debt solutions
Getting out of debt

Debt Solutions: A Guide to Managing Debt

Introduction

 

 

Dealing with debt can be stressful and overwhelming. However, there are many debt solutions available to help you take control of your finances. This article provides an overview of strategies and options to consider when looking for debt solutions.

Understanding the Types of Debt

The first step is understanding the different types of debt you may have:

  • Credit card debt – This refers to balances owed on credit cards. Credit card debt often has high interest rates.
  • Medical debt – Medical bills that you are unable to pay immediately may go into collections and become medical debt.
  • Student loan debt – Loans used to pay for education-related expenses. Federal student loans usually have lower interest rates than private loans.
  • Personal loans – Money borrowed from a bank or online lender that typically has a fixed repayment schedule.
  • Payday loans – Short-term, high-interest loans that are generally due on your next payday.
  • Mortgage debt – Loans used to purchase property. Mortgages often have lower interest rates but larger balances.

Knowing the types of debt you have is key to finding the right debt solutions.

Debt Management Strategies

There are a variety of strategies to consider when developing your debt solutions plan:

Budgeting

  • Create a budget to understand where your money is going each month
  • Try the 50/30/20 budget:
    • 50% to needs like housing, utilities, and groceries
    • 30% to wants like dining out or hobbies
    • 20% to debt payments and savings
  • Stick to your budget to better control spending and have funds to pay down debt

Increasing income

  • Consider taking on a side gig or part-time job for extra income
  • Ask for a raise at your current job if possible
  • Sell unused items around your home

Reducing expenses

  • Evaluate needs vs. wants and cut back on discretionary spending
  • Call service providers to negotiate lower rates
  • Cut back on dining out and entertainment
  • Consider downsizing your housing if possible

Prioritizing debts

  • Focus on paying high-interest debts first while making minimum payments on other debts
  • Consider the debt avalanche or snowball methods
  • Pay off smaller balances first with debt snowball method
  • Pay off highest interest balances first with debt avalanche

Seeking debt consolidation

  • Combine multiple debts into one payment through a debt consolidation loan
  • This can help simplify payments and may lower interest rates
  • Be aware of fees and eligibility requirements

Debt Solutions to Explore

Here are some common options to consider when seeking debt solutions:

Debt management plan (DMP)

  • Offered by credit counseling agencies
  • Agency works on your behalf to negotiate lower interest rates and payments with creditors
  • Make one monthly payment to the agency which distributes funds to creditors
  • Often involves closing credit card accounts and taking out a DMP loan

Debt consolidation loans

  • Allows you to combine multiple debts into one personal loan
  • Personal loans may offer lower interest rates than credit cards
  • Be aware of fees and collateral requirements
  • May require a co-signer if you have poor credit

Balance transfer credit cards

  • Transfer balances from high-interest cards onto a card with a lower promotional rate
  • Intro 0% APR periods allow you to pay down balances faster
  • Watch out for balance transfer fees

Home equity loan/line of credit

  • Leverage available equity in your home to pay off higher interest debts
  • Interest may be tax deductible consult a tax professional
  • Risk losing your home if unable to repay the loan

Bankruptcy

  • Declaring Chapter 7 or Chapter 13 bankruptcy eliminates eligible debt
  • Best option if you cannot repay debts within 5-7 years
  • Bankruptcy stays on your credit report for up to 10 years
  • Consult with a bankruptcy attorney to understand if it’s the best option for your situation

Debt settlement

  • Works best for unsecured debts like credit cards or medical bills
  • The company negotiates directly with creditors to settle on a reduced lump sum payment
  • Typically requires stopping payments to creditors and allowing accounts to become delinquent
  • Settled debts can show on your credit report for up to 7 years

Debt management program (DMP) comparison table

Feature Debt management plan Debt consolidation loan Balance transfer card
Interest rate reduction Yes Maybe Yes
Single payment Yes Yes No
Fees Yes Yes Yes
Impact on credit score None/positive Negative if collateral used None
Time to resolve debts 3-5 years 3-5 years Ongoing

Finding a Reputable Credit Counseling Agency

If considering a DMP or debt management services, it’s important to find a reputable credit counseling agency. Here are some tips:

  • Look for non-profit agencies accredited by the NFCC or COA
  • Avoid companies charging large upfront fees
  • Review BBB ratings and online reviews
  • Meet with an advisor and ask questions before signing up
  • Make sure they offer free budget and credit counseling
  • Confirm they provide ongoing support and progress tracking

Top rated non-profit credit counseling agencies include:

  • Money Management International
  • GreenPath Financial Wellness
  • ClearPoint Credit Counseling Solutions
  • Consolidated Credit Counseling Services

Getting Your Finances Back on Track

Escaping the burden of debt takes time and discipline, but is possible. Here are some final tips:

  • Commit to changing your spending habits
  • Be consistent with your new budget
  • Keep your end goal in mind
  • Celebrate small milestones
  • Seek support from your loved ones
  • Monitor your credit report and score
  • Build emergency savings

The road to becoming debt free may seem long, but taking that first step towards responsible money management is the most important thing you can do. Evaluating your debt solutions options, making a plan, and sticking to it will put you on the path to financial freedom.

References

 

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