to send you a debt validation letter. Sometimes this letter serves as the first communication from the collector. Its purpose is to make sure that the debt in question actually belongs to you.

The rules governing these letters are laid out in the Fair Debt Collection Practices Act (FDCPA), a federal law that defines the limitations on third-party debt collectors who are tasked with collecting debts on behalf of others. The act’s provisions on handling defaulted debt stipulate that debt collectors can’t use “any false, deceptive, or misleading representation or means in connection with the collection of any debt.” This means that they must have validation to support their requests for payment from a particular person. A debt validation letter is often called a “G notice” by those in the industry because the rules for it are laid out in section G of the FDCPA.

The rules are meant to protect consumers from errors caused by mistaken identity and identity theft. While identity theft is the more attention-catching issue, many errors also arise from mix-ups among people with common names — a particular problem with family names from certain cultural groups — and particular naming conventions, such as fathers and sons with Jr. and Sr. suffixes. Mistakes also occasionally occur in the amounts being collected and in record keeping indicating whether or not the debt has already been paid.

The debt valuation letter must contain the following information:

  1. Name of the creditor
  2. Amount to be collected
  3. That the debtor has the right to dispute the debt, which must be done in writing within 30 days
  4. That you can request the identity of the original creditor in writing within 30 days, if it’s different from the current creditor
  5. That once you have disputed the letter in writing within 30 days, no further action can be taken to collect the debt until validation is provided

Item No. 4 on the list is a particularly important thing to understand when debt may be packaged and sold, repackaged and resold, ad infinitum. An example is a letter telling you that you owe a debt to “Midland Credit,” a company you’ve never heard of. Before you become alarmed that there’s been a mistake, request the name of the original creditor from the debt collector. They might inform you that Midland Credit is actually a Capital One card, which will clear up your confusion. It’s important to realize that no collection activity can go forward until they supply that information in response to your request, providing you a reprieve until all uncertainty is cleared up.

How to request a debt validation letter

Debt collectors must send out your debt validation letter within five days of the first time they contact you. This means that you should receive it a few days after that, unless if the debt collector has an incorrect address for you, it may take longer for the letter to get to you (if it arrives at all).

If you don’t receive the letter when you expect it, you still have the right to dispute the debt in question. Imagine you get a phone call from a debt collector, then two weeks go by without a letter arriving in your mailbox. Your best step to take at this point is to call the debt collector and request the letter.

In many instances, the problem is that they are using an old address for you. If that is the case, the debt collector will likely ask to verify your address over the phone. Some debtors who aren’t prepared to deal with the debt may hesitate to verify their address. Certainly no one can force you to provide your current address to the collector, but withholding it can negatively impact you down the line when you’re finally forced to account for the debt.

“Some people feel they don’t want to give their address and be harassed,” said Joshua Cohen, a consumer protection attorney at Cohen Consumer Law. “If that’s how you feel, then you should go to a consumer attorney to know all your rights. There’s nothing worse than going in front of a judge and saying, ‘I didn’t get my letter.’ And then having the collector say, ‘We didn’t have the right address and he wouldn’t verify the address.’”

Keep in mind that it’s good practice not to supply any personal information over the phone until you have verified that the party you’re talking to is a legitimate debt collector.

Responding to a debt validation letter

If you would like to ask for validation of the debt after receiving a debt validation letter, it’s a good idea to use a template to make sure you’re expressing yourself clearly in a way the debt collectors will understand. Send the letter to the debt collector at the address provided in the debt validation letter. There are many templates for such letters available online, including some by the Consumer Financial Protection Bureau (CFPB).

The letter you write will depend on your response to the debt validation letter. For instance, you will write a different letter if you believe the debt is not yours versus if you simply need more information before you can figure that out. If you believe the debt is not yours, though, remember that debts are bought and sold, so the fact that you don’t recognize the creditor’s name does not mean there has been a mistake. It’s best to find out all information possible before you conclude that you’re being held responsible for someone else’s debt.

The CFPB advises that you make sure to find out all of the following information, some of which should be provided in your debt validation letter and some of which you may have to ask for in your response:

  • The name and contact information of the debt collector
  • The total debt amount, including any fees such as interest
  • The reason for the debt and the date it originated
  • The identity of the original creditor
  • Any information the collector is using to justify their conclusion that it is you who owns the debt

It is a good idea to keep a copy of this letter and to send it via certified mail with a return receipt, so you have a paper trail of your communication with the debt collector.

What happens after you’ve sent a validation request?

Once you’ve sent your validation request, the debt collector does not have a deadline to respond. It’s a common misunderstanding that the collector only has 30 days to respond to a validation request, but in truth, they can take as long as they want. That open-ended time frame is a benefit for debtors since the debt collector can’t contact you during the period that they’re working to validate the debt.

“If they take six months to validate, that’s six months they can’t bother you,” said Cohen. “The only thing they’re allowed to do is to say, ‘We’re not collecting this debt anymore.’”

Relinquishing the debt collection altogether does indeed happen. As a general rule, if the debt collector doesn’t respond to the validation request within 90 days, then you’ll likely never hear from them again.

If they do respond, they will provide some amount of information, but often not as much as the debtor wants or has asked for. Unfortunately, the debt collector is not required under the FDCPA to send the debtor a full accounting of the debt, the promissory note or the full agreement.

Many consumers assume that debt in collection cannot go forward unless the debt collector can provide the promissory note, but that is not the case. The debt collector is permitted to submit validation of the debt that basically amounts to a statement from the creditor saying you, the debtor, owe the amount in question.

Once the debt collector has responded to your request for information, they are allowed to resume collection efforts. If you still doubt whether the debt is yours upon receiving whatever information the debt collector provides, you can take action to try to clear up the confusion. If the debt collector can’t provide proof, you can try calling the creditor directly at the contact number provided on your credit report. There are times that a debt collector will decide not to pursue your debt at this point, or they may keep pursuing it until you can definitively prove it’s not yours.

“Debt collectors want to do their job the right way,” said Cohen. “Despite what people think, they want to do it the right way. The more proof you send about the debt not being yours, the better they can do their job and talk to the creditor about not making you pay the note.”

However, if you aren’t able to get this proof and you feel confident the debt isn’t yours — whether you’ve been a victim of identity theft or there’s been a mistake — you should go to a consumer attorney. You can dispute the debt with the creditor and with the credit reporting agencies, which an attorney can help you with. The problem may resolve itself, but if it doesn’t, you’ll probably have to proceed to litigation.

“If the debt isn’t legitimate, the debt collector is the least of your problems,” noted Cohen.


Debt validation letters bring a sense of order to the process of debt collection and provide important protections for those who are being asked to pay large sums by debt collectors.

Those who owe a debt but can’t pay will need to deal with that fact sooner or later; the receipt of a debt validation letter may be a good motivator to contact a consumer attorney to understand your options. Looking to an attorney is also a good idea if you’re being pursued for a debt you’re certain isn’t yours. The debt validation letter will be one of the first indications that something fishy is going on.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Katie Gustafson |

Katie Gustafson is a writer at MagnifyMoney. You can email Katie here


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