How to get out of debt

how to get out of debt

I discussed types of debt and how to avoid bad debt in my previous series of articles. Today, I will look at how to get out of debt. The reality is that many are deep in debt, and when the noose seems to tighten more, they incur more debt to provide temporary relief.

Getting out of debt is not the main issue. It is learning the lesson so that you don’t become a repeat offender that is crucial. You have to understand how you got here. You borrowed for things that did not pay for themselves. In the case of equipment, you borrowed to procure equipment that did not pay for itself. You assumed it will. You assumed wrong. You did not test your assumptions. Assumptions get people into trouble, especially the debt variety.

You need to learn from your mistakes and work through it, so that the lessons become permanent so that you don’t come back to this bus stop again. Although I will lay out some steps for getting out of debt, you may need to see an expert to help you through the process.

Stop borrowing

The first thing you need to do if you want to get out of debt is to declare a ceasefire – stop borrowing. You cannot borrow yourself out of the mess you created. You will only end up digging yourself into a deeper hole. You simply make matters worse. It is like the man that runs away when he hears that his wife has given birth to triplets. He is only heaping trouble for the future. Face up to the mess you created, roll up your sleeves and start clearing it. One thing I know for sure is that coming out of that hole you dug will not kill you. It will make you stronger and hopefully wiser. If you learn your lessons properly, you will no longer touch a bad debt with a ten foot pole.

Some people are tempted to consolidate their loans into one. They take a jumbo loan that will clear all their indebtedness to other lenders and they end up owing one creditor. The tenor is elongated so that monthly payments will not choke life out of the debtor. This is a soft landing that costs more, elongates the process and you will likely come out learning nothing. It is an easy way out and if you take this route, you may likely become a repeat offender. Most banks no longer provide this facility. Many have borrowed trying to repay other loans, only to have part of it diverted to meet other urgent needs, so they end up with an extra creditor to deal with. Borrowing is not the solution for getting out of debt.

Put your house in order

You need to put your house in order. Get together with your spouse and agree that you are coming out, and are willing to pay the price. You may need an excel spreadsheet to analyse your income and expenditure. How much is your monthly payments to your creditors? Can you afford it? How much can you realistically pay monthly? Which areas can you take care of to eliminate debt? Where can you save money? Areas to explore may include cutting cable TV, making do with one car, suspending holidays, limiting eating out, cutting down trips to the mall, moving the children to a cheaper school, cutting down on phone calls and communicating via other channels, getting health insurance etc. Opportunities for cutting cost are virtually limitless. What you do depends on individual circumstances. Explore ways to cut cost without making every one miserable. Wrap your fingers around your finances and really know what is going on. Don’t operate a black box.

After reducing cost, move your focus to making more money. You can leverage on existing assets to make more money. Working overtime or exploring another source of income with minimal financial outlay may be an option. Your brain is a good servant if you ask it the right questions.

Approach your creditors

After having done all, the debt overhang may still be such that you realistically cannot make your monthly payments. You need the courage to tell the truth to your creditors, and renegotiate your loan terms. Don’t suffer in silence. This is where you may need a financial adviser and/or a lawyer depending on who you are dealing with. Admit that things did not turn out the way you planned; you can no longer make monthly payments as envisaged. Write them a letter and make an offer. State clearly what you want. Everything is negotiable. The worst that can happen is that they will say no, and there is only one way of finding out – by asking. You can ask for a longer tenor and a lower rate, waiver of some back interest charges etc (whatever works for you). Any creditor will prefer a debtor that makes sincere effort to repay rather than one that defaults and goes off the radar and they end up with a bad debt. If the officer you are discussing with is not favourably disposed to your request, you may want to speak to someone more senior. I know of cases the creditor agreed to most of the requests. The result is often more favourable when it involves friends and family.

Increasing the tenor (which lowers your monthly payments) gives you a breathing space. This is not for you to return to your comfort zone and ride out the tenor, ending up paying more in interest. Your plan should remain to pay off as soon as possible, to save you the interest charges that can develop a life of its own.

There are also instances of debt write off. I have written of debts owed me. Sometimes debts can be written off through divine favour, but don’t bank on it. Sometimes God wants you to go through the process so that you grow and become a better person. Growth comes through your struggles, not your comfort.

Don’t forget to pay yourself first

This is where most debtors drop the ball. They are so focused on paying off the debt that they forget to pay themselves first. It is criminal to muzzle the ox while treading the grain. Who are you working for? Pay yourself first is a principle that should not be violated no matter what. When it becomes a habit, it stays with you even after the debts have been paid off. If you do not cultivate the habit, when the debt is finally paid off, another ‘project’ will come up that will send you back into debt and the vicious cycle continues.

Put something aside for yourself and your family no matter how small, be it N500, N1, 000, N5,000 or whatever. Pay yourself first and invest it. When you finally get out of debt, which you will, you now have more money to save and invest for multiple sources of income which can pay for that better lifestyle you have been eyeing.