Debtors Anonymous: 12 Steps to Breaking Free from your Debts

Nothing robs your peace of mind more than worrying about debt: sleepless nights, hiding from creditors, piling collection letters. This was the experience of JP, a publicist steeped in credit card bills. The anxiety made her sleep the whole day, waking up only when the collectors stopped calling late in the evenings. Until one day, she felt she had enough and decided to regain control of her life.
JP sold most of her things to pay off her debt, knowing that she could have them again if she worked hard and learned to control her spending.
Though getting out of debt is as difficult as quitting an addiction, it is still possible to reclaim financial health. Follow our 12-step path to debt-free nirvana.

1. Face your debt, no matter how scary.
Gráinne O’Malley, a financial and life-balance coach based in Northern Ireland, shares this piece of advice: Tell yourself the truth about your finances, and acknowledge the fact that it has become unmanageable.

2. Take stock of your debts.
Identify and list ALL your debts (credit-card purchases, housing loans, medical fees, wedding expenses, car loans, etc.). Get the sum of your debts, including interest, late payment fees, and over-limit charges. “Really take these numbers in,” writes budget coach Judy Lawrence, author of The Budget Kit: Common Cents Money Management. “This is very important for creating an effective plan and moving you to a debt-free life.”

3. Be aware of your spending habits.
You may have unconsciously incurred debts by buying things you don’t need—small amounts add up. Lawrence recommends that you become more conscious of your language and thoughts. “Do you focus continually on the debt, or on solutions? Are you constantly talking about ‘always being broke?’” The most important step, she notes, is to change the way you think about yourself.

4. Make it your conviction to stop spending unnecessarily.
To get out of debt, you must be strategic and deliberate. If you have debts incurred from credit cards, stop using them.
Like kicking a habit, it is best to go cold turkey than letting go slowly. If you can’t do it, make the necessary changes. “Start using only cash or check—money you actually have, see, and feel,” writes Lawrence.
Put your credit card in a safe place, not available for everyday use. Also, do not accept increases on your credit limit.  
Create a simple table jotting down the money you owe from whom, the minimum payment, interest rates, and their deadlines.

Click here to read more steps on breaking free from your debts.

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Read on for more steps on breaking free from your debts.

5. Create a budget and stick to it.
Determine the total amount of money disposable for paying your debts each month. “Focus on your needs and not your wants,” advises Rowena Oliveros, head of Metrobrank’s Consumer Lending Group. According to most creditors, a borrower’s monthly ammortization should not exceed 30 percent of the household income. There should be enough of the household income left for living expenses and savings.
List all monthly bills and necessities, and make sure they are covered by your monthly income.
Since taking care of your basic needs is a given, you must cut down on luxuries like dining out, overusing your cellphone credits, and buying clothes on a whim. Have a limit on how much you allow yourself to withdraw each week and every month. You’ll be amazed at savings yielded by small changes. Then, apply these savings to your debt. Use only the money remaining after the bills
are paid.

6. Negotiate with your creditors.
Give your creditors a heads up on your situation instead of just not paying or being late in your payments. Cutting off communication with your creditor is one of the worst things you can do. “We want to help our clients and we want to nourish their loans back to health,” shares Oliveros. Many creditors are willing to work with you in a manner that will help them get their money without having to resort to debt collectors.
Financial coach O’ Malley advises, “Be clear with others about what you owe them and when you can pay. Have clean financial arrangements.” Most of the time, they will understand especially if you were responsible enough to face them.

7. Pay off balance with the highest interest rate first.
Pay as much as you can each month while making only minimum payments on your other cards. Never be late with your payments: It is the cardinal sin of debt management.
You get slapped with hefty late fees and penalty rates that run as high as 30 percent. After you’ve paid off the credit-card debt with the highest interest, get rid of the credit card. Next month, do the same with the card that has the next highest interest rate. “Continue until you reach the credit card with the most favorable terms—that is, low interest rates—and keep that one only,” says O’ Malley.

8. Consider balance transferring.
Public relations practitioner Kosh Ancheta-Villar used to get frustrated that her outstanding balance didn’t seem to get any smaller despite paying her credit card bills regularly.  “It all goes to interest payments,” she laments. With the wise advice of her husband Mon, they looked for another credit card offering balance- transfer schemes. They looked for the company with the lowest interest payments or fixed interest rates, and transferred her other credit card’s outstanding balance there. In just a year, she paid off her dues and is now debt-free.

Click here to read more steps on breaking free from your debts.

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Read on for more steps on breaking free from your debts.

9. Pay extra on top of the minimum.
This is the single biggest thing you can do to get yourself out of debt. “You must optimize your payments for your own benefit. The simple way to do this is to add a consistent extra amount to your monthly minimum payment on one debt at a time,” O’Malley advises.
Consider adding 10 to 20 percent to your minimum monthly due and you’ll be out of debt in no time.

10. Work out repayment plans.
Ria Teng, a sari-sari store owner, approached her collectors after her husband’s credit-card bills shot up to almost half a million pesos (since interest kept piling up for 2 years). “I asked them to reduce the interest payments and eliminate the late payment fees,” she shares. The collectors granted their request, allowing the couple to pay their debts by selling some of their properties. Often, the creditors will work with you on waiving the extra fees—but you will have to ask.

11. Go the extra mile.
If your budget is still not enough, and your peace of mind means more to you than material things, consider looking for extra income to pay off your debts.
There are many ways to bring in extra money, from part-time work to taking in a border. Sometimes you have to make big choices to get out of debt. Consider selling some of your assets:household items, electronic gadgets, car, and clothing items you bought but never used. Sell stuff to your relatives and friends, at E-bay, or at a garage sale. You will not only be free of stuff you don’t need, but will clear your mind of psychological garbage. Just be sure to apply all these extra funds to the debt payment, and pay yourself first by saving.

12. Pray and dream again.
Believe that nothing is impossible with the support of your family and friends. Be accountable to someone other than your creditors. They will give you the love and encouragement you need to get out of your financial ills.
Start dreaming again of the time when you were free of worries and, in time, you will be. Budget coach Lawrence writes, “Know that all these changes will ultimately give you total financial peace of mind, which will be so much more satisfying than a piece of furniture.”

Photography by Jun Pinzon