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How to Reduce Debt

How to Reduce Debt

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Mark Cappel
UpdatedMay 22, 2024
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    5 min read
Key Takeaways:
  • Bankruptcy is fast, but comes at a high cost to your credit score.
  • Debt settlement is quick, and also has its costs.
  • Debt avalanche is the cheapest way to pay off your debt quickly.

Learn How to Reduce Debt Quickly & Effectively

"Quickly" is a relative term, isn’t it? Most people contacting Bill, the advice columnist, ask for ways to reduce their debt without harming their credit score, which for many people is an irrelevant issue. Why? Credit scores are used for setting interest rates on loans and deciding if a person is worth giving a credit card to. If you have no plans for a vehicle loan or new mortgage anytime soon, your credit score is not important.

That's why most people should be asking Bill how to reduce their debt quickly. This article outlines the three fastest ways to reduce debt. This is not an exhaustive list of all debt resolution options and their pros and cons. If you want a complete, dispassionate, and numbers-filled discussion of consumers' options for resolving debt, read Debt Solutions: White Paper on Debt Solutions. If you want a short overview on how to reduce debt quickly, read on.


Bankruptcy is the fastest way to resolve debt. Depending on the complexity of your case and if you qualify for chapter 7 bankruptcy, as opposed to chapter 13, you can see your debt disappear in about six months. Permanently! However, there are significant downsides to bankruptcy.

Bankruptcy? Yay!

Each lawyer sets his or her own price for handling a bankruptcy case, but expect to spend at least $1,000 in lawyer and filing fees. That may sound like a lot, but it is not in comparison to the interest charges and other fees you may be paying now. If you qualify for chapter 7, more on this in a minute, your qualifying debts will be discharged (extinguished) at the end of the process. Also, the moment you file, you are protected from creditors by a "stay," which is a freeze on any creditor activities, including lawsuits, foreclosure, and contact creditors have with you. The damage bankruptcy cases to a credit score is not permanent, and if you practice good credit hygiene your score will recover in 5 years or less.

Bankruptcy? Boo!

Not everyone qualifies for chapter 7. Consult with a lawyer to learn if your debts are sizable enough to qualify for chapter 7. If you cannot qualify for chapter 7, you can be placed in chapter 13, which sets a 5-year payment schedule for your debts. At the end of that time your remaining debts may be discharged, or you may need to pay the remainder depending on your circumstances. Student loans cannot be discharged in bankruptcy unless they are a significant hardship. Bankruptcy causes significant damage to a credit score.

Debt Settlement

Debt settlement is a relatively new service business, but it is based on an old and time-honored tactic for resolving debt. In law, this is called an "accord and satisfaction." In common language, it is called "making a deal."

Here is how it works. You borrow $20 from a friend today, and promise to repay him tomorrow. Tomorrow comes and you do not have all $20 — you have $18 and some change in your pocket. You say, "I don't have all twenty, will you take $18 and some change?" Your friend, who may have a pressing need for the money, may say, "Fine, we're even." That's debt settlement. You can do debt settlement for your debts yourself, or hire a debt settlement company to handle negotiations for you.

Debt Settlement? Yay!

Most debt settlement programs last 3 to 4 years, depending on the amount of debt and how much you can pay each month. Enrolled debt is settled for varying amounts depending on the circumstances, but the savings are often significant.

Debt Settlement? Boo!

You stop paying your creditors, and instead put money into a special account the debt settlement company uses to negotiate lump-up settlements. This means your credit score will suffer. Some hyper-aggressive creditors file lawsuits against people in debt settlement programs. However, most creditors negotiate figuring that something is better than nothing, which is what they would get if you filed bankruptcy.

Debt Avalanche

In debt avalanche, you line-up your debts by interest rate. You pay as much as you can to the account with the highest interest rate first, and pay the minimum to the others. Once that debt is paid off, you target the next highest interest rate debt, until you have paid everything off.

Debt Avalanche? Yay!

This is the cheapest way to pay off 100% of your debt. Is it fast? That depends on how focused you are on paying off the debt.

Debt Avalanche? Boo!

This pays off 100% of your debt, which takes more time than if you paid off less than 100% of your debt with debt settlement or bankruptcy. Not a fast method if you cannot afford to make large payments to pay-off your debt.

Fake Death

One tactic you should not try is faking your own death in an attempt to have your debts be extinguished by the probate process. You risk prosecution for fraud. Also, if you expect to cash-in on your life insurance, there are specialists who investigate life insurance fraud cases. There is no "Fake Death? Yay!" here. It's all "Fake Death? Boo!"

In Summary

How quickly you reduce your debt depends on how fast you want to jettison the debt, and how much short-term pain you want to endure. Weigh your options, because there is no perfect solution on how to reduce debt.

Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2023 was $17.503 trillion. Auto loan debt was $1.607 trillion and credit card was $1.129 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in District of Columbia, 22% have any kind of debt in collections and the median debt in collections is $1672. Medical debt is common and 6% have that in collections. The median medical debt in collections is $599.

Avoiding collections isn’t always possible. A sudden loss of employment, death in the family, or sickness can lead to financial hardship. Fortunately, there are many ways to deal with debt including an aggressive payment plan, debt consolidation loan, or a negotiated settlement.