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5 Questions To Ask Before You Use Savings To Pay Off Debt

debt and save targetDid you know that your savings can keep your finances from flying apart? In fact, you can use savings to pay off debt. These are only a few of the reasons why this is such an important part of your financial life. In fact, some experts are saying that you cannot be a financial success unless you have some form of savings to your name.

While we are all aware of the importance of savings, sadly, this is a difficult goal for a lot of Americans to reach. According to an article published on Mint.com, the ideal saving rate is 10% to 20% of consumer’s income. However, a report from the Federal Reserve Bank of St. Louis reveal that the current savings rate in the country is actually 4.2% only. That is not even half of what the saving rate should be. The article also mentioned why it is so difficult for consumers to save. It is because they have too much debt.

But if you think about it, that is not the only issue that we have about savings. While it makes sense to get rid of debt first, a lot of people are actually struggling to decide if it is a good idea to use savings to pay off debt. After all, this is already money that you have. Some experts will frown at the idea but if you do the math, you will be losing more if you keep your savings intact and your debt accumulating. Looking at the interest rate alone, debt has a higher rate compared to your savings account. It makes more sense to pay off debt first because you will be saving more in terms of the interest amount that you are paying.

However, that decision is harder to make than you think. Some people need the security of a savings – that is why they opt to keep it intact. But if you find yourself right in the middle of saving or paying off debt, there are a couple of questions that you can ask yourself to help you decide.

Ask yourself these questions before you pay your debts with savings

If you are torn between using your stashed cash to get rid of your debts, there are 5 simple questions that you can ask yourself.

Where will you get the savings from?

There are a lot of savings that you can use to finance your debt payments. According to WashingtonPost.com, debt has a high effect on our retirement savings. In fact, a study done by the Employee Benefit Research Institute revealed that 74.8% of their respondents cashed out their retirement savings after leaving their jobs to pay off debt. Whether you are leaving your job or not, it is never a good idea to use your retirement savings for anything other than your retirement expenses.

Do you have sufficient emergency savings?

Unless you have your emergency fund intact, you should never use savings to pay off debt. This is one of the requirements that you need to have. In case you do not have this yet, you need to save up for sufficient emergency savings. Anything in excess can be used for your debts. This emergency fund can actually help you sustain your debt payments. In case something happens, your reserve fund will allow you to continue paying off what you owe while taking care of that additional unexpected expense.

How much is your debt and the respective interest rate?

In case of multiple debts, list all of them down and take note of each interest rate. In case the interest rate is more than 7%, then you will end up saving more money if you pay off your debts first with your savings. But if you mostly have mortgage or student loans that have less than 7% of your debts, then to use savings to pay off debt is not really that beneficial. The best scenario to finance debt payments through your savings is when you have mostly credit card debt – a debt that can reach up to 36% of interest rate.

Are you expecting any extra money in the near future?

Another question to ask yourself is this: will there be any extra money in your near future? This should be something guaranteed like a commission that is already being processed, a confirmed holiday bonus or your tax refund. If you have this extra money, you can go ahead and use your savings and just replace it with the money that is coming your way.

Is it in line with your financial goals?

The last question that you should ask yourself is whether this move is in line with your financial goals. Smart money management requires you to set goals and that also means your decisions should be aligned with your goals. If you are saving up for a downpayment of a new home, then it might not be a good idea to use your stashed money to lower your debt. But if you need to lower your debt level to have better chances at a low interest home loan, then go ahead and use savings to pay off debt.

Other options to pay back your debts without touching your savings

In case the answer to the 5 questions point you towards not using your savings to pay off your debts, then that is okay. There are other means for you to eliminate debt without touching your savings.

PIOnline.com published a survey that revealed how more than half of Americans set saving goals. But when it comes to retirement, less than half are able to save through their employer’s saving plans. The current survey revealed that the number of Americans saving is basically slipping – that is why you may want to opt not to use savings to pay off debt. Use other options that will allow you to get out of debt while still adding to your savings.

Here are some of your options:

  • Debt Consolidation Loan. This debt relief program involves you borrowing a bigger loan that can help you pay off all or most of your existing debts. What will happen is you will consolidate your old debts under one low interest loan. That should make things easier to pay off.
  • Debt Management. This is also a form of consolidation – but this time, you get the help of a credit counselor. For a maximum fee of $50 a month, you can enjoy their service that includes a careful analysis of your debts and the creation of a Debt Management Plan or DMP. This plan contains your proposed lower monthly payment plan that stretches it over a longer period. That means you get a lower monthly payment requirement.
  • Debt Settlement. In case you are in need of debt reduction, this is a debt solution that can work for you. The whole idea is to convince your creditor or lender that you are in a financial crisis. Then, you will offer them a lump sum money that can pay for a percentage of your debt. You will ask them to accept this lump sum and have the rest of the debt forgiven (at least anything that this big payment cannot cover).

These are only a few of the debt relief programs that you can use to achieve debt freedom. If you do not want to use savings to pay off debt, then make sure you know your other options.

How To Talk Your Way Out Of Debt

woman looking at her credit cardDid you know that you could talk yourself out of debt?

Yes, really you could talk your way out of debt.

The solution is called debt negotiation, debt settlement or debt arbitration. But whichever you call it, it’s basically the same thing. It’s where you contact your creditors and talk them into helping you get out of debt.

Sound too good to be true?

Does this sound just too good to be true – that you could just talk your creditors into helping you? Well, it is true but only under certain circumstances. For one thing it’s not worth trying unless you owe a good amount of money. And second, you should already be behind in your payments.

How it works

For the sake of an example let’s say you owe $5000 on a credit card and you haven’t been able to make a payment for the last three months. Before you contact the credit card provider you need to have a goal in mind. It could be to get a reduction in your interest rate, to ask for forbearance (where you make no payments for some period of time), a temporary reduction in your payments or to settle your debt for less than you owe (debt negotiation).

The first thing you will need to do is get through to a person that has the authority to work with you. In many cases this isn’t as easy as it might sound. The first customer representative you reach probably won’t have that authority. In fact, you may have to keep making phone calls and talking with people until you finally work your way through all the various levels to get the someone who has the authority to really help you.

As a general rule it’s easier to get a concession such as a reduction in your interest rate, forbearance or a temporary pause to your monthly payments then debt settlement. Why is this? It’s because the whole idea behind debt settlement is to pay that credit card company less than what you owe – maybe much less than you owe. As you might guess, credit card companies are pretty much opposed to doing this.

If your goal is debt settlement

If your goal is to negotiate a debt settlement, you will need to be further behind in your payments than three months – probably something around six months. The reason for this is that most credit card companies are loath to talk settlement unless you’re this far behind. Plus, after six months most of them would sell off your debt to a third party such as a collection agency. This means it’s important that you contact that lender sometime between when you haven’t made a payment for five months but it hasn’t quite yet been six months.

Be honest

When you do finally reach a person that has the authority to help you be honest about your finances and explain them as clearly and comprehensively as possible. What you’re doing at this stage is building a case for settlement. You may also need to convince that person that if he or she fails to settle you will have to to file for bankruptcy. This is the old “half a loaf is better than none” deal where the credit card company understands it would be better to get a substantial chunk of what you owe than nothing at all.

What to ask for

Unfortunately there’s no hard and fast rule as to how much of your debt you should first offer to pay. If you have the necessary intestinal fortitude you might offer to pay 30% or 40% of your debt. You can just about figure that this offer will be refused. However, your customer rep will have to come back with a counter offer – after all this is called debt negotiation. Where you end up will depend largely on how good a negotiator you are and how much you owe. But if you are pretty good and if you do owe $5000, you might end up settling for 50%.

Get it in writing

Assuming that you are successful in talking your way into a settlement make sure you get it in writing. Also be prepared to pay for the settlement almost immediately. In fact, this can be one of your best bargaining chips – “settle with me today and I’ll send you the money by cashier’s check or wire transfer tomorrow.” Of course, this does mean you will need to have the necessary cash on hand. The Catch-22 here is that if you did have $5000 on hand you might not have to ask for any concessions let alone debt settlement. So where would the money come from? If you are fortunate you might be able to borrow it from a relative. Barring that you will need to get creative. For example, if you have a 401(k) or IRA you might be able to borrow the money from it. The best thing about this is that you will have to pay the money back with interest but you will be paying interest to yourself. And you will need to repay it within six months or it will be treated by the IRS as ordinary income and you will be taxed accordingly.

What can you do if you don’t have either a rich relation, a 401(k) or an IRA? You could get a second job and use the extra income to pay off your settlement. Our economy has rebounded to the point where there are a number of part-time jobs available. For example, we recently saw that both our local Best Buy and Staples stores were looking for help. While these jobs generally don’t pay more than $10 an hour you should be able to easily net $600 a month or more.

Does this sound just awful?

Make no mistake about it; DIY debt negotiation takes time, patience and steel nerves – as well as the cash to pay off any settlements you negotiate. Plus, it will seriously ding your credit score. This is why debt settlement should be low on your list of ways to deal with your debt.

Bankruptcy is worse

The one thing that can be said without argument about debt settlement is that it’s better than filing for bankruptcy. Yes, a chapter 7 bankruptcy would get rid of all or almost all of your unsecured debts such as medical debts, credit card debts and personal loans. But it comes at a very serious cost. For one thing, a bankruptcy will stay in your credit reports for either seven or 10 years and in your personal record forever. You could be turned down for a really great job 10 years from now because the prospective employer won’t hire anyone that has had a bankruptcy. It will probably be two to three years after your bankruptcy before you can get any new credit and when you do it will come with a very stiff interest rate.

couple with debt management consultantA better option

This means that for many people a better option is credit counseling. There’s undoubtedly a nonprofit credit-counseling agency near you that either provides its services free or at very low cost. When you go to one of these agencies you will be assigned a debt counselor that will review all of your finances and help you develop a budget or plan for getting out of debt. He or she will probably also work with your creditors to get your interest rates or even your monthly payments reduced. If you’re really stuck in a black hole of debt your counselor will probably offer you what’s called a debt management plan or DMP. This is where you send the agency one payment a month and it then distributes the money to your various creditors. The benefit of this is probably fairly obvious – that you get all of those creditors off your back and would make just one payment a month versus the multiple payments you’re probably now making. However, like many things in life there are downsides to a DMP. For one thing, it will probably take you as many as five years to complete it. And second, all of your accounts will be closed and you will be required to give up your credit cards. Sadly enough a large percentage of people who sign up for DMPs never complete them and these are probably the reasons why.

Debt Relief In The Form Of Donation

Graduation cap with money

In today’s time, debt relief is goal because of all the debt around us. From the time we get in college, to our first employment, to our first house and even when we have kids. Debt varies in amount as well as various multinational companies are millions in debt to that 6th-grader in Houston-area middle school whose breakfast was trashed because he was short of 30 cents in credit as reported by Washingtontimes.com.

Even colleges are also in debt. But one learning institution recently made headlines as they went down a route not usually wandered on by those in debt. As reported by Mlive.com, Calvin College, a private school in Grand Rapids, Michigan, put together a fundraising project to raise the money to address their debt problem.

The school was looking at a long-term debt of $116 million. At the moment, the school needs to raise $25 million to pay down debt and start on the right track. The school has been around for quite some time now being built in 1876 but the way it handled its finances in the past years got the school deeper in debt. Debt relief could be a far dream with the amount of payments they had to make. Then they started fundraising.

The school was able to raise the target amount in 8 months time. It was a herculean task and made possible by a strong alumni network and the hope of quality education being turned-out by the school in its students.

Though unconventional, this is not the first time fundraising was done to pay off debt. Washingtontimes.com carried a story early this year about an eight year old student from Michigan who started the “Pay It Forward: No Kid Goes Hungry” campaign. This was when his friend was denied hot lunch because he did not have enough credits for lunch.

Why debt relief is a goal for the school

There were missteps along the way that got the school deep in debt. As they are in the rebuilding stage, it would benefit a lot of institutions and even individuals if we look back and see what went wrong. Analyzing and looking at the insights and lessons from the circumstances that lead them to debt would yield a lot of learnings.

Proper use of money

We have different goals in life and a lot of them requires financial counterpart. That house we dream about would need to be bought first or taken into a mortgage. That car we always wanted to drive would require finances as well so we can purchase and  drive it around town. That college degree we want to graduate with needs tuition fee so we can carry it in our job hunt.

To make these happen, we save up for it or we allocate funds to pay for it. That power tool we need to start making DIY repairs at home, we can put away a few dollars a week so we can purchase it at the end of the month. But if we use that saved up money to buy something else, we forego the original intention for the money and would have to save up for it again.

That is what happened with Calvin college. They had funds to start construction on some buildings on the campus. Good move considering they had the money and a 390 acres space to build around in. But the problem was they took the money and put them in investment instruments. The intention was to use the the income from the investment to pay off for the construction expense.

There are several investment options to choose from. Some people and companies use them as a debt relief option but using them and maximizing the tools needs careful planning and thorough understanding of the risks.This is where Calvin college’s problem started.

Below par investment income

The school had the best intention in mind. Invest the capital and earn off from the income to pay off for construction expenses. If done right, they would finish the building project and still have the capital intact. They can even use it for other building projects. The forecast might have been favorable that the school voted on it.

What the school did was to take out a loan so the monthly payments can be in small amounts enough for the investment income to cover. This is one form of passive income where the you make your money work hard for you. The problem was the investments did not yield the expected results and payments are not made.

Unbudgeted payment

Knowing how much money comes in is essential to plan who much money comes out and vice versa. This budget plan allows you to keep track of finances and avoid having to think about debt relief options. The school did not budget the payments for the year and when the time came that payments had to be made and the investments did not yield expectations, they had to cut budgets from different areas.

Rebuilding the finances

After Calvin college raised the money, there are the steps they took to ensure they are on the right track in terms of their finances. Calling it budget prioritization plan, the school laid out a plan to get them out of debt and ensure they are out of debt. Consumers can learn a lot from these and how to handle finances the right way.

Internal audit

The school took a good close look of their internal processes and procedures to ensure there are not any loopholes in their planning phase. This is essential before they can reach out again for benefactors to believe in the system .

Consumers can do this as well in their own quest of financial freedom using any debt relief programs. Study their own spending and income and see where they can improve. There is always a big room for improving any process whether as big as a learning institution or as small as those of a family of five.

Budget cuts

As soon as the internal audit was complete, the school now has a clear picture of where budget cuts can be executed. Whether to strike out non-performing courses or control utilities, the school can save up and add that up to debt payments.

Same thing with consumers, taking on a frugal living can do wonders for the budget. It can free up some funds that you can redirect to either savings or retirement or emergency funds. See where you can lower down or eliminate expenses altogether. This will do wonders for your financial standing down the line.

Revenue increase

The school will also concentrate on increasing revenues from enrollment and cashing in on non-performing real estate. This means prioritizing those performing sources of income and letting go of those that can be sold. Increasing their revenue will help the company pay for their debt and provide cushion in case the same incident strikes their finances.

We can learn from this move by looking for ways to increase income. It could be from taking on a second job, putting up a side business or doing yard sales. The additional income can be used to pay off debt and save up for the future.

Debt refinancing

There are several options depending on the financial situation. There is no single formula that can apply to all. Each situation has to be carefully studied to discern the most suitable course of action. The school is now refinancing their debt as a way to address their debt problem.

This is one of the many possibilities to achieve debt relief. Consumers can take refinancing or consolidate their debt to make it easy to make one payment every time.

There are a lessons consumers can learn from even the biggest institutions including colleges. They have their own share of financial difficulties and their own take on how to solve them. We can look into their process and learn from their mistakes and apply those debt relief options that works.

Could You Buy A 2004 Subaru For What Your Credit Cards Are Costing You?

frustrated looking woman looking at a laptopDid you know that if you have $30,000 in credit card debt at 19% you’re paying enough in interest in just a year to buy a 2004 Subaru WRX or a 2004 Ford Focus SVT? Those two cars were recently on a list of AOLAutos.com’s best used cars for $5000. And $5000 is what you’d be paying a year if you did owe $30,000 on credit cards.

Not good long-term loans

Don’t get us wrong. Credit cards definitely have a place in your life. They can be great for buying an item when you don’t have enough cash with you to pay for it or as a short-term loan. But credit cards should never be used as a long-term loan – due to their prohibitively high interest rates — vs. a personal loan or a homeowner equity line of credit where you’d pay something like 3.99%.

If you’re working to get out of debt

If you want to get out from under that load of debt, the first thing you need to do is get a handle on your spending. The reason why you’re in debt is simple. You’re spending more each month than you have money coming in. And the only way to fix this is to determine where your money’s going. You need to then sit down and develop a budget to get your spending under control. If you find that your budget won’t handle both your living expenses and paying down your debts, you’ll have to either find ways to earn more or to cut your expenses.

Credit card transfer vs. a home equity line of credit

In the meantime there are two ways to get your interest rates reduced while you’re working to pay off your credit card debts. The first is to transfer it to several 0% interest balance transfer cards and the second – if you own your house – is to get a home equity line of credit.

So, which would make the most sense?

0% introductory rate vs. a home equity line of credit

Transferring your high interest credit card debts to new ones with 0% introductory rates or getting a home equity line of credit would both give you a lower interest rate. And either could help you pay off that debt as quickly as possible.

The fog of war

This is a phrase that is often used to describe what happens once a battle begins. It’s a shorthand way of saying that no matter how carefully a general crafts a battle plan once the fighting begins a sort of fog sets in and things don’t go according to plan. Unfortunately, the same is true about a plan for getting out of debt – things don’t always go according to plan.

A home equity loan

As an example of this, take a home equity line of credit. If you were to get one of these loans to pay off that $29,000 in credit card debt and then pay it totally off as quickly as possible, this would be a great solution. But what happens to many people is they get a line of credit with all the best intentions for paying it back. But then a bank offers them a higher limit than they need to pay off their credit card debts. They believe that’s okay and convince themselves they won’t use that extra credit.

By the way — if you’re not familiar with home equity loans here – courtesy of National Debt Relief – is a video that explains the differences between a home equity loan and a home equity line of credit.

Twice as much debt

What happens to many people is they then run into a bunch of bad luck, use up the entire line of credit and are forced to once again run up their credit card debts. And before they know it, they have twice as much debt as before they took out the loan. The same thing can happen with 0% interest balance transfer cards. People use the money to pay off their high-interest credit cards but forget to close them. They eventually find themselves short of money and begin using the old cards again and end up having both the old cards and the new ones and their balances just keep ballooning.

Have an emergency fund

If you create a budget to get your spending under control, try to make one that includes money for an emergency fund. Ideally, this fund should be the equivalent of six months of living expenses. But if that doesn’t seem doable, shoot for at least three months’ worth. Then when an emergency hits — and trust us that one eventually will — you won’t have to use a credit card to pay for it.

To escape the debt trap

If your goal is to get out of the debt trap, there are some things you should do besides creating an emergency fund.

For one thing you should close those old credit cards the minute you pay them off — whether you use new 0% interest cards or a home equity line of credit. This will cause your credit score to drop but totally eliminates the possibility that you would be tempted to use them again.

Second, if you opt for a home equity line of credit, try to get one with a limit that’s no higher than what you need to pay off your old credit cards. Some financial experts might advise you to get the highest line of credit possible, as this would help your debt-to-available-credit ratio, which could boost your credit score. But the extra points you would earn is less important than getting out of debt. The best way to improve your debt-to-available-credit ratio is to pay down your debt and not to expose yourself to taking on even more. And if you don’t get a higher line of credit than you actually need, you will never be tempted to use that extra credit.

A 0% transfer card might be best

Between the options of transferring your high-interest balances to 0% interest cards or getting a home equity line of credit, we recommend the balance transfers – but only if you’re positive you can pay off your balances before your introductory periods end. The reason for this is the transfer fees you might be charged ($300 to $500 per transfer) will be far less than the interest you would pay on a home equity line of credit over the same time period. But you need to be really careful that you do pay off the balances on those new cards before your introductory periods expire or you could end up right back where you started or in even worse financial shape.

It’s not easy but it should be worth it

Paying off a huge pile of debt like our hypothetical $29,000 is not an easy task. It takes time and self-discipline. The reason you got into trouble with debt is because you were living a lifestyle you couldn’t afford. The only way to fix this is to change your lifestyle to match your income, which will mean you will need to make some sacrifices. You might have to find a cheaper place to live, trade in your car for a used one with more miles (and not as much pizazz), quit eating out three or four times a week or stop hanging out with friends so often.

But just imagine how you will feel when you become debt free. You’ll be able to sleep better at night, which means waking up feeling refreshed and looking forward to your day. If you’ve had debt collectors hounding you unmercifully, they will go away. You won’t be paying interest on your debts so you’ll have more money to save and invest for your long-term goals such as buying a home or for your retirement. You’ll have money for an emergency so that you won’t be wiped out when you have an unexpected medical bill or car repair. You’ll be able to face the world knowing that you’re in debt to no one and that no creditor can make your life miserable.
Wouldn’t this be worth some short-term sacrifices?

10 Things It’s Important To Know Before Choosing Debt Settlement

woman looking at documentsIf you’re seriously in debt and by that we mean you owe $10,000, $15,000 or more, you’re probably lying awake at night wondering how in the world you’re ever going to get out from under that burden. Fortunately, you have several alternatives such as a debt consolidation loan, consumer credit counseling, debt settlement or filing for bankruptcy. While you might be familiar with debt consolidation loans or even consumer credit counseling, you might not exactly understand what debt settlement is and whether or not it would offer you a good way out of that debt burden. If this is the case, here are things you need to know about debt settlement.

1. What exactly is debt settlement?

Debt settlement is sometimes called debt negotiation or debt arbitration. It’s where your lenders accept less money than you actually owe but agree to treat the debt as paid in full.

2. How a debt settlement program works

The way a debt settlement program works is that when you sign up, you make monthly payments to the debt settlement company, which is deposited into a trust account. You are then not required to make any more payments to your creditors. Only you can manage your trust account and you do this through a secure login. When you have deposited enough money into your account, the debt settlement company will begin negotiations with your creditors.

In these negotiations, the debt settlement company will work with your creditors or collection agencies to settle your debts for sums that are acceptable to both you and your creditors. Once the settlement company has settled on an amount with your creditors, you then pay off the settlement either in installments or as a lump sum. Debt settlement usually means a substantial reduction in the amount of your outstanding debt. However, how much of a reduction that you get will depend mostly on how good the debt settlement company is.

Here’s a short video that explains a bit more about debt settlement and how much of a reduction you could expect based on the type of your debt.

3. When it makes sense to choose debt settlement

  • There are certain circumstances where debt settlement makes sense. They are:
  • You can’t pay your bills
  • You have unsecured debts
  • You could repay if your debts are reduced
  • You’re thinking of declaring bankruptcy
  • You’re five to six months behind in your payments

4. Debt settlement is legal

There is nothing at all that’s illegal about debt settlement. In fact, it is one of the most popular options for paying off debts. Unfortunately, there are swindlers that have made money off people struggling with debt. Fortunately many of them have been shut down because of their failure to comply with state and federal laws.

5. Why lenders accept debt settlement offers

If a lender accepts a debt settlement offer it is forgiving a part of your debt. This means it’s losing money on the deal. So why would a lender agree to work out a debt settlement? It’s because they are smart people. They understand that when your finances are in very bad condition, you could decide to file for bankruptcy. In this case, your creditors would recover very little if any money from you. This makes debt settlement a better deal for them because they will get back at least a significant part of what you owe.

6. The biggest pros and cons of debt settlement

The biggest pro of debt settlement is that you will have your debts reduced and you will no longer have to put up with debt collectors. In addition, debt settlement can help you avoid the hazards of bankruptcy, which can be severe. As an example of this, if you were to file for a chapter 7 bankruptcy, your credit score would probably drop by 180 to 200 points, you will have a tough time getting any new credit for two to three years and the bankruptcy will stay in your credit report for 10 years.

The biggest con to debt settlement is that your credit score may drop although it won’t be as severe as if you had filed for bankruptcy. The reason for this is that any time you don’t pay back the full amount of the debt, your lenders will report the account as “paid as agreed” or “paid as settled” to the credit reporting bureaus. And this will stay in your credit report for seven years. However, if you’re already having a serious problem with debt, this might not be that big a negative.

7. How long  debt settlement usually takes

How long it would take you or a debt settlement company to settle your debts will depend on how many debts you have, the type of debts and the amount of money you would have to pay for your settlements. In general, debt settlement programs require two to three years. However, the more you owe, the longer it will take. For example, if you owe $10,000 or more, it might take you two to four years to complete your program.

8. How to know you would be eligible for debt settlement

Debt settlement isn’t for everyone and although it can be beneficial, not everyone will qualify. However, it is likely that your lenders will agree to settle your debts if you have defaulted on a loan, are continuously missing payments and have some source of income. You would also likely be able to have your debt settled if you have a very large amount of debt and are facing a financial hardship.

9. Why choosing a debt settlement company could be better than doing it yourself

You might be able to do debt settlement yourself, depending on what kind of person you are. You need to be patient, a good negotiator and able to understand complicated legal documents. Plus, you must have the cash available to pay for any settlements you are able to negotiate because that’s one of your chief bargaining tools – that if the lender will settle with you for less than you owe, you will send immediate payment. If you don’t have the requisite cash on hand to pay for your settlements or if you don’t feel that you would be good at negotiating with lenders, your best option would be to turn your debts over to a professional debt settlement company.

10. How to select  good debt settlement company

There are numerous debt settlement companies available via the Internet but as noted previously, some of them are swindlers. Here are some tips that could help you select a good and ethical one.

  • Does the company require you to pay an upfront fee? It is actually illegal for debt settlement companies to charge upfront fees but some will try. Avoid them at all costs.
  • How much does the debt settlement company charge? Ethical debt settlement companies will tell you upfront how much they charge for their services. If fact the good ones won’t charge you anything until they have settled your debts to your satisfaction and presented you with a payment plan that you approve.
  • Read reviews. There are reviews available of all the top debt settlement companies. Check them out to make sure that most of the reviews are positive. Some of them will be negative as that’s just the nature of the business – it’s impossible to make everyone happy when it comes to money and debt.
  • Check with the Better Business Bureau. The top debt settlement companies will be members of the Better Business Bureau and will have a rating of at least an A.
  • Make sure it’s licensed in your state. Not all debt settlement companies are licensed in every state. Be sure to check to make sure the company you’re thinking of using is licensed in your state.
  • Be certain to understand your contract. Your contract with a debt settlement company should be clear and easy to understand. If the one you’re offered is complex, complicated and difficult to understand you should either take it to a friend or an attorney for help or find another company.

Three Simple Steps For Getting Out Of Debt

frustrated looking woman

1. Add up the damage

There’s a thing about we humans that we sometimes find it easy to ignore problems. In fact, there’s even the old expression about “turning a blind eye.” And make no mistake about it, being heavily in debt is a bad problem. But turning a blind eye to it doesn’t make the problem go away. It will just make things worse. If you haven’t done this already, sit down and determine exactly how much you owe and to whom and at what interest rates. You will need to look at everything and not just your credit card debt. This includes personal loans, student loans, car loans and even your mortgage. You will then need to do three important calculations and determine:

  • What you owe on your consumer loans and credit cards
  • The amount that interest costs you each year
  • How much of your monthly salary goes towards paying your debts

2. Determine the root of the problem

Before you do anything else, such as using your retirement savings to pay off your debts, you need to be honest about what got you into trouble in the first place. What you don’t want to do is put a fix in place while ignoring the cause of the problem. This means you need to determine where your money goes. If you have not been keeping track of your spending, it’s critical that you begin to do this. This will help you understand those areas where you could cut back. There are two ways to do this. You could do it the old way by saving your receipts and then typing the numbers into a spreadsheet program or you could use one of the numerous financial management programs available like Mint.com or Quicken. Mint is free and can be used on your computer or on virtually any smart phone. It’s by far the most popular online tool for managing personal finances and for good reason. It’s sort of the Swiss Army Knife of personal financial management.

3. Create a teamfamily reading a book

If you’ve followed the first two steps for getting out of debt you now have all the information you need. You know whom you owe, how much you owe and how much interest you’re paying. You should also have learned your soft spots or those areas where you could cut back on your spending. But before you decide where to make those cuts, hold a family team meeting. You’ll get better results when this is a joint effort. If you have children you should even involve them in tracking your spending and creating ideas for trimming expenses. As a general rule, reducing your spending is usually better than cutting out categories. This is because it’s practically pointless to come up with a budget if you can’t stick to it. Of course, you don’t have to tell your kids every little detail of how you stand financially but it’s important that they understand why it is that you need to make changes and what this will require.

While this may not be true for you, most people who have chosen to cut back on their spending have found it’s easiest to do this in categories like clothing, dining out, entertainment and groceries. Your “team” might even be able to find ways to cut back on “fixed” expenses such as automobile insurance, utilities and transportation.

Building a better budget

If you don’t already have a budget it’s important that you create one. Whether you use Quicken, Mint.com or some other app it’s critical that you do this in order to get a fix on your finances. This can also help you stop wasting money on things such as overdraft penalties and late fees. Plus, it will enable you to eventually reach the point where you’re spending less money than you earn and will have money to put into savings. Assuming that you’ve already added up your income and tracked your monthly spending, here are four other steps you could use to build your budget.

Remember the little things. It’s easy to group your spending into the big categories such as food or transportation but you may be spending a lot that’s hard to group into major categories. This could be money you withdraw from an ATM and use for your day-to-day needs. But it’s critical to track where that cash is going. What this may require is for you to keep a journal of your cash expenditures for the next four weeks. You would then be able to use that information to extrapolate the amount of cash you’re going to need for a typical month and then build this into your budget.

Expect unexpected expenses. There are unexpected expenses that you should expect or they can totally derail your budget. Unexpected expenses you should expect are things such as holiday gifts for your kids’ teachers or for your trash pickup guy. Or how about getting hit up with requests that you buy stuff for fundraisers or chip in for a birthday cake for a fellow employee? You know these are coming so set aside enough money to handle these recurring one-off expenses. Then be sure to include them in your budget.

Watch out for items you could cut. As noted above, you should by now have been able to find places we you can reduce the fat. You might be able to cut membership in an expensive gym, cancel a monthly subscription to something or slash those premium cable channels. You should always wait until things go on sale to buy them. You should turn down your thermostat in cold weather and up in summer. Also, when you get your car paid off, don’t immediately trade it in for a new one.

Get some high tech help. As mentioned above, personal finance program such as Quicken or Mint offer built-in tools to help you develop a budget. With almost all of these services, whenever you make a deposit, pay a credit card bill, write a check or send off an electronic payment, you will be asked to assign it to a specific category. If you bank online as we do, you should be able to download those payments and deposits directly from your bank. This would save you from having to enter them by hand.

Getting out of debt is certainly not as easy as getting into debt but it’s doable. We know of people who put together debt management plans that helped them become debt-free in three years or less even though they owed more than $20,000. If you follow the information in this article, there is no reason that you also couldn’t be debt-free in three years or less. And just think how good it would feel to be able to open the day’s mail or to answer the phone without that awful feeling in the pit of your stomach.

10 Things You Can Give Up To Increase Your Debt Payment Fund

frustrated looking woman looking at a laptopDespite the rising confidence of consumers towards our economy, it remains to be a fact that we need to continue working hard to finance our debt payment fund. The recent data from the Federal Bank of New York revealed a continuing rise in consumer debt. The number itself is already alarming. If you take into consideration the long term effects of debt, you will realize just how important it is for us to lower our current debt level.

An article published early this March on USAToday.com revealed how student loans are expected to have a long term impact on our economy. The article mentioned how more 40 million Americans owe $1.2 trillion worth of student loans. It has now surpassed all types of consumer credit – save for housing loans.

It is a devastating picture for young adults to be so buried in debt even before they have been given a chance to prove themselves in the corporate world. While this may drive when to work hard to finance their debt payment fund, it puts them in a compromising position when it comes to investments. At an age when they should have been driving their own vehicles, they could not afford it. Home ownership is also something that is delayed because of this debt. Instead of buying their own home, they are forced to live with their parents just so they can save up and pay down their student loan debts.

If you scrutinize the statistics about debt, you will realize that we need to look for extreme measures to increase debt payment fund. But in some cases you will realize that the changes does not have to be too drastic. You can spot a little sacrifice here and there and it can add up as a huge amount in your monthly credit payments.

10 things you can cut off to have more money for debt payments

Whether you are in the midst or still trying to survive a looming financial crisis, you should know that no small feat is too little for you to try. Do not think that the small savings you get from simple changes will not matter. When it comes to your money, even a penny will matter.

Given that thought, here are 10 things that you may want to consider cutting off to help you grow your debt payment fund.

  1. Less dining out. Compared to the frequency that we spend eating in our homes or in restaurants and the amount that we spend on each, you need to realize that the latter costs us so much more. If you are used to grabbing that take out every night – you need to change that habit. Just do your grocery every weekend and cook your meals at home.

  2. Brown bag your lunch. Another simple change that can accumulate to be a huge addition to your debt payment fund is when you brown bag your lunch to work. If you do not like cooking in the morning, you can prepare your lunch at night. Just heat your food in the microwave when you get to the office. That will really cut back on your daily expenses by $5-$10. If you compute that at 25 days a month, it will add up to $125 to $250. In a year, that can add $1,500 to $3,000 towards your credit contributions.

  3. Cancel gym memberships. Inquire with your local community center if they have their own gym equipment. You can utilize that to save on gym membership fees. This can save you around $100 a month and you do not have to sacrifice your exercise routine. You can also access training videos via Youtube. Jogging and making use of your trusty bike can also help you with your cardio exercises.

  4. Bundle your Internet. You do not really have to cut your Internet subscription but you may want to bundle it together with your phone or cable subscriptions. The savings will not be as great as your other options but it can add up.

  5. Cut the cable. Some people think that they cannot live without a cable subscription when it fact, they can. If you find yourself wanting to catch the latest sports event, why not organize a get together a friend’s house (who has cable) and watch as a group? Not only will it cost you less, it will also give you a chance to bond with your peers.

  6. Eat healthy. If you are wondering how you will cut down on food costs, prioritizing the healthy food choices will do the trick. Believe it or not, the unhealthy food are sometimes the ones that cost you unnecessary money. Why not cut back on potato chips, soda, chocolate and other junk food? Concentrate on rice, beans, vegetables and oatmeal. These will fill you up without having to eat a lot. Not only as your saving, you are taking in healthier food choices.

  7. Avoid new clothes. Unless it is really necessary, do not buy new clothes. Who cares if you wear the same thing over and over again? With all the tips you can see online or in magazines, you can accessorize the same outfit and make it appear like you are not repeating your wardrobe.

  8. Buy used everything. From furniture to clothing and electronic, you may want to consider buying only used things from now on. At least, until you have paid off your debts. If you really have to buy clothes, just buy used and whatever you save should be placed in your debt payment fund.

  9. Use coupons. For some people, coupons have become their way of living. We even have reality shows dedicated to this purchasing tool. The dollar or two that you save for every purchase can really boost your credit payments.

  10. Lower car expenses. You do not have to go to the extreme by getting rid of your vehicle but you may want to stick with just one. Not only will you benefit from the sale of the second car (if you have one), you will also cut back on costs when it comes to insurance, gas, car repairs, etc. You can check how much your car will really cost you if you go to Edmunds.com. They have a true cost to own calculator that can really help you out.

You can opt to choose only a few from these or you can come up with your own set of saving strategies. Do not worry about the amount at first. No matter how small, remember that it will all add up in the end.

Pay off debt fast to avoid the negative side effects

The Bank for International Settlements published a study on BIS.org that discussed the effect of debt in general. The study revealed that when you borrow in moderation, debt can improve your personal wealth and aid in the growth of your finances. But if it is already too high, it can be destructive already. The study mentioned that for household debt, 85% of the GDP is the limit. Anything more than that can drive the consumer down.

In truth, debt can dictate how you live your life. If it eats up a huge portion of your income, you cannot do anything but comply. Even if you want to move to a new job, you need to make sure that the income is enough to pay for your debt payment fund.

But beyond all of this is the alarming effect of debt in your emotional well being. Here are some of the negative effects that you can expect from being in debt.

  • Debt stress. This is a serious problem that borrowers are facing. It can affect not just your everyday disposition, it can also affect your health.

  • Relationships. Money is a powerful influence in a marriage, or any relationship for that matter. If you are not careful, you could end up putting a serious strain in the relationship if you do not deal with your debt trouble.

  • Delay financial investments. Another effect of debt is it can delay your personal wealth. It can keep you from investing in a car, a business or a home. That will seriously set you back.

These are more are some of the reasons why you have to work hard to grow your debt payment fund. Deal with your credit situation before things get out of hand.

How To Pay Off Debt If You Are Not Paid Enough For A Job You Love

telemarketerHow’s this for a difficult scenario. You spent months after graduation stressed out about getting a job despite a tough job market. When you finally found a job opening, you are ecstatic to learn that it is a job that you know you will love to do for decades. But here’s the catch – it will not pay you enough for the type of lifestyle that you want to lead. How will you decide between your dream job and having the finances to support your dream lifestyle?

Most people will actually choose the latter. They will sacrifice their sense of personal fulfillment and happiness with work just so they can earn more money. And guess what the main reason is: to pay off debt. They will lean towards the practicality of being able to pay for their debts instead of pursuing the career that they know they love to do.

But there is some logic to pursuing the job that you love despite not giving you enough money to pay off debt. It may seem impractical but we have some sound reasoning that could help you decide. The work that you will do will take up at least 40 hours of your time every week. Imagine feeling miserable for 40 hours each week. If you think that the lifestyle you can afford will make you happy, think again. In most cases, people who come home from a bad day at work will bring that negativity with them. It will be felt by the people they live with.

But if you pursue a job that you love to do, your sense of personal fulfillment and happiness will be greater compared to the other scenario. And even if you start out with a low paying job that you are passionate about, you will most likely be more productive because of the happiness level that you have towards it.

Do not be too quick to shut out the jobs that you love to do just because it will not pay you well. There are two options for you to make ends meet so you can afford to pay off debt accounts that you owe. You can either earn more or spend less during a debt crisis.

Lower your expenses if you want to increase debt payments

The first option is for you to cut back on your expenses. If you are a new graduate, this may be easier for you. People who are older and have families will usually have a harder time changing their lifestyle to fit their low income. The longer you have grown accustomed to an affluent life, the more difficult it will be for you to make the change. But if you concentrate on the priceless benefit of doing a job that you love, it should be a sacrifice worth making.

The reason why it is difficult to make this transition is because Americans are spenders. That is according to an article published on CNBC.com. The article even cited a statement by former President George W. Bush back in 2006. Apparently, he said that the best help that Americans can give their country is if they went shopping.

In this country, everything around us encourages us to spend. But that is a lifestyle that we can no longer follow. You need to pay off debt by lowering your expenses. That will free up more money from your limited income.

To start, you need to simply concentrate on your priority expenses. According to the latest consumer expenditure data published on the Bureau of Labor Statistics website (BLS.gov), the average expense per consumer in 2012 is $51,442. It is noted to have increased by 3.5% from the previous year, 2011. Here are the top expenses that people usually spend on.

  • Housing: $16,887 (32%)

  • Transportation: $8,998 (17%)

  • Food: $6,599 (13%) (at home $3,921; away from home $2,678)

  • Personal insurance/pension: $5,591 (11%)

  • Healthcare: $3,556 (7%)

  • Entertainment: $2,605 (5%)

  • Cash Contributions: $1,913 (4%)

  • Apparel and services: $1,736 (3%)

  • Other expenses: $3,557 (7%)

If you notice, the food expense is high and that is alright. But we are wasting a lot of money on eating out. You can cut back on expenses if you only opt to cook and eat more at home. Not only that, transportation costs can find more room for savings. You can carpool with colleagues or opt to bike to work – if the distance can make it possible. There are so many ways that you can cut back on your expenses at home. And if you cannot afford, it simply opt not to spend on it. Prioritize what is important like the funds you will use to pay off debt.

Increase income to grow your credit contributions

The second option to make your low income job work for you is to set up side jobs that will earn you more income. In fact, this is common for Americans.

An article published on BostonGlobe.com revealed that Americans hold multiple jobs to help supplement their primary source of income. The article said that 4.9% of working adults hold more than one career. Half of them have one full time job and a part time job. They are called the moonlighters.

A lot of people have opted to increase their income through a second career but we encourage you to set up a passive income source to avoid burning yourself out. The article mentioned that people seek to get payment for the amount of time that they spend working on their hobbies and interest. They will spend some time doing handyman repairs, some will tutor or work on computers in their spare time. Any skill or interest that you have can be capitalized on so you can earn money on side to pay off debt without feeling too burnt out.

Here are some of your options to earn more money.

  • Freelancing. This is when you use your skill to earn money and get paid on an output basis or based on the time that you spend working on a job.

  • Passive income. There are so many options to earn a passive income. You can use a spare room in your home and rent it out. You can let other people rent out your extra vehicle. You can also convert your garage into a storage space for other people to rent out. These are options that will help you earn without necessarily having to work for it all the time. Writing a book and earning off it’s sales is also an option.

  • Earn from a hobby. If you love to garden, offer to plant and take care of the garden of your neighbors. Not only will you be going something that you are good at, you can help your neighbors cut costs on food. You can also offer to cook for colleagues and brown bag their lunch. That will help you earn extra through the lunch payment they will give you. Babysitting is also one way to earn more.

  • Teach a skill. If you are good at playing instruments, you can opt to take on student and teach them what you know. Cooking and baking classes will also work. If you love sports, this is also something that you can coach every summer.

Of course, you can always opt to simply ask for an increase from your boss. Given that it is something that you love to do, you will find the motivation to be as productive as you can be and improve your skill. That can be a leverage in negotiating for an increase.

Debt relief options for low income households

While you work on your options to increase the money that you can allocate to pay off debt, you need to choose a debt relief program to further improve your chances of achieving a debt free life. You have three options to help you out.

  • Income based repayment for student loans. This option will help you set a monthly payment on your student loans depending on the amount that you earn every month.

  • Loan forgiveness for those working in public service. This is mostly for student loans too. You may be qualified for a loan forgiveness if you work in the military or another career in public service.

  • Debt consolidation. For all the other debts that you owe, you can opt to use debt consolidation. This type of debt solution will help you restructure your payment plan so you can make lower monthly contributions towards your debts without being penalized for it. Here is a video that discusses your different options to consolidate debt.

Sacrificing a high paying job to do something that you love is rewarding. Do not worry about how you will pay off debt because you have so many options to help make it a less of a burden.

Tips For Resolving Debt

man chained to a debt ballYou’ve undoubtedly seen those TV commercials where a guy is sitting around a table of children asking questions like, “is it better to get something now or something later.” Well, our question for today is, “is it better to be in debt or debt free?” If you’re typical, your answer was it’s better to be debt-free. The good news is that you could accomplish this in the year 2014 just by resolving to do some fairly simple things.

Get your finances organized

If you haven’t already done this, it’s important tp make a list of your bills, your interest rates and how much you’re accumulating in interest charges. You should create a filing system and a budget. The reason why most people get into trouble is because they didn’t realize what was happening until it was too late. If you get organized and pay attention to your bills you can keep this from happening.

Set up automatic transfers

Why write checks every month, buy stamps and mail your bills when you could set up electronic bill pay? Your bank probably offers online banking tools such as sample budgets, calculators and the ability to pay your bills electronically. If not, you could get an app for your computer or smart phone that would do the job for you. You should also arrange for automatic transfers from your checking to your savings account every payday. If you don’t see the money, it’s less likely you’ll miss it.

Get a financial buddy

Find a friend or relative that would be willing to help you create a budget and stick to it. It’s a fact of life that you’re more likely to stay with your goals when you don’t want to disappoint the person who knows what they are.

Shop fast

The best time to go shopping is when you’re in a hurry. This is because the less time you spend in a store the fewer items you’ll probably put in your shopping cart. Also make a list of the things you need before you go shopping. Then stick to that list and buy nothing that’s not on it.

Make smart and reasonable resolutions

If you’re making resolutions for 2014, be smart about them. Be careful about resolutions such as “go on a nice vacation” or “lose 30 pounds. These can result in travel expenditures or the cost of a gym membership. When you’re writing down those new resolutions, choose ones that don’t put a dent in your wallet. Also make sure that they’re realistic. Your 2014 resolutions don’t have to be big ones. Think instead about those that would help you save money and that are reasonable, such as “bring lunch to work three times a week” or “put $25 extra a month into my credit card payment.”

Pay cash

If you find you are unable to pay off your credit card balances every month, you should definitely resolve to pay cash more often. There’s just something psychological that makes paying cash more difficult than using a credit card. For that matter, you probably shouldn’t take a credit card with you when you go shopping so that you won’t fall prey to temptation.

Tour your house

Take a tour of your home and look for ways that would save you money such as deciding to lower the temperature during the winter months or adding insulation. Did you know that every degree you lower the temperature in your home will save you as much as 5% on your monthly heating bill? It’s true and is an easy way to save money.

Hunt for couponsdiscount and promo

There are people who say you shouldn’t ever pay full price for anything and I definitely agree. There are coupons available that would save you money on everything from your groceries to a night on the town. Here are nine of the most popular coupon websites you should check out.

  • Coupons.com (http://www.coupons.com/)
  • Retail Me Not (http://www.retailmenot.com/)
  • Groupon (http://www.groupon.com/app/subscriptions/new_zip?)
  • Shop at home (http://www.shopathome.com/)
  • Brad’s Deals (http://www.bradsdeals.com/)
  • Slick Deals (http://slickdeals.net/)
  • Coupon Cabin (http://www.couponcabin.com/)
  • eBates (http://www.ebates.com/)
  • Fat Wallet (http://www.fatwallet.com/)

Make small changes daily

You don’t have to make huge changes in order to pay down your debt. Sometimes just making small changes will get you where you want to be. You should write down a list of changes that you could make in your day-to-day routine that would save you money, then create incentives that would help you stick to them. Here are 12 changes you could make that would save you money you could then use to pay down your debts.

1. Shop and re-shop your auto and home policies – If you haven’t gotten competitive bids on your auto and homeowner’s insurance for the past couple of years, now would be an excellent time to do this. Insurance companies are as competitive as the auto companies. Shop around a bit and you’re likely to cut your premium substantially.
2. Have a massive garage sale – Get rid of all that stuff lying around the house that you either don’t need or aren’t using and turn it into cash. You might be surprised at how much money you could raise in just one single weekend.
3. Use a grocery store awards program to save on gas – Our supermarket has won our undying loyalty with its program that awards points we use to cut the cost of gas. We had enough points recently that we were able to fill up one of our vehicles for just $20. It was amazing!
4. Go to matinee movies – Many theaters price their afternoon movies cheaper than the same ones that run in the evening. You could see that new movie on a Saturday afternoon rather than Saturday night. It would be the same movie but the tickets should cost much less.
5. Get books and movies from the library – Our library offers books, CDs and movie DVDs you can check out for a week. The movies won’t be first run or maybe not even second run but you should be able to find classics and great family films. For example, next Christmas why not check out “A Christmas Story” or “National Lampoon’s Christmas Vacation” rather than buying the DVDs.
6. Plan your errands to save gas – Don’t do three errands in the morning and then another two in the afternoon. Group your errands to save gas. Start with the one that’s furthest away and then work your way back towards your house.
7. Call you utility companies and ask about a budget plan – Many utilities offer budget plans. The way these work is that they take your total billing for the past year, divide it by 12 and then bill you 1/12th of that amount every month. Yes, you probably will have a higher natural gas bill in the summer than you’re used to but your winter bills should be much smaller.
8. Use exercise videos and walk or hike instead of using a health club membership – A health club or gym membership can cost anywhere from $50 to several hundred dollars a month. If you belong to one of these clubs, you could cancel your membership, save the money and resolve to either use exercise videos or to just hike or walk to get your exercise. Most experts say that if your goal is to lose weight all you have to do is walk 30 minutes a day every day of the week.
9. Make extra dinner servings then eat them for lunch the next day – Instead of making dinner for two or four, double your servings and use the leftovers for either lunch or dinner the next day.
10. Buy your most expensive groceries – meat, cheese, paper products, etc. – in bulk
at Costco or Sam’s Club. You’ll get the same quality but at much lower prices. Paper products are especially good items to stock up on because they never go bad.

Pick just three or four

It could be a mistake to try to implement all 10 of these tips beginning in early January. Instead, pick three or four and start working on them. Once you feel that you have them mastered you could start working on another three or four, etc.

Do You Have What It Takes For DIY Debt Settlement?

woman drowning in debtIf you feel as if you were drowning in a sea of debt and saw a sign advertising “bankruptcies for as little as $500″ you might be very tempted to call that attorney and say “sign me up.” However, this could be a very serious mistake. A bankruptcy will stay in your credit report for up to 10 years and in your personal file for the rest of your life. Once you file for bankruptcy it will be at least two to three years before you will be able to get new credit. And when you are able to get credit it will have a very high interest rate. You may even have to pay more for your auto insurance, your utilities and your rent.

A better option

If you’re five months or more behind in your credit card and loan payments a better option might be to settle those debts yourself. This will cost you less than hiring a professional to do it for you and puts you in control of the settlement process. However, many people won’t try DIY debt settlement because they just don’t want to have to interact with banks, collection agencies and other creditors. DIY debt settlement can seem like it would be a very scary experience and you may have heard that it can be a brutal process. And it definitely isn’t for the faint of heart. DIY debt settlement requires hard work, persistence and the willingness to deal with debt collectors for months or even years.

The goal

Of course, the goal of debt settlement is to settle your debts for less than you actually owe. In fact, if you have the guts, time and negotiating skills you should be able to settle your debts for 50% or even 40% of what you owe.

What you need to know

Debt collector hollering into micBefore you decide to try to settle your debts yourself, there are some things you need to know. First, it will probably be a time-consuming and frustrating process. You will have to be ready to field calls from angry lenders and possibly even debt collection agencies. Debt settlement will damage your credit though not as badly as a bankruptcy. Many financial experts believe that a bankruptcy will drop your credit score by as many as 200 points, while debt settlement might reduce it by only 140 points.

How to determine if debt settlement is for you

The first important question you need to ask yourself is whether debt settlement would be your best option. To answer this question you will need to look at your whole financial picture and alternatives such as a family loan or consumer credit counseling.

How to do debt settlement

As noted above, you will probably have to wait anywhere from three to five months before you initiate negotiations with your lenders. The reason for this is because they are usually unwilling to negotiate until they believe that if they refuse to settle you will file for bankruptcy and they will then get nothing.. Many experts say that the best way to begin is by writing a simple letter stating that you had run into financial problems, that your situation had improved somewhat and that you wanted to settle your debts. You should offer a partial payment of each debt if the lender agrees to remove the delinquent payments and collections from your credit report. Be sure to ask each lender to sign and send back the letter. This way you would have a paper trail in the event you needed to prove that the lender had agreed to settle for the amount you offered.

A small silver lining

While debt settlement will have a negative affect on your credit, there is a small silver lining. If you can take your outstanding balances down to zero, this might help mitigate the damage to your credit because 30% of your FICO score is determined by how much you owe. Also, many lenders will not provide credit to people who have outstanding delinquencies. So if you can settle your debts, this can put you in a position to start rebuilding your credit.

Settling debts like a pro

If you feel you have what it takes to settle your debts yourself, here are some tips that could help.

1. Talk first to an expert.

Get some expert advice from a tax accountant before you plunge into DIY debt settlement. This is because there it could have tax implications.

2. Write out a timeline

You want to settle your debts as fast as possible as this increases your chances of success and cuts the risk that you would end up being sued. The ideal is 12 months or less and you should never go beyond 24 months. Take a hard, realistic look at your finances and assets to determine how quickly you could come up with the money you will need to make the lump sum payments that will be required to settle your debts.

3. Find the money

Your chances of successfully settling your debts will increase if you can find assets or other ways to come up with the money you will need. For example if you have a motorcycle sitting in the garage or a second car that’s not absolutely necessary, think about selling it. You might also have collectibles such as coins, antiques and baseball cards you could sell. Or you might consider refinancing your mortgage, getting a loan from a family member or taking on a second job.

4. Ditch the emotions

If you’re you’re typical, you may feel shame, guilt and fear about debt you can’t manage and collection agencies and banks will try to take advantage of those emotions. Forget all this and treat the settlement as if it were a business transaction. Also, try not to get angry if you are turned down or if a lender makes a ridiculous counteroffer. Remember, it’s not about the emotions. It’s about your money.

5. Create a system

If you’re average, you will have about six accounts that you will need to settle. Multiply this by several calls a day – especially if there is one or more collection agencies involved – and you can see that you will be receiving a lot of calls. You might want to assign those people a silent ring tone on your cell phone to help manage the calls. You might also get collection calls routed to another phone – a second cell phone, a Skype account or a magicJack. Then you can listen to those messages and return the calls on your own schedule.

6. Explain the problem

There’s no way you’re going to be able to settle your debts unless you have a real hardship. This needs to be something such as you lost your job or your spouse or got hit by a tornado. It’s best if you can detail your situation so that your lenders and debt collectors will understand just how underwater you are. For example, if you’re trying to settle a credit card debt you may not need a lot of evidence. But if you’re trying to negotiate on a second mortgage, you may have to provide copies of bills and even tax documents.

7. Get it all in writing

Always get everything in writing before you pay a cent. This is especially important if you reach an agreement with the original creditor or a collection agency over the phone. If you fail to do this, the amount of money you thought would take care of your debt might end up being counted as just a partial payment. Understand that when talking to a debt collector, he will say anything to get you to pay. It’s up to you to not pay anything until you have the entire settlement in writing.

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