During an extremely warm and sunny afternoon last September, when I should have been at Juanita Beach Park or at a happy hour, I found myself sitting in the home office of a bankruptcy attorney in Sammamish. I had finally crunched the numbers: There was no way in I-405 hell I could pay off my loans and credit cards.
Turns out, I was wrong. Fast forward six months and my credit score is almost 200 points higher, I’ve managed to lower my monthly bills by almost $2,000, and I’ve learned to operate my life without going further into debt and without resorting to bankruptcy protection.
Bankruptcy seems like a simple fix, but it actually can do more harm than good, especially when you can solve the problem yourself. “It’s no small decision,” said Leanne Plancic, a financial consultant and retirement planning specialist from Bellevue. “The biggest pro to bankruptcy: You wipe out (most) of your debt. However, the biggest con is you have put a huge blemish on your credit score. You’re not going to be able to buy anything on credit for a long time, and your wages might be garnished to help resolve the bankruptcy.”
If you have a significant amount of debt, you aren’t alone. One major source of debt — $1.2 trillion in the U.S. — is student loans. “This is a result of high inflation on education costs and students not being fully aware of what it means to take on debt — even ‘good debt’ from investing in your own education,” Plancic said. “This lack of education also gets students and other young adults into trouble with credit card debt early on. A lack of education on credit card debt causes students to fail to understand that if you don’t pay off credit card debt monthly, you end up paying a higher price tag for the items you bought.”
Once indebted, recovery is a challenge for many. “People have trouble getting out of debt because it’s a compounding snowball effect. It is a problem that doesn’t grow linearly. It grows exponentially,” Plancic said. “While compounding can work great for you when you are investing money and growing it, it works just as hard against you when you owe money to a credit card company and the interest is growing exponentially each month.”
There are ways to eliminate significant debt, perhaps even within a year. An easy way to start, according to Plancic, is to stop using your credit card. Pay for basic monthly expenses (bills, groceries, etc.) with cash or from checking account funds that you’ve set aside from your paycheck. Then, take the rest of your income and strategically apply it to your debt. Make the minimum payments on all credit cards, and put the rest toward paying off the credit card with the highest interest rate. Once that card is paid off, put that money beyond the minimum payments toward the card with the next highest interest rate.
As I’ve experienced the past few months, that takes a ton of work, such as phone calls to your creditors to negotiate settlements and payment plans, but eventually you’ll have all your credit card debt paid off.
Finally, once you get out of debt, make sure you live within your means.
“Don’t spend what you don’t have. And furthermore, you don’t want to spend 100 percent of what you earn,” Plancic said. “You should be saving some of your earnings (for) future goals like retirement, and short-term goals. Otherwise, oversaving for the future will land you in a poor situation in the present.”
Once you’ve paid off your debt, that portion of the paycheck previously devoted to debt reduction can be used for living life. Life can feel a little meager while you’re paying down debt, but it’s as if you suddenly got a massive raise once you’re in the black. That said, once you’re there, you might want to consider using all the extra cash to start generating even more money through smart investments.
Or, you know, a vacation. Maybe to a beach far, far away. Or how about playing hooky for a few days straight at Juanita? Sounds good right about now, huh?
This article originally appeared in the February 2016 issue of 425 Business.