How to become debt-free without bankruptcy

It's easy to max out your credit cards during the Christmas holiday, and before you know it, you can find yourself thousands of dollars in debt. Your back is against the wall, and you can't figure out a way to get over the hump.

You may have made the mistake of applying for loans or refinancing your home to pay off credit card debt. However, who wants to pay on credit card debt for thirty years? Maybe you even applied for payday loans in order to alleviate some of the financial burden. Big mistake. You may find yourself paying as much as 700 percent over the course of a year for a payday loan.

The first step in becoming debt-free is figuring out if there's a way to avoid bankruptcy. Gather all of your monthly expenses that aren't going away: phone bill(s), food, electricity, gas, rent, etc. Subtract total monthly expenses from disposable monthly income. Next, add up total monthly debt: credit cards, loans, car note, mortgage, etc. Subtract total monthly debt from disposable monthly income minus total monthly expenses. This is your net income. If this figure is a negative dollar amount, then bankruptcy may be the only viable option. If you're in the black, then becoming debt-free without bankruptcy is a definite possibility.

Next, list your monthly debt in order from lowest to highest unpaid balance. Example:

Capital One Bank Balance- $500 Min. Payment- $25, Household Bank Balance- $2500 Min. Payment- $50, Wells Fargo Auto Balance- $20000 Min. Payment- $400, Countrywide Mortgage Balance- $100000 Min. Payment- $750

You want to aggressively attack the smallest bill first, and you need to figure out how much of your net income can you sacrifice to the smallest bill. After that, you will make minimum monthly payments on the other larger debts. Example:

Capital One Bank Min. Payment- $75, Household Bank Min. Payment- $50, Wells Fargo Auto Min. Payment- $400, Countrywide Mortgage Min. Payment- $750

In the example above, an extra $50 ($25 + $50) was applyed to Capital One Bank from net income. Therefore, Capital One Bank will be paid off much sonner by tripling the monthly payment.

Once you pay off the first debt, you will attack the next debt by adding the monthly dollar amount of the first debt (Capital One) to the minimum payment of the next debt (Household Bank). The monthly payment for Household Bank will be ($75 + $50 = $125). Once Household Bank is paid off, you will apply the same method to Wells Fargo Auto: ($125 + $400 = $525). You will continue to do this until all of your loan and credit card balances are zero. You may have more debt than this, but the general concept is the same.

If you apply these steps to eliminating your debt, you will become debt-free much faster. It takes a lot of diligence and discipline to achieve financial freedom, but I believe it can be done.