What to Do If You Have Debt Problems
Nothing is as stressful as having nagging creditors calling you every second. Debts can put you in a thick situation that can be pretty frustrating.
Whether the financial crisis was a result of abusiness failure, the loss of a job, family illness, overspending, or gambling, it can get quite overwhelming. So, what do you do?
If you’re in such a situation, read on to know how to cope. This piece offers free debt advice that can help improve your situation a little or get you out of debt altogether. However, the one that will work best for you depends on your level of discipline, your debt level, and your future prospects.
Let’s dive in.
Work Out a Personal Budget
If you’re in financial hot water, the first significant step to take is to do a realistic assessment of your income and expenditure. This involves creating a weekly or monthly budget that lists your income and expenses. A budget can help you find the areas in which you can save money.
You can start by creating a list of all your income from all sources. You should then list your fixed expenses, which are mostly the same every month. These typically include rent, health care, education, car repayments, mortgage payments, insurance premiums, etc.
Next, make a list of your variable expenses, such as your clothing, groceries, and entertainment expenses. Identifying these expenses helps prioritize the items you’ll have to spend on first. Also, this helps you to figure out how much you have remaining after settling all those expenses that you can afford to pay creditors.
Paying creditors requires categorizing them in the order of priority as well. First, create a list of everything you owe. This includes sorting out precisely what you owe and who you owe it to.
Then, place your debts in the order of importance as well. This involves identifying the most important debts or “priority debts,” and they aren’t always the biggest ones.
Priority debts are those urgent debts that you need to settle first because failure to repay them can result in serious action against you. Those that fail to pay priority debts:
- Could lose valuable items
- Could have an essential service get disconnected
- May be taken to court
- May also incur jail time given for failure to pay money owed
Some of these priority debts include:
- Secured loans
- Court fines
- Pawn loans
- Title loans
- Payday loans
After that, identify non-priority debts. These can include:
- Credit card and store card payments
- Bank loans
- Catalog repayments
- Money you’ve borrowed from family or friends
Though the non-priority debts cannot be ignored and should also be settled as soon as possible, they can come after settling the priority items.
Debt Relief Services
Another excellent option for dealing with debt is getting debt relief services. These are arrangements you make with debt specialists and reputable organizations that can help with settling the debt. When you take up these options, you may have to incur extra costs and have to agree to certain conditions.
Before you decide to do business with any debt relief service, check with the local consumer protection agency and the state Attorney General. They can inform you if the firm you’re considering working with is licensed and if there are any consumer complaints filed against them.
Perform thorough homework before you settle for any firm. Find out their costs, the services they offer, and the duration it will take to get the results promised. Go beyond verbal promises by getting everything on paper in the form of a contract. Also, make sure you know and understand everything the contract states.
Debt relief services include:
If you’re unable to meet your loan repayments, you can seek advice on how to manage your debts and money from reputable credit counseling organizations. These organizations can help you create a budget and provide you with additional workshops and educational materials.
The counselors are trained experts in money and debt management, consumer credit, and budgeting. They will discuss with you your entire financial situation online, over the phone, or in a local office, and they help create a customized plan to resolve your issues.
Find reputable organizations by asking around; check with your family and friends, your local consumer protection agency, or your financial institution.
While these services are “non-profit,” that status doesn’t always guarantee that services are free, affordable, or even legit. Some credit counseling organizations ask for very high fees, which may be hidden, or they’ll urge clients to make “voluntary” contributions to them illegally.
Debt Settlement Programs
Debt settlement programs help negotiate with your creditors to let you pay a lump sum ‘settlement’ not the entire amount to resolve your debt.
The organization asks you to set aside savings of a particular amount of money every month which helps pay that lump sum. Also, they’ll ask you to transfer the money to an escrow-like account until you accumulate sufficient savings for 36 months or more towards the ‘settlement’ that was reached.
The downside of this method is that the creditor may refuse the settlement deal. Since they are under no obligation to accept anyway, some of your debts may never be settled this way.
Furthermore, the debtor is asked to stop making monthly payments to the creditor, and this has a negative impact on their credit score.
Before you sign up with a debt settlement service, review your budget to know if you’re capable of setting aside the amounts required every month for the entire program length. This will help you decide if this is the right path for you.
Beware of scams by unscrupulous debt settlement services. Some try to get their fees before they deliver on their promises.
Also, make sure that the money you’re saving goes to a dedicated bank account not affiliated with the debt relief firm. Additionally, be sure that all interests earned from the savings are yours and you can withdraw the money any time with no penalty.
Check online if there are any complaints filed against the firm you’re working with. Read and understand the disclosure requirements that indicate their price and terms, their offer, the results, and what happens in a non-payment situation before you sign the contract.
The third option to help deal with your debt problems is to consider consolidation. Consolidation involves combining multiple debts into just one monthly payment. Credit unions, banks, and installment loan lenders may offer debt consolidation loans.
Debt consolidation helps lower the payments you make monthly. Before consolidating a loan, look at your budget to figure out if you can settle the loan by adjusting your expenditure.
A good example is when you lower your cost of credit through debt consolidation by getting a second mortgage or a home equity line of credit. However, you must place your home as collateral. If you fail to make payments, you risk losing your home.
Filing for personal bankruptcy may also be an option, although it should only be a last resort because it’s far-reaching and long-lasting. If you file for bankruptcy, you’re exempt from repaying certain debts by the court.
This bankruptcy information lasts for 10 years on your credit report which may make it challenging for you to buy a home, get credit, get a job, or get life insurance.
All in all, this legal procedure can offer you a fresh start if you have fallen into debt problems.
Amanda is a senior writer at AdvanceSOS. She has more than six years of journalism experience, mostly in the finance sector. She graduated with a Bachelor’s Degree from Drew University.