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10 Steps to Be Debt-Free in Less Than a Year

Take this advice and pay back what you owe

by Lynnette Khalfani-Cox, AARP

Pencil erasing debt, Steps to becoming debt-free (Istockphoto)

iStockPhoto

Using your tax refund can help quickly erase your debt.

En español | When getting out of debt is a priority, there are several things you can do to eliminate that debt entirely — or at least pay off most of it — in 12 months or less.

Here are 10 tips and strategies to get you started on a debt-free life:

1. Bump up your debt repayment percentage

Putting at least 15 percent of your paycheck — or income from Social Security or pensions — toward credit card debt and loans will help you pay down those obligations much more quickly because most credit card companies only ask you to pay about 2 percent of the outstanding balance each month. Making small, minimum payments means that your debt balances are collecting interest as each month or each year goes by. Paying off large chunks of your debt within a few months could save you a significant amount of money on interest payments alone.

2. Use savings to pay down larger debts

Don't be afraid to use a portion of your savings to pay down high-interest rate debts. Using cash reserves for debt repayment is a smart decision because you will stop accruing interest on those large balances. Although it may feel comforting to have some extra cash sitting in your bank account, the truth is that those funds aren't really working for you — not with today's record low interest rates. Don't deplete your savings entirely. If you're sitting on a pile of cash, do use some of those funds to eliminate your bills.

3. Negotiate for a lower interest rate

Call your creditors to negotiate a lower interest rate. You'll be surprised how many creditors will be willing to reduce your interest rate based on your payment history and account standing.

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If you have maintained a good relationship for a few years, you may be in a much better position to qualify for a lower interest rate. This can help you save some money on interest payments as you pay down that debt over the course of the year.

4. Use your tax refund check to pay down debt

While it's tempting to splurge on a high-ticket item or go on vacation with that tax refund check, a smarter money move would be to pay down some, or all, of your debt. Consider the value of reducing your monthly payments with a single lump sum debt payoff strategy. You'll enjoy the benefits of a lighter debt load over the entire year and for years to come, instead of enjoying the short-term satisfaction of a purchase.

5. Sell items for cash

Put together a list of items that you could sell on eBay, Craigslist, or at a garage sale. Drumming up some extra cash by selling items you no longer need or are ready to part with — and using the proceeds to pay down debt — can help you rapidly lighten your debt load.

6. Consider cashing in your life insurance

Cashing in your life insurance may be a viable debt payoff strategy because it will give you a chance to pay down larger amounts of debt quickly. If you feel like you are drowning in debt and don't have beneficiaries that need to benefit from your life insurance policy — for example a spouse or children — then it might make sense to use those funds to pay off debt.

This strategy doesn't apply if you own a term life insurance policy. It only works for those with whole life policies that have built up cash value. It's also important to note that even if you do have beneficiaries, you may be able to tap into part of the cash value of your whole life policy, getting cash for debt reduction and still leaving some life insurance proceeds to your loved ones.

7. Make more money

If you're very determined to pay off that debt within the year, you should look for ways to increase your income and use that extra money to pay off debt as quickly as possible. Whether it's taking on a part-time job or negotiating a raise with your boss, think of some ways to start earning more money for at least a few months and make debt elimination a high priority.

8. Do a credit card balance transfer

Most of us typically tear up all those credit card balance transfers that arrive in our mailboxes. But if you want to go on a tear with your debt reduction efforts, a balance transfer can help. By transferring high rate debt to a zero percent deal — one that lasts for 12 months or so — you eliminate all credit-card interest. That frees up cash flow, giving you additional money to knock out those credit card bills. Just read the fine print before signing up to make sure you are really getting that low rate.

9. Use a statute of limitations law to eliminate old debt

Some people pay off old credit card debts — really old ones — even when they're no longer legally obligated to do so. We all want to repay our bills. But if times are especially tight and you just don't have the money, you should focus on current debts and consider forgoing repayment of old bills that are 7 to 10 years old, or even older.

Each state has its own set of rules regarding outstanding debts. Some states don't allow a debt collector to collect a certain type of debt after a certain period of time; others limit the amount of time when a creditor can sue you over an old debt. Either way, you should find out whether the statute of limitations has passed regarding an old debt you may owe. If it has passed, you can likely forgo repayment without worrying about financial, legal or credit consequences plaguing you.

For more information about dealing with old debts, contact your state Attorney General or the consumer protection agency for help and advice regarding your state's statute of limitations on credit card debt.

10. File bankruptcy to discharge your credit card debts

Bankruptcy should only be used as a last-ditch option to rid yourself of debt. But under extreme circumstances — as when you have no income or you have completely unmanageable credit card payments or medical bills — a Chapter 7 bankruptcy filing is appropriate to discharge credit card bills in their entirety.

If you feel morally obligated to repay your debts, you can also look into Chapter 13, which reduces some of your credit card bills. Then you repay the remaining debt over a three- to-five year period.

Lynnette Khalfani-Cox, The Money Coach(R), is a personal finance expert, television and radio personality, and regular contributor to AARP. You can follow her on Twitter and on Facebook.

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