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Paying Off Debt On A Fixed Income

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When money is tight, it can seem practically impossible to pay off debt.

You might feel stuck in a cycle where you pay down debt one day, and then rack up more debt to cover bills the next. Some describe it as robbing Peter to pay Paul.

Whether your income is limited because you’re on Social Security, living off of a small pension, or you’re just earning too little to feel like there’s breathing room in your budget, there may be help available. Here are some solutions to consider for paying off debt with minimal income.

List All Your Debts

When you’re stressed out about debt, it can be tempting to hide from your finances. Unfortunately, ignoring bills, or even making just the minimum payments, can lead to even more debt.

But you can change that by taking a few minutes to write down a simple inventory of your debts. If it seems daunting, try one of these approaches:

  • Ask a friend or family member to sit with you for moral support.
  • Schedule an appointment to get help from a credit counselor (see more on this below).
  • Start by pulling your free credit reports to see a clear overview of your accounts.

Once you have a list of your debts, consider organizing them according to the Debt Avalanche Method, which can help you save money on your repayment and keep you motivated to reduce your balances. It works like this:

  1. Prioritize the debt with the highest interest rate: Pay the minimum amount due on all debts but pay extra toward the debt with the highest APR whenever you can afford to.
  2. Work your way down the list: Once you’ve paid off the first debt on your list, roll the payment down to the next item. For example, if you pay $200 a month towards the first debt on your list and $50 toward the second, start paying $250 toward debt number two after the first one is paid off.
  3. Continue until all debts are paid off.

Stop Acquiring New Debt

This tip might sound obvious, but it’s easier said than done. For someone who relies on credit or loans to cover their regular expenses, it takes effort and planning to break free from the cycle.

Here are a few tips for putting an end to new debt:

  • Cancel all automatic payments that are connected to your credit card accounts.
  • Review your credit card statements and look for expenses you can cut from your budget until your debt is paid off.
  • Delete your credit card information from your online accounts and apps.
  • Leave your credit card at home and take cash or a debit card with you instead.
  • Cut up your physical credit cards or place a temporary freeze on the accounts.
  • Make a list of ways you can entertain yourself for free or reward yourself for free each time you pay off a certain amount of debt. For example, going for a hike, checking out a new book from the library or having a family movie night at home.

Set A Realistic Budget

The idea of creating a budget can be incredibly stressful when money is tight, but it’s also one of the keys to improving your situation.

Fortunately, the main challenge in creating a budget is simple: you make a list of all your expenses, and then compare it to your income. Think of it as a snapshot of your financial situation.

Look over your bank statements, credit card statements, e-wallet transactions and pay stubs to ensure you don’t overlook anything.

As you look over your completed budget, ask yourself these questions:

  • What can I go without temporarily or even permanently?
  • Can I reduce my expenses, starting with the biggest ones, by looking for negotiating better rates or switching to a different provider?
  • Can I increase my income by asking for a raise or promotion, increasing my work hours, looking for a new job or taking a side-job, even if it’s just temporary?
  • Can I reduce my retirement contribution until I pay down some or all of my debt?
  • Can I bring in extra money by using something I already have? For example, renting out a room or selling old jewelry or workout equipment.

If you’re still coming up short, determine how much money you need to come up with each month and keep that figure in mind as you consider your options for help (see below).

Create An Emergency Fund

Once you’re debt-free, the key to staying that way is to set cash aside for emergencies.

When you have money in savings, you don’t need to go into debt in order to cover the occasional, surprise expense that can pop up, like a trip to the emergency room or a car repair.

Building an emergency fund can start with something as simple as setting up an automatic deposit of $25 per paycheck into your savings. When you have more cash available, you can increase the amount.

Eventually, you should aim to have somewhere between three to six months of your living expenses set aside, that way you have a broad safety net that will replace your income in the case of a serious emergency.

Consider Debt Refinancing Options

When you’re exploring how to pay off debt on a fixed income, it’s important to understand all of your options.

Sure, working overtime or cutting more costs can help, but you can only squeeze yourself so thin. The following options might give you extra relief without running you into the ground:

Debt Consolidation

Debt consolidation doesn’t automatically reduce what you owe, but it can help make your expenses more manageable.

The way it works is that you take out a new loan and use the loan to pay off your credit cards or other accounts. The benefit of debt consolidation is that it can potentially reduce your overall monthly debt expense and/or reduce your interest rates. The drawback is that your credit scores will determine what you qualify for—the better the scores, the lower your rates.

If you’re interested in a debt consolidation loan, the best place to start is usually your local credit union, since they tend to offer the best loan rates while having relatively lenient requirements for credit scores.

Debt Settlement

Debt settlement is one way of dealing with debt, but it’s important to understand that it’s often more harmful and expensive than it is helpful.

The gist of debt settlement is that you stop paying your debt, but you pay a for-profit company to try and negotiate lump-sum settlements with your creditors, with the hopes that it will save you money.

But what these companies don’t tell you is that they’re not usually successful at negotiating. On top of that, working with them causes major damage to your credit scores, adds late fees and charges to your debt balances, and can put you at risk of being sued.

If you’re looking for a safer way to reduce your debt, consider nonprofit debt settlement instead.


For some people, no combination of pinching pennies, taking side jobs and moving debt to new accounts can make a dent in their debt. If you can’t find a way to pay off your balances within the next few years, it might be time to seek legal help.

While filing for bankruptcy is a serious legal decision that can cause major damage to your credit scores, the damage isn’t permanent. Plus, filing bankruptcy can put an immediate stop to any efforts to collect your debt. Here are the options to consider:

  • Chapter 7: If you qualify, chapter 7 bankruptcy can relieve you from having to pay another dollar toward certain debts, like medical bills, personal loans and credit cards.
  • Chapter 13: If you file chapter 13 bankruptcy, you can be put on a three to five year payment plan for your debt, with monthly payments that are deemed affordable based on your financial situation.

Receive Guidance From A Credit Counselor

There are a handful of ways to deal with debt, but it’s difficult and overwhelming to navigate them when you’re focused on making ends meet.

Fortunately, credit counseling can help.

A certified, nonprofit credit counselor can relieve the burden of having to sort through and compare all of your options. They can meet with you to review your income and expenses, walk you through all of the potential solutions, and offer professional advice on things like how to manage your medical bills or get into a more affordable payment arrangement with your creditors. Plus, their services are often free.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via