Everyone is going to deal with the debt monkey at some time in their life. Unemployment, failed businesses, health issues, irresponsibility – all of these may mean that you, or someone you know, may need have to dig out of a debt pit.
So if this is the case, here are some thoughts that might help:
Regardless of how psyched you are to start getting in the black, it is necessary to take action to make that happen. Taking action will often help you feel better about your situation as well as help you get the process started. Having a lot of debt is a major depressing drag, but don’t be afraid to kick start yourself – even sending in 5 bucks to your credit cards can help.
Get all your paperwork together in one place. Get an envelope and put all your bills in it, or get a folder on your computer and put all your electronic correspondence on it. Getting everything in one place will make it easier to both understand and track your debt, as well as help you design a strategy to get things paid off. This is key because you have to understand your situation before you can effectively get out of it. Not all loans are created equal, some have pre-payment penalties, others have variable rates and some kinds of debt are tax deductible. At a bare minimum, you’ll certainly want to know how much you owe and what interests rate you’ve borrowed at.
Figure out Your Strategy:
There are several schools of thought when it comes to debt reduction strategies, but the bottom line is that your debt pay off strategy needs to be tailored to your mindset and your financial circumstances. Some advocate a “snowball” approach, where you pay off your highest interest rate debts first. This is mathematically the quickest way to get rid of debt. The only trouble with it is that people often don’t stay motivated, so you might consider something that will keep you more engaged in the process. For example, you could pay off some smaller but less onerous debts first, just to get psyched up with an early win. You could then set some goals to help attack the more expensive debt later. The bottom line here is that your strategy must work for you.
Along these lines you might want to consider changing your spending behavior. Getting a budget, getting your credit cards out of reach or cutting your spending can also be part of your plans to get out debt. In any event, you’ll want your repayment plans to be tailored to your specific situation.
It is best to stop spending altogether on your credit card, but we realize that sometimes this isn’t feasible. In any case, start to set aside a bit of a contingency fund for those items that can’t be put on a card, so you begin to live within your means.
If you have a large debt problem you are probably going to have to prioritize your repayments. Okay, you might be wondering – what is high priority and what is low priority?
Basic necessities like a roof over your head, food and transportation are high priority. You’ll need to be able to take care of yourself and your family as well as get out and get to work. This is however, a lot harder with no house and no car. So, if you miss more than three mortgage payments your lender may start the process of foreclosing and if you rent (depending on your state), your landlord can evict you after only a month. Cars are a similar situation, finance companies can repossess cars pretty easily, and in some cases they don’t even have to tell you. Also, don’t let your insurance lapse. You‘ll need it in case something happens. Pay your high priority bills.
Other high priority payments are income taxes and child support obligation. Fees for non-payment of income taxes can be very steep. For both taxes and child support if you don’t pay, the government can put you in jail. The story is the same with student loans. If you default on student loans the government can take special collection actions against you that other creditors cannot.
Credit cards, loans on household stuff and store charge cards are lower priority. That said these types of obligations often have high interest rates and you should be aware that many lenders will look very negatively on even one or two late payments, so if you can, pay the minimum on these balances. As always call your creditors and let them know what is going on, they may be able to work with you.
Priorities Can Change:
Your priorities may need to change in some circumstances. If a court judgment is entered against you on old credit card debt, for instance, that should become a high priority, as the creditor may be able to garnish your wages. On a similar note, if you have bills that are over 60 or 90 days late, you might consider paying them before those which are only 30 days late, as long term delinquent debt dings your credit score more.
This has gotten harder in recent years, but it can pay to pick up the phone or fire up the internet to keep communication open. Sometimes if you are having trouble paying or may need to make a late payment, letting the lender know can help to waive fees or temporarily lower your payments.
If you have gobs of consumer debt that isn’t secured by a home or rental property, you’ll probably need to cut back. Look at your spending habits carefully, reduce wasteful expenses, make dinner and pack your lunch. You might be able to eliminate some of the waste in your budget; like magazine subscriptions, daily coffee, cable, or internet recurring billing for service you won’t use. This kind of stuff is mostly useless and will just make getting out of debt slower for you. Whatever bad little spending habits you have, now is the time to kick them. The bottom line here is if you have debt, you definitely should not live beyond your means.
Needs vs. wants. Now is the time to take the lean road. If you really feel you need it, think on it, and think on it some more. Chances are you don’t really need it. If it’s on Groupon or Living Social, you definitely don’t need it!
Get Professional Help:
Lastly, if you aren’t able to get your debt paid off on your own, consider getting some professional help. But, be careful! The credit counseling industry has been sued numerous times by state and local governments because it is full of companies who want to take advantage of your situation to have you be in debt to them. Instead, get a professional counselor who has an advanced degree in social work or psychology/psychiatry and a focus on dealing with motivation and financial issues. You can often get this through an Employee Assistance Program, with three free sessions per topic. If you do have to pay, it is likely worth it to help you get your attitude straight and things back on track.
Finally, remember: you can get out of debt. But it will take work and some sacrifice.
James & Miel
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