Escaping the Debt Trap

Debt on a low income isn’t just a financial problem — it’s a trap designed to keep you borrowing. Payday loans, overdraft fees, and high-interest credit cards cost the most to the people who can afford them least. This lesson gives you the tools to break the cycle.

🔄 Quick Recall: In the previous lesson, you started building an emergency fund. Here’s why that matters for debt: a $500 emergency fund prevents new debt from forming. Every car repair or medical bill you can cover without borrowing breaks one link in the debt chain.

Your Debt Audit

Help me audit all my debts and create a payoff plan:

My debts:
- [Creditor 1]: $[balance] at [interest rate]%, minimum payment $[amount]
- [Creditor 2]: $[balance] at [interest rate]%, minimum payment $[amount]
- [add all debts]

Monthly income available for debt payment (after all expenses): $[amount]

Compare two strategies for me:
1. AVALANCHE method (highest interest first) — show total interest paid
   and payoff date
2. SNOWBALL method (smallest balance first) — show total interest paid
   and payoff date

For each method:
- Monthly payment allocation
- Which debt to attack first
- How much I'll save in interest
- Month-by-month payoff timeline
- Psychological pros and cons

Predatory Lending: What to Avoid

✅ Quick Check: Your bank charges $35 every time you overdraft. Last month, you overdrafted 3 times for a total of $105 in fees on $67 worth of transactions. What should you do? (Answer: Opt out of overdraft “protection” — which actually means opting out of the fee. Without overdraft protection, your card simply declines at the register instead of charging you $35 for a $12 purchase. Then switch to a fee-free bank like Chime or Varo. That $105/month is $1,260/year — more than your emergency fund goal.)

Negotiating with Creditors

Help me negotiate with [creditor type]:

Situation: [describe — behind on payments, medical bill, collections, etc.]
Amount owed: $[amount]
What I can realistically pay: $[amount per month or lump sum]
How far behind: [current, 30 days, 60 days, collections]

Draft a negotiation strategy that includes:
1. Who to call (and who to avoid)
2. What to say (and what NEVER to say)
3. Specific settlement offer to make
4. How to get any agreement in writing BEFORE paying
5. How this will affect my credit
6. My rights under FDCPA (if it's in collections)

Negotiation power moves:

Medical Debt Specifically

I have a medical bill of $[amount] that I can't afford. Help me:

1. Request an itemized bill (look for billing errors — found in 30-40% of bills)
2. Ask about the hospital's financial assistance/charity care program
   (nonprofit hospitals are legally required to have one)
3. Negotiate a cash-pay discount (typically 20-40% off)
4. Set up a 0% payment plan (most hospitals offer this)
5. Determine if this qualifies for medical debt forgiveness programs
6. Understand the new credit reporting rules (medical debt under $500
   no longer appears on credit reports as of 2024)

✅ Quick Check: A debt collector offers to “settle” your $1,000 debt for $400 if you pay today by phone. Should you accept? (Answer: Never pay over the phone without a written agreement. Ask for the settlement offer in writing, including that the debt will be reported as “settled” or “paid in full.” Once you have it in writing, then pay — preferably with a money order or from a bank account that isn’t your primary one. Paying without written confirmation risks the collector taking your money and then selling the remaining $600 to another collector.)

Key Takeaways

• Payday loans cost 300-400% APR and trap 80% of borrowers in repeat borrowing — always use alternatives (credit union PALs, employer advances, community assistance)
• Opt out of bank overdraft “protection” immediately — it’s the most expensive fee per dollar in consumer finance
• The avalanche method (highest interest first) saves the most money; the snowball method (smallest balance first) provides the most motivation — both work if you stick with them
• Medical bills are the most negotiable debt — request itemized bills (30-40% have errors), ask about charity care, negotiate cash discounts, and set up 0% payment plans
• Never pay a debt collector without written validation and a written settlement agreement — your rights under the FDCPA protect you

Up Next

In the next lesson, you’ll focus on the other side of the equation — growing your income. You’ll explore side hustles, skill-building, and career advancement strategies that create a realistic path to earning more.