8 ways to pay down debt when on a fixed income
Tamara E. Holmes/CreditCards.com
17 May 2016
Climbing out from under a mountain of debt is never easy, but when you’re living on a fixed income, the task may seem insurmountable.
Whether you’re retired, disabled or facing a lengthy period without the promise of a raise, promotion or other windfall, the first step is to “focus on the income you have and evaluate where it has to go,” says Kathryn Bossler, a financial counselor with Farmington Hills, Michigan-based GreenPath Debt Solutions.
For seniors in particular, there is often no room for large debt repayments. According to a 2015 survey by the Institute on Assets and Social Policy, more than 1 in 3 seniors had either nothing left over once household needs are met or were in the negative.
While it may seem like you have nothing extra to put toward your debt, the following steps may show you that you’re in a better position than you think.
Know the rules
Before you start brainstorming ways to raise money to pay off debt, make sure earning extra money won’t set you back. That can very well happen if you receive Social Security benefits. If you’re collecting Social Security benefits before you reach full retirement age, your payment will be reduced if you earn more than $1,310 per month in 2016. However, once you reach full retirement age, your Social Security benefits won’t be reduced no matter what you make.
Earning additional income can also hurt you if you receive Social Security Disability Income. There are two types: Social Security Disability Insurance (SSDI) is available to people who have a working history and have paid Social Security taxes. Supplemental Security Income (SSI) is a benefit received by low-income people who are disabled, blind or over 65.
In order to receive SSDI, you must be physically unable to work, so if you raise cash for paying off debt through a part-time job or starting a side business, that might jeopardize your ability to receive benefits, says Beth Laurence, senior legal editor for publisher Nolo. Likewise, if you receive SSI and substantially increase your monthly income, your benefit may decrease or be eliminated altogether. Before making a move that will bring in more money or affect your assets, reach out to a disability attorney, suggests Scott Suzuki, president of the Special Needs Alliance, an organization that advocates for people with disabilities. “If you lose benefits, it can take months to get them back,” Suzuki says.
1. Focus on cutting costs. If raising money is not an option, look for ways in which your spending can be cut. Spending less on nonessential items frees up money that can be applied to debt. You can sacrifice some luxuries such as cable and entertainment, and search for benefits programs that help seniors and others on a fixed income pay for necessities such as prescriptions. For example, the National Council on Aging (NCOA) created a website called BenefitsCheckUp.org that “connects eligible older adults to public and private benefits programs that can add that needed extra boost to a person’s monthly budget,” says Vanessa Sink, a spokeswoman for the NCOA.
2. Pay less in interest. One of the most effective ways to pay off debt faster is to get a lower interest rate. Credit card issuers frequently lower rates for those who ask them to, according to a March 2016 scientific survey by CreditCards.com. Card issuers also frequently offer promotional no-interest or low interest rates for a short period of time on new card offers, which can allow you to get the debt down to a more manageable level. Or you can call your card issuer and ask to speak to someone regarding a hardship rate reduction, but that type of arrangement is temporary and will only work if you can pay off balances in a short period of time. If you can’t find a card issuer to give you a lower rate or can’t qualify for a new card, you can explore other options, such as a personal loan or tapping home equity.
3. Take money from your heirs. While it’s nice to leave assets to your grown children and other family members, it doesn’t make sense to do so if you can’t afford your day-to-day expenses. If you’re struggling with debt and you own a home, you might consider taking out a reverse mortgage, which allows you to convert equity to cash. However, after you die, the bank will get your house unless your heirs can pay back the loan. If you have a permanent life insurance policy that has a cash value, you might also take out a loan against it. While that would lower the amount your beneficiary would receive after your death, the money could be used to pay off debt and give you more peace of mind while you’re alive. Again, make sure these moves won’t affect Social Security benefits.
4. Turn your talents into cash. “Everyone has a skill people are willing to pay for,” says Angela Heath, owner of TKC Incorporated, a Kensington, Maryland, company that helps Baby Boomers come up with money-making ideas. Whether you use gardening knowledge to help friends select flowers, organizational skills to plan local family reunions or free time to run errands for working neighbors, a little cash here and there can help you whittle down that debt.
5. Use bartering to free up money for debt. When Missouri City, Texas, resident Mary Kaarto’s income was limited by two separate two-year layoffs, she freed up money by bartering with friends. For example, she took a friend’s mother to physical therapy appointments in exchange for the friend paying some of her utility bills. Another way she raised cash was by selling belongings she no longer used via yard sales and websites such as eBay. “You can learn how to live on less,” says Kaarto, who has written about her experience in a book called, “Hope for the Laid Off - Devotionals.”
6. Share your space. If you’re not limited by the income requirements of SSI, you might raise money to pay off debt by renting out part of your home. According to AirBnB, an online marketplace that connects people with rooms to rent with travelers, 49 percent of the seniors who host travelers are on a fixed income and use their rental earnings to supplement their finances. Not only that, but the average senior host earns just under $6,000 a year from welcoming guests in their home, which could put a significant dent in credit card debt.
7. Participate in a clinical trial. There’s one way to raise money that won’t impact Social Security income requirements. Some clinical trials for medical research pay people to participate. In order to encourage people to participate in medical research, the government won’t count the first $2,000 you make from participating in clinical trials if you’re receiving SSI, so if you’re not averse to being a human guinea pig, you could apply your earnings to your debt.
8. Visit with a nonprofit credit counselor. If all else fails and your debt is just too much to handle, it may be time to seek out professional help. Before you even consider the option of filing for bankruptcy, for example, visit a nonprofit credit counselor – for free – affiliated with either the National Foundation for Credit Counseling or the Financial Counseling Association of America. There you can go over your bills and explore your options, including whether a debt management program could help. A DMP is when you send in a monthly lump sum to the credit counseling agency, which then distributes that among your debtors. The credit counselor will typically try to negotiate with your debtors to reduce the interest and any fees tacked on to your debt. In exchange for their services, you will pay a fairly reasonable monthly charge.
Paying off debt can be exhilarating, but don’t be tempted to start spending again. When you’re on a fixed income, “separate the needs from the wants,” Bossler says. “Then consider those 'needs' again.”