When you’re looking for debt relief, you’re in a vulnerable position. You’re deeply in debt, often to various different creditors, and you’re at a turning point. Do you keep on going, paying your monthly payments on time, accruing interest and never making much progress towards getting out of debt? Or, do you do something serious and start to make significant strides towards becoming debt-free?
In this kind of situation, it’s not always easy to think straight and make sure that you consider all your options. In reality, it’s hard to even know what all of your options are, much less evaluate them in a rational way.
So, let’s run down everything that you should consider when you’re seeking debt relief. Following these tips won’t guarantee that you’ll successfully eliminate your debt, but they can definitely help you figure things out.
How do you know if you need debt relief?
First, consider if you’ve exhausted all the options at your disposal for paying off your debt on your own. If you don’t really need to enlist the help of a debt relief professional, then you might be better off just trying to pay down your debt on your own.
Did you control your spending?
When you realized that you were getting deeper into debt, how did you react? Did you change your approach to spending money? Or, did you carry on much the same way as before, keeping up the habits that got you into debt in the first place?
That’s not to say that every person in a tremendous amount of debt did it to himself or herself. It’s just to say that when you do find that your debt is adding up, your first move should be to control your spending, save up some money, and use that to try to pay down your debts.
If you didn’t make an effort to do that, try that first. You’ll be surprised how much money you can save if you really put your mind to it.
Did you follow a budget?
Making and keeping up with a budget should be priority number one when it comes to managing your money. This is doubly true when you’re dealing with debt.
Making a budget forces you to take a full account of your finances and figure out where you’re overspending. By directly comparing your income to your expenses, you can more clearly see just how much wiggle room you have. By setting limits on your spending, you can force yourself to save more money to use to pay off your debt.
Didn’t make a budget and never have? It’s easy.
Open up a new spreadsheet. Add your total income for the month (estimate as intelligently as you can, if you have to). List your fixed essential expenses, such as rent and car payments. Then, list your variable essential expenses, such as groceries and gas for your car. Then, add up your minimum monthly payments for your various debts.
Compare your income to your expenses. The difference is how much money you theoretically have each month to pay down your debts if you follow this budget. If that’s enough money to make a dent in your debts, then you’re on the right track.
Could you increase your income?
Making more money is easy to say and hard to do, but it’s possible, and any extra money you make can be vital for paying down your debts.
If you can, look into taking on a second job. With time constraints, this might not be an option for everyone, but it can be a blessing for people who are serious about paying down their debts. A second job means a second paycheck devoted to paying off your creditors.
Even better; try to find a way to get a promotion at work. When a promotion opens up, such as a managerial position, make sure you apply for the position. Express your interest in taking on a more serious role in the company to your superior. Try to get ahead! A promotion means more money without having to sacrifice more of your time, which can be huge when you’re trying to pay down your debts.
Did you have a payoff plan?
Many people make the mistake of assuming that if they pay their minimum payments, their debt is going to go away on its own. For the most part, they’re wrong. While your minimum payments seem like a lot of money, and they do chip away at your total debt over time, they don’t make very much progress very quickly. And, since they keep your total balance relatively high, you’ll accrue more interest with each passing month during which you carry a balance.
For this reason (and many more), it’s vital to have a payoff plan for paying down your debt. This strategy helps you focus your efforts and make efficient progress towards becoming debt-free.
The most common methods are the debt snowball and the debt avalanche. With the snowball, you focus on paying down your lowest balance first, regardless of the source or the interest rate. That means you can eliminate that payment sooner, freeing up more of your resources and giving yourself a small victory.
With the avalanche, you focus on the debt with the highest interest rate. This method often saves you more money over time, but it can take a while to make any significant progress. That makes it easier to fall off the wagon and stop following your payment plan.
If you tried all of these methods, and you still can’t get a handle on paying down your debt, then it may be time to start considering professional debt relief help.
What are some common debt relief options?
Those in need of debt relief have options. Bankruptcy, debt management, debt settlement, and debt consolidation are all viable alternatives for those that need a bit of help getting back on track.
Those in need of debt relief have options. Bankruptcy, debt management, debt settlement, and debt consolidation are all viable alternatives for those that need a bit of help getting back on track.
Bankruptcy
Bankruptcy is a process that structures how you’ll pay off your debts under the protection of a federal bankruptcy court. This legal process is open to both individuals and businesses.
Two types of bankruptcies exist: Chapter 7 bankruptcy and Chapter 13 bankruptcy.
With Chapter 7, your property may be liquidated in order to pay down some of your debts not tied to specific pieces of collateral. The government won’t take everything you own, as there are legal protections for things such as your car, clothes, and furniture, but it could take quite a bit at the outset of the process.
If you have secured debts (i.e. debts tied to a specific piece of collateral), you may have the option of continuing to pay money towards your creditor each month or giving up the collateral.
With Chapter 13 bankruptcy, you need to have a steady and significant source of income. In these cases, you propose a payment plan to the court detailing how you’ll pay off a portion of your debt over the next 3 to 5 years. The amount that you’ll have to repay is proportionate to your income. In this sense, Chapter 13 is more of a reorganization of your debts.
Keep in mind that bankruptcy does not apply to all types of debt. Also, remember that it will probably have an extremely negative impact on your credit score, which can affect your eligibility for loans, as well as your ability to find a job or a place of residence.
Debt Management
With a debt management plan, you’ll likely work with a credit counseling company to pay back your debts in full. Credit counselors work with credit card companies to set up these payment plans, often seeking to get interest rates reduced or fees waived to make it easier for you to pay the money back.
Credit counselors don’t just help you change the terms of repayment, though. Often, they force you to change your spending habits and financial outlook by mandating that you close your credit accounts and do not use any more credit over the course of the repayment period. That can be a tough transition for someone accustomed to using credit all the time, but it can also change your life for the better.
Credit counselors do what they can to help make repayment easy; however, at the end of the day, it’s up to you to keep up with the plan put together. Failure to make payments can easily get you knocked out of the plan, and then you’re back to square one.
It’s also worth noting that suddenly closing credit accounts can have a negative effect on your credit score. If it means getting out of debt sooner, though, it may be worth it.
Debt Settlement
With debt settlement, you work directly with a company that claims it will be able to help you negotiate a smaller overall payment to your creditors.
It goes like this: You stop paying your creditors anything at all. Instead, you pay into a savings account managed by your debt settlement company for a defined period.
Once you stop making your payments to your creditors, they start to get nervous that they’ll never get their money back. Therefore, they start to call you or have collections agencies contact you in order to encourage you to pay up.
In some cases, your debt settlement company can help you avoid some of that harassment at the hands of your creditors. Either way, though, your creditors aren’t going to be thrilled.
After you’ve built up a significant amount of money in the savings account, your debt settlement company goes to your creditors with a proposition. They can accept a lump sum drawn from the savings account, as long as they forgive the rest of your debt and stop harassing you.
This approach isn’t a sure thing to work, but you’d be surprised how many creditors will gladly take the certain money now in exchange for letting the rest of your debt go.
There’s plenty to be wary of, though. On one hand, the debt settlement process can wreak havoc on your credit score, especially if your debt settlement company mandates that you close all of your credit accounts in the meantime.
Additionally, numerous disreputable debt settlement companies exist in the marketplace. They will prey on your vulnerabilities, take your money, and never really deliver on the things they promised to do for you.
Debt Consolidation
With debt consolidation, you consolidate all of your various debts into a single monthly payment with a single interest rate and due date. This is often, but not always, accomplished by taking out a large loan that is usable to pay off all of your debts at once.
Debt consolidation is popular because it can save you quite a bit of money in the short term and in the long run. Your total debt consolidation payment may end up being less per month than the total minimum payments you were paying before. It may also have a much more forgiving interest rate, which can save you quite a bit in the end.
That said; debt consolidation isn’t a great option for everyone. You may need to have good credit in order to qualify for a debt consolidation loan, and many people who are swimming in debt do not have that. It also might be a case of someone treating the symptom, but not the disease. If you use debt consolidation to free up some credit, only to run up your debts again once you start to pay it off, then you’re worse off than you were before. For debt consolidation to work, you have to be willing to change.
If you’re interested in what debt consolidation can do for you, take a second to learn more about National Debt Relief. We’ve helped scores of people just like you get out of debt in a timely fashion and take control of their lives. And, when it comes to debt consolidation companies, we like to think we’re one of the best. Just check out our reviews!