How to Reduce Debt Fast

Mr. Credit Card,

I’ve looked around your site and it looks like you are pretty good at helping people work down their debt. Will you help me?

I have about 17,000 worth of credit card and medical debt. I have a job and I am making the payments. It’s slow, but I am not past due on anything.

Is there any faster way to reduce this debt? Can I negotiate? How do I do that? What do I need to do to get the debt to go away faster? I read somewhere that I had to pay taxes on the forgiven debt. Is this true?

Thanks,
Phil

Phil:

The state of the economy has left a number of people, just like yourself, looking for a way to get rid of their debt the fastest way possible. Besides continuing to pay on your bills, there are a couple of ways to reduce the debt a little quicker. Fortunately, you are not past due on any of your debts, and the key to keeping your credit clean is to continue to be vigilant in paying these bills (no matter how slowly).

Medical Debt

We’re going to take a look at reducing medical debt first because there are only so many options in paying medical bills off quickly, aside from just making larger payments. Here are a couple solutions for speeding it up a little.

Contact the Medical Facility

Most hospitals and medical facilities have charitable programs that are funded and waiting for someone in need to use them. This means that you have to ask for help with your medical bills and usually will need to apply or fill in some kind of form. The medical facility will not usually call you and offer the assistance so you have to call them. Usually you will need to speak with someone in billing, fill out their form, and then wait to see if you are approved. There is a good chance that you will be approved for at least a small reduction, which means your medical bills are paid off quicker. The good thing about taking part in this type of program is that sometimes your medical bill can be reduced by 60% or more, depending on income and need.

Lower the Payment Plan on Medical Bills

If you request a payment plan, it’s important that you stick to it but let’s face it, medical bills aren’t going anywhere. In your situation, you may want to lower the payments on the medical bills in order to pay more on your credit cards. If you are able to make extra payments on the credit cards, you will save quite a bit of money in interest and will also be able to pay them off quicker. Even if you lower your payment plans on the medical bills for a short period of time, you can always go back and increase your payments if you feel you are able to pay more.

Now we’ll look at a couple ways to pay off credit card debt faster.

Extra Payments on Credit Cards

It may seem like an obvious solution, but people often don’t realize how much faster they can pay off their credit cards, simply by making extra payments. Budget and cut out any extra spending and pay that money onto one of the balances (preferably, the one with the highest APR). It may help to create a spreadsheet of your credit cards, with the APR, the balance and the minimum payments so you can see which cards you need to work on first.

Snowball Method for Paying Credit Cards

One method for paying off credit cards quickly is the highly publicized snowball method. How this works is, you pay the minimum payments on all of your cards except the one with the highest APR. On that card, you pay as much as you possibly can to get it out of the way (and save money in the long run on hundreds or even thousands of dollars in interest).  Any extra money you find, win or receive should be paid on this card as well. When that card is paid in full, you would continue making those payments in addition to the minimum monthly payment on the next card with the highest APR.  This helps you knock out each card by APR and as long as you keep snowballing the money you pay from each card as it gets paid off, you will have your cards paid in full in no time.

High Interest Cards

Cards with high interest rates not only cost you a lot of money in interest but can take forever to pay off, especially if you’re only making the minimum monthly payment. If you qualify for a card with a 0% introductory APR, it may be wise to transfer the balances from the very high APR credit cards. This only works if you can pay the 0% card off quickly and also (which you should make sure of when applying for the card) if the APR after the 0% introductory rate ends, is not higher than the what you started with.  If you can’t pay it off and the rate is higher, you end up in a worse situation than you started.

This would also be ideal, if you can get a loan with a lower interest rate to consolidate your credit card debt.

Make More Payments

Much like paying mortgages, if you split your minimum monthly payment in half and pay biweekly instead of monthly, you will pay off the debt faster. The reason this works is because there are two months every year where you will end up making three payments instead of two, and extra payments mean the balance is paid off faster.  It is not suggested to only make the minimum monthly payments on your cards so if you can pay more it’s better. Paying biweekly will speed things up a little bit.

Your last question was regarding paying taxes on forgiven debt and the answer is yes, you may. Forgiven debt is the result anytime a creditors or debt collectors negotiate and allow you to make a smaller payment to pay off an account than what is owed. The reason you could possibly be taxed on the forgiven debt is because in the eyes of the IRS, the forgiven debt is considered income or extra cash.  If a creditor agrees to accept at least $600 less than what is owed, they will have to file and send you a form 1099-C which you will need to report on your income tax return.

Even with the possibility of being taxed on the forgiven debt, if you can get the creditor to accept a lower amount, it will definitely assist you in paying off your debt quicker.

I hope this helps you with a few options in paying off your debts faster. Good luck!