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Step 1
First, make a list of all of your debt. Once a year visit www.annualcreditreport.com which is the ONLY authorized free credit reporting website. It gives free reports from each of the three major reporting agencies. Review the reports for any debt that seems like it should not be there. When making your list, note any company that has filed collections against you as opposed to just reporting late payments or over-limits. Add to the list any debts you have that do not appear on your report.
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Step 2
Prioritize your household expenses. The first debts to pay and to keep up to date are the necessities: utilities, rent or mortgage, payments to active/open credit cards. Prioritize credit cards by the highest interest rate to lowest, unless you can pay off one card in one chunk, therefore eliminating one more interest rate assessment. Cancel the cable and eliminate any unnecessaries from the house because you won't care about television if you are forced to file bankruptcy.
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Step 3
Prioritize your non-household debt. Use your best judgment, but first to pay off are any companies that have sent you notice that they are planning to sue or garnish your wages. Next, pay the debts that are long-outstanding but still being held by the original company, in other words, the debts that haven't been sent to collections. Those in collections have already made their negative impact on your credit, so you want to prevent more impact. Next pay the debts that are in collections.
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Step 4
Pay down one debt at a time. When you've accumulated so many debts, you want to eliminate one at a time, thereby reducing the chances they will all try to sue you at the same time, or garnish wages. This will also help you focus your energy and money. Those charging monthly or other added fees are the ones you want to attack first so that you can prevent the debt from growing. Those debts with very low balances are good to pay off right away, in one chunk.
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Step 5
If you pay a small sum to each debt each month, this process will take you a lifetime. With a little research about the terms of agreements with each company, you can determine which ones will allow you to skip payments. In general, those debts already in collections do not require a monthly payment and do not add additional interest fees. Skip paying these until you get some of the other debts paid off completely.
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Step 6
Stop using your credit card, or rolling balances into new credit cards. If you cannot pay off the full balance each month then you should not be spending on credit. If you don't have cash in hand, it means you cannot afford the purchase you are about to make. When you roll balances into new cards with 0% interest, unless you can pay off the balance within the time set, then the interest will be added later and it has been accumulating throughout the 0% period. Your payments to credit cards are applied to new debt first, so that old debt is accumulating more and more interest.
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Step 7
Change your lifestyle or you will live in a cycle of debt and stress. None of the 'things' you are accumulating will bring you happiness if your home is foreclosed on, or you have debtors at the door every day. Slim down on the necessities even after the debt has disappeared.
