Home
> Get
out of Debt
How to Get Out of Debt
There are essentially five options
open to you when you decide it's time to get out of debt. We'll go
over each one briefly in this article. Further information on each
can be gotten from the links provided in the corresponding sections.
1) A Disciplined Plan
of Attack
Mentioned first
is the one that requires the most discipline, but it's the only method that
will not either adversely affect your credit or simply restructure your debt.
This involves first making an inventory
of your debts, which generally includes credit card debts, car payments,
house payments, mortgage payments, student loans, and any other debt you
may have, either secured or unsecured.
What you do here is list out your debts
starting with the one that can be paid off the quickest. Usually this would
be the one with the smallest balance. Here's where the discipline comes in:
You find all the possible ways you and your family can think of to cut expenses
down to a bare minimum. Anything from going out to dinner less often to car-pooling,
bringing lunch instead of buying, etc. and compute the savings from doing
all the above. In addition to this, or maybe more confrontable for
you is to take on a part-time job
where every penny you make goes to paying that debt. You then use this "created"
money to make extra payments on that first debt on your list. You'll be amazed
at how fast you can eliminate a debt when you attack it in this way.
Once you have paid off the first debt,
use that same pool of money to attack the next one, and so on. Remember,
once you have paid off a debt, you can now use the monthly payment that used
to go to that debt to add on to the next one. You can see how this snowballs
as you go. And don't stop until you've paid off everything, including your
mortgage. If you don't have a mortgage, by the time your car is paid off
you should go get a mortgage (a house) and make extra payments on that! The
savings to be had by paying extra on your mortgage are staggering. Here's a
good link to check regarding this. There's no greater security in the world
than owning your home free and clear. What a great position to be in, and
with a little discipline, it can be done in a reasonable time!
2) Refinancing Your Mortgage
This next method is for homeowners, and
is a very popular method many people are using these days. It is simply to
refinance your mortgage and include your debts in the refinancing. With interest
rates as low as they are, and some mortgage companies willing to lend more
than 100% of the value of a home, this is becoming an easy out for people who
have let their unsecured debt get out of hand.
Considering that mortgage rates
are often 1/4 of many credit card interest rates, this is one way to bring
your monthly payments way down. There are some excellent online companies
offering this service, here are two of the best:
Ameriquest
Mortgage
-
Ameriquest says, "At Ameriquest, we
work hard to get you the money you need. Our loans are easier to qualify
for, and our rates are competitive. You can be prequalified in 24 hours.
And we can close your loan in days, not months.
LowerMyBills.com
- LowerMyBills
is a comprehensive service that helps consumers lower all their monthly bills,
all in one spot. We offer a broad range of savings opportunities, with a special
focus on home loans.
3) Consumer Credit Counseling Sevices
The third option is to
use one of the non-profit CCCS (Consumer Credit Counseling Services) companies.
These companies are funded by the banks - and although they may not want to
advertise that fact, they are under the thumb of the banks, and must show a
good performance record keep their standing. Having said that, these companies
will give you the opportunity to pay your credit cards off at a reduced interest
rate, provided you close each card out.
So there are some positives here -
the first being that you can't use the cards anymore. Yes, that's a positive!
The CCCS company will look at all of your debts and figure out a minimum single
monthly payment for you, and at this point it is up to you to see how this
monthly payment will actually bring your debts to zero in how much time. Be
very diligent here. Have them show you exactly how long it will take,
and by how much your debt is shrinking after say, one year, two years, three
years, etc. A three or four year payoff is pretty reasonable, maybe a little
longer depending on your situation. If your counselor can't show you
and guarantee that your debt will shrink year-by-year with the payment you'll
be making, don't sign up! In an effort to keep monthly payments low, it is
possible that your debt can actually get larger if
your minimum payment is too little.
The other thing to understand about signing
up with a CCCS company is that it does go on your credit record, and
is looked at as a negative. This is knowledge learned first-hand.
So, the main points with CCCS companies
are to be very diligent, don't be timid, and be sure that this option will
work out for you in the long run before signing up.
You can get a
list of CCCS companies in your area from LowerMyBills.com -
LowerMyBills is a comprehensive service that helps consumers lower all their
monthly bills.
4) Debt Negotiation
What is Debt Negotiation? Well, it's an alternative
way to handle debts by contacting creditors directly and offering them a lump
sum amount or payment plan for an amount less than the existing balance of
the debt. Why would creditors go for this? It's because the creditor
has good reason to believe that this debt might not bring in as much repayment
if they were not to accept the settlement offer.
This type of negotiation
does not work well when a debt is current - these are for the delinquent ones
that the bank may wind up selling off to a credit collections agency for much
less than they could get from a negotiated payoff.
There are companies that specialize in debt
negotiation. Many lawyers will also do this service, but not neccesarily as
efficiently as the companies who specialize. Typical negotiated percentages
range from about 25% to 80%. Most debt negotiating companies are paid by the
debtor, commonly as a percentage of what they are saving you, although expect
a sign-up fee in addition.
Think of debt negotiation as a more desirable
alternative to bankruptcy, because although your credit report will most likely
reflect the debt as being paid for a settled amount, not neccessarily as paid
in full, it is nowhere near as damaging as having a bankruptcy on your credit
file.
If your situation fits the above criterion, You
should check into debt negotiation as an alternative to bankruptcy.You can
get a list of debt negotiating companies in your area from LowerMyBills.com -
LowerMyBills is a comprehensive service that helps consumers lower all their
monthly bills.
5) Bankruptcy
Bankruptcy is a legal procedure that should
be used only as a last resort for solving financial problems. A decision to
file for bankruptcy is a serious step. It will stop the creditors from calling,
but will at the same time substitute a new set of problems. Bankruptcy stays
on your credit report for up to 10 years, and can have negative effects even
longer, possibly affecting your ability to buy or rent a home or even obtain
car insurance. It usually does not wipe out child support, alimony, fines,
taxes, and some student loan obligations. Also, many of us have seen that question
on credit applications, "Have you ever filed
for bankruptcy?" Also it usually does not permit you to keep
property when the creditor has an unpaid mortgage or lien on it.
Individuals are eligible
to file for two types of bankruptcy: Chapter 7, called "straight" bankruptcy,
and Chapter 13, also known as "wage-earner" bankruptcy.
Chapter 7
is the "liquidation" type of bankruptcy, where it is determined
that you will not be able to repay your debts in a reasonable amount of
time. Your assets are liquidated to pay your creditors, with some exceptions,
such as your home, life insurance, retirement plan
assets, most furniture and other personal items that
can be exempt from liquidation.
Chapter 13 will also stop the creditors from
calling, and can be used if you are a wage-earner, and you can produce enough
to cover living expenses along with a monthly payment that can repay your debts
in 3 to 5 years. The advantage here is that you will lose no property - no
liquidation.
Remember, bankruptcy's after-effects are long
and very damaging. Do your "due diligence" before declaring bankruptcy. It
is meant as, and should be your absolute last resort.
Credit Repair
Once you've gotten yourself out of debt, you may find yourself in need of some credit repair. The first step always would be to obtain copies of your 3 credit reports. The three major credit reporting agencies are Experian, Equifax, and TransUnion. They have a habit of changing their names, but you'll know which are the current, important ones by going to this website. Here you will be able to obtain complete, up-to-date copies of all three of your credit reports, and the best part is, it's totally free. Due to a new Federal Law, you now have the right to a free copy of your credit report once a year. Most areas of the U.S. are now eligible; by Sept 1, 2005 all areas wil be covered. Don't let anyone charge you for your credit report!
Once you have your credit report, you can enter the wonderful world of credit repair. There are a lot of fly-by-night credit repair operators out there, and there are plenty of guides on do-it-yourself credit repair. If that's all you can afford, then you can try to do it yourself. But the best way to tackle credit repair is through an attorney. Having the weight of an attorney behind your inquiries can help things considerably. Lexington Law Firm
is the one we recommend. They have an excellent track record, charge a fair price, and are members af the Better Business Bureau.
