5 things you can do about bad debt

Most of us take on debt at some point in our lives—whether it’s good debt or bad debt. A good debt improves your financial situation or your quality of life. A bad debt is expensive, stops adding value to your life, and may be difficult to break free from. Lots of people take on a debt they couldn’t avoid—or a debt they later regret. That’s okay. We all live and learn. The more important thing to focus on is what to do about it.

What can you do about bad debt?

Whether it’s good or bad, there are only so many ways to get rid of debt. The option you choose depends on a few factors. Let’s explore them.

1. Debt consolidation loan

A debt consolidation loan is a new loan that you use to pay off more than one debt. This could make sense if you can get a new loan that has a lower interest rate than your current debts. Potential benefits include:

Get a lower interest rate. If you have higher-interest debt like credit cards, you might be able to get a lower rate on a new loan. 

Pay less interest overall. A lower rate could help you pay off your debt ahead of your current schedule, resulting in a smaller amount of total interest over time.

Get a more affordable monthly payment. The debt consolidation loan payment may be smaller than the total of all the payments you’re making now.

Pay off the debt faster. If you’re making minimum payments on credit cards, a debt consolidation loan could help you get rid of that debt sooner.

Streamline your finances. Moving multiple debts into one consolidation loan reduces the number of monthly payments you have to make. That could make it easier to manage your finances. 

When to consider a debt consolidation loan:

• Your credit score is high enough to qualify

• You’re dealing with more than one debt that you’d like to consolidate

• The loan you qualify for has a lower interest rate than the debts you want to consolidate

• You can afford the monthly payment

• You can avoid running up new debt while you’re paying off your consolidated debts

2. Refinance loan

A refinance loan is when you take out a new loan and use it to pay off an old loan. This is common with mortgages, but it could be done with any kind of loan.

Refinancing could have benefits, especially if it gets you a lower rate or a lower payment. In some cases, you can borrow enough to pay off your current loan and still have some cash leftover to use for something else.

When to consider a refinance loan

• When your credit score is high enough to qualify

• The loan you qualify for has a lower interest rate than the loan you want to refinance

• You only have one bad debt to deal with

• You’re comfortable with starting a new repayment period on the debt, and the total interest you’ll pay 

3. DIY debt payoff strategy

A DIY debt payoff strategy is your plan for rolling up your sleeves and dealing with debt on your own. 

Some people use the snowball method. You list your debts from smallest balance to highest, and focus on paying off the smallest one first. You’ll still make minimum payments on the others. Once you pay off a debt, you add its entire payment to the minimum payment you were making on the next debt on the list. In this way, the payment grows each time you clear a debt.

The avalanche method is similar, but you focus first on the debt that has the highest interest rate.

You could also combine methods, such as getting rid of your smallest debt first for a quick win, and then focusing on the most expensive one.

Whatever method you choose, the idea is to dial in your budget and devote as much money as possible to paying down your debt.

When to consider a DIY debt payoff strategy

• You’re good with your budget

• You can afford your payments 

• You can find extra cash to add to your total monthly debt payment

• You can afford to fully repay your debts, whether they are good or bad

4. Debt resolution

Resolving debt means getting your creditors to agree to accept less than the full amount you owe, but consider it payment in full. The rest is forgiven. Creditors might be willing to negotiate if you can show that you have a financial hardship that makes it difficult or impossible for you to afford to fully repay your debts.

Anyone can negotiate with their own creditors. If you aren’t comfortable with negotiating or you just don’t want to, you could work with a professional debt resolution company that negotiates on your behalf. 

Debt resolution is a serious solution for big debt problems, and it could have a negative impact on your credit standing. But if your bad debt is holding you back from  reaching basic financial stability and enjoying your life, it’s a good idea to focus on your debt first. Once your finances are stable, you’ll be in a better position to build a favorable credit standing and focus on your other financial goals.

If you work with a professional debt resolution company, you could get rid of all the debts you include in their program in two to four years.

When to consider debt resolution

• You can’t afford to fully repay your debts 

• You have a financial hardship that qualifies for debt resolution

• You can afford a monthly payment

• You don’t qualify for Chapter 7 bankruptcy

• You don’t want the public record of a bankruptcy on your credit report

5. Bankruptcy

Bankruptcy is a legal process for dealing with debt, and it’s a matter of public record. Most individuals file either Chapter 7 or Chapter 13. Chapter 7 allows you to walk away from unsecured debts, but you might have to give up some of the things you own (the court can take certain property and sell it to repay your creditors). Chapter 13 is a repayment plan, but you generally won’t be forced to give up anything you own. 

Chapter 7 cases tend to be very successful. In 2023, about 48% of Chapter 13 cases failed.

The kind of bankruptcy you qualify for depends on your financial situation: your income, the median income where you live, what you own and how much it’s worth, your family size, your allowable expenses, and other factors.

When to consider bankruptcy

• You qualify for Chapter 7 and the things you own are exempt (can’t be taken by the court and sold to repay your creditors)

• Most or all of your debt is eligible to be included (credit cards, unsecured loans or lines of credit, medical debt, payday loans, etc.)

• Your home is in foreclosure and you want the court to force the lender to let you get caught up

• You want the court to halt all collection efforts by your creditors

This information is intended for general informational purposes only. It’s not legal advice. For personalized legal advice, talk with a qualified bankruptcy attorney licensed to practice law in your state.

What’s the best way to deal with bad debt?

The best way to deal with bad debt is to do exactly what you’re doing: research your options for getting rid of it, and choose the one that feels like the best fit. 

Bad debts are some of the hardest ones to get rid of because of the negative feelings they can drag with them. We can’t rewrite the past, but we can focus on finding a solution that will help you be done with bad debt once and for all.