How to Avoid Bankruptcy and Actually Get Out of Debt For Good

You can avoid bankruptcy by negotiating with creditors, consolidating debt, increasing income, or using formal debt management programs. You might have more options than you realize, and this guide provides a clear framework for deciding which path best fits your situation.

The Math You Need to Do First To Avoid Bankruptcy

Before exploring any debt relief strategy, you need to understand exactly where you stand financially. These three calculations tell you which options will realistically work for your situation and which ones are a waste of time.

Calculate your debt-to-income ratio

Add up every monthly debt payment you owe, including minimum payments on credit cards, car loans, student loans, personal loans, and your mortgage or rent payment. Divide that total by your gross monthly income, which is what you earn before taxes come out of your paycheck.

If your ratio is below 36%, you can likely get out of debt through focused budgeting and the snowball or avalanche method without needing outside help. A ratio between 36% and 42% is a warning sign that you need to take aggressive action now before things get worse, such as cutting major expenses or adding income.

A ratio above 42% puts you in the danger zone where minimum payments barely cover interest, and you need to consider hardship programs, debt settlement, or other interventions. A ratio above 50% means traditional payoff methods almost certainly will not work, and you should explore formal debt relief options or consult with a bankruptcy attorney to understand all your choices.

The two-to-three-year test

Look at your current monthly income and expenses with complete honesty about what you actually spend, not what you wish you spent. Calculate how much money you could realistically put toward debt each month if you cut all unnecessary spending and focused entirely on payoff.

Multiply that monthly amount by 24 to 36 months and compare it to your total debt balance. If paying that amount for 2 to 3 years would not eliminate or significantly reduce your debt, traditional payoff strategies are unlikely to work for your situation.

People who can only afford minimum payments often spend years watching their balances stay flat or grow as interest accumulates, which is why this test matters. If you fail this test, it does not mean bankruptcy is your only option, but it does mean you need more aggressive strategies, such as hardship programs, debt settlement, or professional help.

List every debt you owe

Write down each debt with the current balance, interest rate, minimum monthly payment, and whether it is secured or unsecured. Secured debts like mortgages and car loans are tied to property that can be repossessed if you stop paying, which limits your negotiation options. Unsecured debts like credit cards, medical bills, and personal loans have no collateral attached, which gives you more leverage to negotiate reduced payments or settlements.

Include debts you might have forgotten about, such as old medical bills, store credit cards you opened years ago, or personal loans from family members. This complete list serves as your roadmap for every strategy in this guide, as different debts require different approaches.

Reduce Your Monthly Expenses Fast

Before considering bankruptcy, you need to first drastically reduce your expenses and try to eliminate the problem that brought you to this point in the first place. Otherwise, you might find yourself in the exact same situation a few years down the road.

Start with the big three

Housing, transportation, and food consume 50% to 70% of most household budgets, which means small percentage cuts in these categories free up more money than eliminating smaller expenses. These are the areas where you can make the biggest immediate impact:

• Moving to a cheaper apartment or house can save $200 to $500 per month, but you need to calculate moving costs, security deposits, and lease break fees to make sure the math actually works in your favor.
• Selling a second car eliminates not only the payment but also insurance, gas, maintenance, and registration costs, which often total $400 to $800 per month.
• Switching to a cheaper vehicle by trading down from a financed car to a reliable used car you own outright can free up $300 to $600 per month.
• Cooking at home instead of eating out or ordering delivery saves most people $200 to $500 per month, and meal planning reduces grocery costs even further.

The resistance to making these changes is real because they feel like major lifestyle disruptions. But temporary discomfort now prevents permanent financial damage later. Most people who avoid bankruptcy by cutting expenses look back and realize the sacrifices were far less painful than they anticipated.

Cut subscriptions and recurring charges

Cancel streaming services, gym memberships, subscription boxes, and app subscriptions temporarily until your debt situation improves. Call your phone provider and ask for a cheaper plan or threaten to switch to a discount carrier, which often results in immediate savings of $20 to $50 per month.

Review your bank and credit card statements for the past 3 months to find recurring charges you forgot about or no longer use. Many people discover they're paying for subscriptions they signed up for years ago and had completely forgotten about. Pause services rather than canceling when possible, so you can easily restart them once you are in a better financial position.

Pause the extras

Skip vacations this year and plan free activities like hiking, beach days, or visiting family instead of paying for travel and hotels. Tell friends and family you are focusing on financial goals and will be giving time and presence instead of expensive gifts for birthdays and holidays.

Postpone any major purchases like furniture, electronics, or home improvements until your debt-to-income ratio drops below the danger zone. This is not forever. This is a focused sprint to get your finances under control so you can make choices from a position of strength rather than desperation.

Increase Your Income

The easiest and most effective way to eliminate debt and avoid bankruptcy is to increase your income through side gigs, a second job, or other routes. This is something you should consider before filing for bankruptcy because you’ll save yourself a lot of trouble in the long run.

Get a second job or side income

A part-time job bringing in $500 to $1,000 per month can cut years off your debt payoff timeline because this money goes straight to principal rather than living expenses. Gig work like rideshare driving, food delivery, or freelancing offers flexibility to work around your main job and earn during evenings or weekends.

Sell items you no longer use through Facebook Marketplace, eBay, or local consignment shops to generate quick cash for debt payments. Most households have $1,000 to $3,000 worth of unused items sitting in closets, garages, and storage units. Offer services you already know how to do, such as lawn care, pet sitting, tutoring, or handyman work, to neighbors and community members.

For more detailed information about how to earn money with a side income, check out some of my detailed guides on the topic:

• How to Make Extra Money: 19 Ways to Increase Your Income
• How To Make Extra Money While Working Full Time
• 7 Side Jobs From Home That Can Replace Your Income

Ask for a raise or look for higher paying work

If you have been at your current job for a year or more without a raise, schedule a meeting with your manager to discuss your compensation and bring examples of your contributions. Research what your role pays at other companies using sites like Glassdoor, LinkedIn, or Payscale, and use this data to support your request or guide your job search.

Sometimes switching employers is the fastest way to increase income because outside offers often come with 10% to 20% higher pay than internal raises. Update your resume and apply to a few positions each week, even if you are not sure you want to leave, because having options gives you negotiating power.

Apply for assistance programs

SNAP benefits (formerly called food stamps) can cover $100 to $300 per month in grocery costs, which frees up that cash for debt payments instead. Medicaid provides free or low-cost health coverage if your income qualifies, potentially saving you hundreds per month on insurance premiums.

Utility assistance programs like LIHEAP help cover heating and cooling costs, and most states have additional local programs to help with water and electricity costs. These programs exist specifically for situations like this, and using them while you get back on your feet is a wise financial decision.

Negotiate Directly with Creditors

Many people assume creditors won't work with them, but the truth is that creditors almost always prefer some payment over no payment. They have entire departments dedicated to working with struggling borrowers because helping you stay current protects their bottom line better than sending your account to collections.

Call and ask about hardship programs

Most major credit card companies have formal hardship programs that they do not advertise, offering benefits such as temporarily reduced minimum payments, lower interest rates, and waived late fees. Call the customer service number on your card and say you are experiencing financial hardship due to job loss, medical bills, reduced hours, or any other reason.

Ask specifically about reduced interest rates, lower minimum payments, fee waivers, and whether they can put you on a hardship plan for 3 to 12 months. Be prepared to explain your situation briefly and honestly because representatives have more flexibility to help when they understand why you are struggling.

Get any agreement in writing or ask for a confirmation number before you end the call, so you have documentation if something goes wrong. Some creditors will try to backtrack on verbal promises, and having written confirmation protects you.

Negotiate payment plans

Creditors almost always prefer working out a payment plan over sending your account to collections or writing off the debt entirely. Ask if they can extend your repayment period to lower monthly payments, even if it means paying slightly more interest over time.

Some creditors will freeze your account from new charges while you pay down the balance, which prevents the debt from growing while you work on it. This arrangement benefits both parties because you get manageable payments and they get consistent income from your account.

Request interest rate reductions

Call your credit card company and ask for a lower interest rate, which works more often than most people expect, especially if you have been a customer for several years. Mention whether you have received offers from competing credit cards with lower rates, as companies often match competitors' rates to keep your business.

Even a reduction from 24% to 18% saves significant money over time and means more of each payment goes toward your actual balance instead of interest. If you have a history of on-time payments with the company, mention this as evidence that you are a reliable customer worth keeping. A 10-minute phone call could save you thousands of dollars.

Debt Consolidation Options

Consolidation combines multiple debts into one payment, ideally at a lower interest rate. This strategy works best when you have decent credit and a stable income, because you need to qualify for new financing at better terms than what you currently have.

Personal loans for debt consolidation

If your credit score is in the fair to good range (typically 580 or above), you may qualify for a personal loan for debt consolidation at a lower interest rate than your credit cards charge. Use the loan proceeds to pay off all your credit card balances at once, which leaves you with one fixed monthly payment instead of multiple variable payments.

Personal loans have fixed interest rates and set payoff dates, which means you know exactly when you will be debt-free if you make all payments. Predictability helps with budgeting and reduces the temptation to keep charging on credit cards, since those accounts are paid off.

Balance transfer credit cards

Some credit cards offer 0% interest for 12 to 21 months on balances you transfer from other cards, giving you a window to pay down principal without interest accruing. You typically need a credit score of 670 or higher to qualify for the best balance transfer offers with the most extended 0% periods.

Calculate whether you can realistically pay off the entire transferred balance before the promotional period ends. If you transfer $6,000 and only pay off $4,000 during the promotional period, the remaining $2,000 starts accruing interest at rates often exceeding 20%.

Home equity options

If you own a home with equity, a home equity loan or a home equity line of credit (HELOC) often offers interest rates much lower than those of credit cards. Home equity loans provide a lump sum with a fixed interest rate and fixed monthly payments, similar to a personal loan.

HELOCs work more like a credit card, where you can borrow as needed up to a limit, but the variable interest rate can increase over time. The serious risk is that you are converting unsecured credit card debt into a secured loan against your home, which means you could lose your home if you cannot make payments. Only consider this option if you are absolutely certain you can afford the payments and have addressed the spending problems that created the debt.

When to Consider Debt Settlement

Debt settlement is a high-risk, high-reward strategy that can eliminate significant debt but comes with serious consequences. This option makes sense only in specific situations where other strategies have failed, and bankruptcy is the alternative you're trying to avoid.

How debt settlement works

You or a company you hire contacts your creditors and offers to pay less than the full balance in exchange for closing the account and marking the debt as settled. Creditors often accept 30% to 50% of what you owe because they would rather get something now than risk getting nothing if you file bankruptcy.

Settlement typically requires paying a lump sum, though some creditors accept a short payment plan of 3 to 6 months. Debt settlement companies charge fees of 15% to 25% of the total enrolled debt, so you need to factor this cost into whether settlement makes financial sense. In many cases, you can negotiate directly with creditors and avoid paying settlement company fees entirely.

The risks you need to know

Most debt settlement strategies require you to stop making payments to creditors while you save money for lump sum settlement offers, which damages your credit score significantly. Before you pursue this option, understand the serious risks involved:

• Your credit score will likely drop 100 points or more during the settlement process because of missed payments and accounts going to collections.
• Creditors can still sue you for the full balance while you are trying to settle, which can result in wage garnishment or bank account levies.
• The IRS considers forgiven debt over $600 as taxable income, so if a creditor forgives $10,000 of your debt, you may owe income tax on that amount.
• There is no guarantee creditors will accept your settlement offers, and some refuse to negotiate regardless of your situation.

These consequences are not hypothetical. They happen to real people who pursue a settlement without understanding the full picture. Debt settlement can work, but only if you go in with your eyes open and have a solid plan for handling these risks.

Debt Management Plans

Debt management plans (DMPs) offer a middle ground between doing it yourself and more drastic options like settlement or bankruptcy. These plans work best for people with stable incomes who need help organizing their debts and getting better terms from creditors.

How debt management plans work

You work with a nonprofit credit counseling agency that reviews your finances and negotiates with your creditors on your behalf. The agency often secures reduced interest rates (sometimes dropping from 20%+ to 6% to 9%) and waived fees from creditors with whom it has relationships.

You make one monthly payment to the agency, and they distribute the money to all your creditors according to the agreed plan. This removes the stress of juggling multiple due dates and payment amounts while ensuring every creditor gets paid according to the arrangement.

Pros and cons of debt management

Debt management plans offer a structured path out of debt, but they come with trade-offs you need to understand. Here are the main advantages:

• Your monthly payment is often lower than paying all creditors separately, thanks to reduced interest rates and waived fees.
• Debt management plans are less damaging to your credit than debt settlement or bankruptcy because you are still paying what you owe, just under better terms.
• There are usually modest fees of $25 to $50 per month plus a setup fee, which is much less than what debt settlement companies charge.
• You get professional guidance and accountability throughout the repayment process.

The downsides are real but manageable for the right person. You typically must close your credit card accounts while on the plan, which can temporarily lower your credit score by reducing your available credit. This restriction also removes the temptation to keep charging while you're paying off debt, which helps many people succeed.

This option works best for people with stable income who can commit to 3 to 5 years of consistent monthly payments. If your income is unstable or you cannot afford even reduced payments, a DMP probably won't solve your problem.

The Truth About Bankruptcy Most People Get Wrong

Bankruptcy might be a last resort for most people, but it's not the end of the world. The reality of bankruptcy is very different from the horror stories most people have heard.

You probably will not lose everything

About 95% of Chapter 7 bankruptcy cases are classified as "no asset" cases, which means the filer keeps all their property and nothing is sold to pay creditors. Federal and state exemption laws protect essential property, including equity in your primary home, one or more vehicles up to specific values, retirement accounts like 401(k)s and IRAs, household goods, clothing, and tools you need for work.

The specific exemption amounts vary by state, with some states offering unlimited protection for home equity and others capping it at particular dollar amounts. The widespread belief that bankruptcy means losing your house, car, and everything you own is essentially a myth that keeps people trapped in debt situations they could escape.

Your credit can recover faster than you think

Most people see measurable improvement in their credit scores within 12 to 18 months after bankruptcy if they practice good financial habits. Many people qualify for car loans, apartment rentals, and secured credit cards within 1 year of their bankruptcy discharge.

The bankruptcy stays on your credit report for 7 years (Chapter 13) or 10 years (Chapter 7), but its negative impact decreases significantly over time. People who spend years making minimum payments while maxing out credit cards often have worse credit than those who file for bankruptcy and rebuild on a clean slate.

Within 2 to 4 years of practicing good credit habits after bankruptcy, many people achieve credit scores in the "good" range of 670 or higher. The credit damage from bankruptcy is temporary, while the financial stress of unmanageable debt can last decades.

When bankruptcy actually makes sense

Your debt-to-income ratio is above 50%, and you have determined that there is no realistic path to repayment through other means. You are facing or about to face lawsuits, wage garnishments, bank account levies, or home foreclosure from creditors.

Medical debt, job loss, divorce, or other circumstances largely outside your control caused your financial situation. You have tried hardship programs, debt management, or settlement, and they did not work or were not available to you. Bankruptcy is a legal tool created by Congress to give people a fresh start, not a moral failing or personal weakness.

The One Thing Most People Miss (Saving While In Debt)

This might seem counterintuitive, but building a small emergency fund while paying off debt is one of the most important things you can do. Without it, you're setting yourself up for failure.

Save $500 to $1,000 first

Without any emergency savings, every unexpected expense, like a car repair, medical bill, or job disruption, goes on a credit card and adds to your debt. This creates a frustrating cycle where you work hard to pay down balances only to charge them right back up when life happens.

Even a small emergency fund of $500 to $1,000 breaks this cycle and gives you a buffer that helps you keep moving forward. Financial emergencies are not rare; they are predictable parts of life, which is why building this buffer matters before pursuing aggressive debt payoff.

How to build savings while in debt

The strategy here is simple but requires discipline. Split any extra money 50/50 between your emergency fund and debt payments until you reach $500 to $1,000 in savings. This balanced approach ensures you're making progress on debt while simultaneously building the buffer that prevents you from sliding backward.

Once you hit that target, shift 90% or more of any extra money to debt payoff while maintaining your emergency cushion. The remaining 10% continues building your emergency fund toward the eventual goal of 3 to 6 months of expenses, but debt payoff becomes your primary focus.

Pay yourself first by treating your emergency fund contribution like a bill that must be paid. Set up an automatic transfer for the day after your paycheck arrives, even if it's just $25 or $50 to start. This removes the decision-making and ensures the money gets saved before you have a chance to spend it on something else. Most people who wait to "see what's left over" at the end of the month never actually save anything.

How This Connects to Your Rich Life

Getting out of debt is not the end goal. It's the foundation that makes everything else possible.

Getting out of debt is the first step

Debt payments consume money that could go toward things you actually value, whether that is travel, security, experiences with people you love, or building wealth. Every dollar you currently send to creditors is a dollar that is not working toward your goals, which is why eliminating debt is the foundation of financial freedom.

This is not about living a deprived life forever; it is about a focused effort now that opens up choices and opportunities for your future. The sacrifices you make today create the freedom you'll enjoy for decades.

Build systems to stay out of debt

Once you are out of debt, the real work is making sure you never end up back in the same situation. Systems remove the need for willpower and make good financial habits automatic.

Automate savings transfers so money goes to an emergency fund before you can spend it. Set up your bank to transfer $50, $100, or whatever amount you can afford into savings the day after each paycheck arrives. This builds your emergency fund back up to 3 to 6 months of expenses over time, which protects you from future financial shocks.

Set up automatic payments for all bills so you never pay late fees or damage your credit with missed payments. Late fees can easily cost $200 to $400 per year, and a single missed payment can drop your credit score by 100 points. Automation eliminates these completely avoidable costs.

Your money should work for your priorities

After debt is eliminated, your income goes toward whatever actually matters to you, which is different for everyone:

• Some people value travel and experiences, using their freed-up income to explore the world without guilt.
• Others prioritize security and early retirement, building wealth that provides peace of mind and options.
• Some want to give generously to causes they care about or help family members in need.
• Others focus on building a business or pursuing creative work without financial pressure.

The point of getting out of debt is not to sacrifice for its own sake; it is to create the freedom to spend intentionally on what you care about. This struggle is temporary, and the financial freedom you are building by following this guide is permanent.