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I Have $40,000 in Debt and Make $20,000 in Income. Now What?

June 13, 2014
Credit Card Basics, Credit Cards
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Nobody’s perfect. Sometimes we get in over our heads when using debt. It can happen suddenly, or creep up on you. Sometimes something unexpected happens, like losing a job or getting a cut in pay. What should you do if you find yourself owing more in credit card debt than you make in income?

Getting out of debt takes patience, persistence and these important steps.

Admit the problem

The first step is to admit that there’s a problem. Now you can work toward a solution. If you can do it yourself, great, but don’t be afraid to ask for help from a debt counselor. They will tell you the same things I’m about to tell you, but using different language and with a strategy tailored to your situation.

Call your credit card companies

Ask for a lower interest rate from each card company. Most consumers don’t know that hardship plans exist at many credit card companies. The logic behind helping a consumer out in hard times has plenty of evidence to support it. The bank will want to collect as much from you as possible without you defaulting, so they will be willing to help … but only up to a point.

Create a home balance sheet

This is where you inventory your assets in one column, and your debts in another. This will give you a picture of how much you are worth. You may find that you have some assets you can sell to chip away at some of the debt.

» MORE: How to pay off debt

Make a budget

Next, make a monthly budget. Write down all the money you take in each month as income. Subtract from that all your monthly expenses, including making minimum payments on all your credit cards. You will have to sacrifice a few things, but you’ll be astonished at what you can save if you are forced to do so.

If your monthly income exceeds your new ultra-cheap expense list, apply the surplus to credit card payments.

Visit a debt counselor

With your own homework done, you are ready to visit a debt counselor. Most are nonprofit entities. Some are attached to a university, credit union or military base you are a member of. The services may not be free, however.

You are looking for a service that will help refine the process outlined above, and give you options and ideas. Education is the underlying offering at all debt counseling services. Besides making a plan to pay off your debt, they should be able to offer assistance on how to avoid landing in this situation again. Ideally, they may even be able to improve upon whatever deal you struck with the credit card company.

Always make sure that they disclose all fees; don’t sign anything until you’ve read and understood it; make sure they are licensed and the counselors are qualified; and make sure they aren’t paid on a commission basis.


It isn’t the greatest solution, but if things are truly beyond repair, you may have to file for bankruptcy. When you do this, all the creditors are notified that your debts exceed your assets. The court protects you from having those creditors come after you. Instead, the court determines who gets paid from what assets you do have, and eliminates all the other debts. This may sound too good to be true, and it is, because there’s major downside. First, you are likely to be left with no assets. Second, bankruptcies stay on your credit for up to seven years. That means it will be extremely difficult to obtain unsecured credit going forward. Finally, it can be an expensive process if you use an attorney.

The best advice is to stay on top of your debts at all times, and never charge more than you know you can afford to pay.

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