What to Do When You're In Financial Trouble? A Step by Step Guide

As of January 2022, the average American household held over $155,000 in debt. And despite paying back a record amount last year, many families are sliding further into debt and financial trouble rather than digging themselves out of it.

Meanwhile, the average cost of living is up about 7%, while median income fell by 3%. So if you're finding it harder than ever to keep your head above water, you're far from alone.  But the situation is by no means hopeless.

With the right budgeting advice and help managing money, it's possible to not only survive whatever life can throw at you but bring yourself back to financial wellbeing.  And the first step is making moves to get your debt under control.

Taking Steps to Get Out of Financial Trouble

Most people don't find themselves with serious financial problems overnight. And likewise, you can't expect to find your way out of those problems immediately.

It takes a concerted, sustained effort to reverse a negative situation. But it is very much achievable. And you'll find that making that effort not only improves your financial health but your mental health as well.

Here are the steps you need to take to get started.

Take Control of the Situation

First things first, you cannot resolve a problem without acknowledging it. Many of us are guilty of setting bills, statements, and the like aside, hoping that they'll somehow resolve themselves on their own. Alas, it's rarely ever that easy.

So the first thing that we need to do is face the music.

You can start by clearing off your desk or kitchen table and gathering up any bills, loan statements, and other financial materials you've been neglecting. From there, you can start making a plan of action.

Your credit card and loan payments, along with bills for essential services like water, power, and rent, will make up your base expenses. If these expenses are already exceeding your net income, then some tough choices need to be made.

You may need to make dramatic changes to your lifestyle. Or, if the damage is severe, you may even need to consider bankruptcy.

But that latter option should be reserved as an absolute last resort. Before we entertain that conversation, let's see what other steps we can take to get the situation under control.

Create a Hierarchy of Debts

Paying down debts is important in general. But not all debts are created equal. As you make your plan, you need to prioritize which debts you want to target the most aggressively.

You want to target high-interest loans first. The longer it's left alone, the more interest will accumulate over the principle and the further out-of-control it will get.

And while we're on the topic, now's a good time to stop using high-interest debt altogether. Keep a single credit card for emergency use only and put all the others away. And even then, work to accumulate a rainy day fund so you can minimize your reliance on the card you keep.

After your high-interest obligations, prioritize non-deductible, low-interest debt next. And of lowest priority is tax-deductible debt.

Review Your Credit

It's challenging to manage your credit without knowing where you stand. So the next step is to get a copy of your full credit report and credit score.

You're entitled to a free credit report every 12 months. Don't worry; checking your credit doesn't hurt your score.

Making a habit of checking your credit every year is an excellent general practice as it can help you spot either identity theft or negative patterns in your credit habits. The simplest way to get your report is through the official website authorized by the federal government.

Once you get your report, inspect it for any inaccuracies or suspicious items, and look for any accounts that may be dragging your credit down. It can take as little as a couple of late payments to bring your rating from green to red. Late payments on all of your accounts may put you in the "high-risk" category, even though you work diligently to pay down your loans.

Start Damage Control

Once you've identified your problematic accounts, it's time to get to work. Unfortunately, there is no quick fix for damaged credit. But there are things you can do to make repairs over time.

Tightening your budget and setting using automatic payments is a great way to make sure you're paying your debts on time every month. This will keep your credit from deteriorating further and will improve it with enough time. It will also speed up the repayment process and help minimize the interest charged to your accounts.

You can also transfer balances from several cards onto a single one if your credit allows it. This helps consolidate your debts and can reduce the amount of interest you end up paying. Some offers may even extend you a grace period of six to 18 months.

Alternatively, if you have access to credit lines like a home-equity line of credit, you may also be able to use those to minimize your interest payments. These lines of credit usually have rates in the single digits, while credit cards tend towards the teens and 20s, so transferring the balance from the latter to the former is a chance to make significant savings.

And while you might consider closing your extra credit cards to avoid the temptation of using them, putting them away in a drawer would be a better option. Your credit is determined in part by how long you've had lines of credit open. Closing a line like a credit card can therefore hurt your score.

Double Down on Your Payments

If your funds allow for it, you should double up on payments on your high-interest loans whenever possible.

It's not as efficient as consolidating your debt, but it can be a suitable substitute if you don't have the credit necessary to shift those debts onto a low-interest line.

Once you've paid off your high-interest debts, you can do the same on your next-highest debts, and so on. This is a tried and true strategy for minimizing your overall interest payments. And over time, you can shift the needle towards the magic number a bank might be looking for to grant you a loan consolidation.

It's Time to Make Some Sacrifices

It's unfortunate, but getting out of financial trouble often requires making some hard choices. And depending on how far behind you are, it might be time to take drastic action.

On the soft side, this could mean cutting out non-essentials like luxury items, gym and club memberships, and substituting "staycations" for vacations.

At the intermediate, it could mean finding ways to supplement your income. Selling off valuables you can live without and putting those funds towards rectifying your financial situation. Or you can take on a second job or side-gigs to increase your cash flow.

At the most, you may need to make radical lifestyle changes. Selling a home or downsizing into a smaller rental is an extreme measure for some, but it might be necessary to right your financial ship.

Seek Professional Financial Advice

When it comes to digging yourself out of an unfavorable financial position, there's no shame in seeking help. If anything, it helps to seek credit and financial counseling before you're in a desperate spot, so the sooner you act, the better.

A counselor will break down your unique situation and provide you with a personalized roadmap to financial health. They may also help you when you meet with creditors, and you should never underestimate the value of having a professional in your corner.

Have a Sit-Down With Your Creditors

You want to avoid defaulting on any of your obligations at all costs. Doing so will leave a black eye on your credit that will take years to heal. But if you have a heart-to-heart with your creditors before it gets to that point, you may be able to renegotiate your debt in your favor.

If you have multiple creditors, first visit the one you have the most positive history with. Do your homework before you go, making sure to have your documents, damage report, and new budget plan in order. Present your case to them, and with a bit of luck and a lot of humility, you can often win them over.

Start Looking to the Future

Paying down debts is essential for ensuring your financial health and stability. But you shouldn't put your long-term financial planning on indefinite hold, either.

Once you develop a workable solution for getting your debts under control, it's time to start looking toward the future. What those short and long-term goals will look like will vary depending on your unique situation. And you may not be able to take significant action in the immediate future.

However, it's never too early to start looking at financial planning for the near, intermediate, and distant future.

Start Solving Your Financial Problems Today

Recurring financial trouble can be a severe barrier to significant life milestones. Getting those issues under control is a necessary step to taking control of your life. But you don't have to do it alone.

For all the resources and financial advice, you need to take your first steps, visit our Financial Wellness Center to start working towards a bright financial future today.