Taking Control of Debt

Regardless of the reason someone finds themselves in financial distress there are always solutions for dealing with it. If you find yourself facing overwhelming debt and are struggling to find a solution, here are several strategies that can help you get control of your debt before it becomes unmanageable.

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Stop Creating More Debt

In today's world it's easy to fall into debt because of just one emergency. That's more a reflection on our modern challenges than on you. If you're reading this then you're seeking actionable steps toward remedying your situation. Kudos to you. The first step to stop creating more debt is taking stock immediately of your unnecessary expenses. This stops a good part of the snowballing. Even a big snowball will eventually melt if it stops rolling. Since everyone has a unique dynamic, stick with what's necessary and weed out the rest. Take this new master list and rework your budget accordingly. You're now ready to research the below options.

The Necessities:

If you're having trouble deciding what's necessary, review the following short list and use what applies. Basic human needs include food, clothing, shelter, heat and health insurance or a health emergency fund for you and your dependents. You also need transportation whether it be a budget for trains, taxis and buses or a car and car insurance. It's also imperative for car owners to have an emergency car repair and alternate transportation fund for your commute. Other unavoidable living expenses may include:

  • Homeowners Association
  • Renters Insurance
  • Property tax
  • Phone (You may have a landline and a cell phone)
  • Child Care and After school programs
  • Life Insurance and Retirement Savings and Kids Benefits

Other necessities may include your work uniform or work clothes and dry cleaning if applicable. More negotiable expenses are the cable company and extra cell phones. You may want to investigate bundling and family plans.

Once you have assessed your finances and made any cuts to free up as much disposable income possible, it's time to figure out the best way to dispose of your debt. It may look like a daunting task but keep things in perspective. You didn't get into debt overnight, and you aren't going to be able to get out of debt quickly either. The good news is that taking advantage of one of the options below, should allow you to get out of debt in a reasonable amount of time – usually in under 5 years.

Debt Consolidation Loan

A debt consolidation loan is an easy and organized way to pay off unsecured debt. Debts like credit cards, personal loans and medical bills are put together into one total amount. You then pay off all these individual debts with the consolidation loan. If you think this sounds like a viable option, get a head start and organize yourself for your appointment. They'll need most of the items listed below. Some of these items are to qualify for the loan. Don't be nervous. It's not a pass or fail test and it's not meant to judge you. Their system is in place to make sure that you can make your payments and aren't getting in over your head financially. Here are some items you will need to gather:

Your Bills:

Credit cards, medical bills, personal loans and any other debt that you want to consolidate.

Bank Statements:

Generally, you'll want to make sure you have 3 months available, but each company is different, and they'll tell you how far back they need the statements to be.

Current Credit Report:

It helps to have an idea of what your credit is before applying because the interest rate you are going to be offered is often driven by your credit rating. You can get your free credit report from all 3 agencies at www.annualcreditreport.com. Typically, the loan company will retrieve a copy at the time of application using your social security number, but it's a good idea to know where you stand ahead of time so there are no surprises.

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Credit Counselling

Credit counselling is a way for a neutral and knowledgeable party to help you organize your finances. They also highlight some of the challenges that have affected your credit negatively. They typically allow you to include any unsecured debts on the plan, but they mainly benefit you by getting interest rate concessions from your credit card companies. This reduced interest and waiving of penalty fees usually allows you resolve your debt in about 48 – 60 months. You can expect an initial phone call and then the assignment of a dedicated counsellor. You'll gather the paperwork and they will guide you through setting up the debt management program. The counsellor will negotiate the lower interest rates for you. You'll pay an agreed amount per month and the counsellor will disperse it. There is typically a small management fee to the company for this service that is included in your monthly payment.

Debt Settlement

Debt Settlement companies try to settle your debts for less than the full balance owed. This can take a little time, because each credit card company is going to negotiate differently, but most debt settlement programs aim to have their clients out of debt in 24 – 48 months. Some credit card companies will resist until a certain time period has arrived along with other elements, but the debt settlement company will handle the negotiations for you and report back on the progress they are making. The debt settlement company will not settle student loans, but they will negotiate credit cards and other unsecured debts like medical bills. If you are struggling to make minimum payments or you've had no choice but to stop paying your debt, then debt settlement may be the option for you.

The Takeaway

The first step for anyone confronting debt is to act as quickly as possible. Ignoring your debt is not going to make it go away. If you don't know which way to turn, it may benefit you to seek the counsel of a reputable debt relief company who can explain your options that may include credit counseling or debt settlement depending on your unique circumstances.