Being in a debt trap has a harmful effect on your financial future than you might imagine. Bad debts can continue to harm you and your credit score, especially if you don’t take care of them now. The first step is to know your current financial situation. It provides you with your credit score, and proper details on various components of credit file in a clear way. When you’re prepared to take a broad look at your actual credit report, you can pull three of them each year (free once in a year).
Once you’re ready to get out of debt, you have to think how to reach that aim. But, there are many professionals and experts who already gave different solutions. So, how to pick the best ones that’ll suit your situation. Here are five options that may work for you:
1. DIY debt reduction
You can proceed with two different strategies, 1) the snowball method, and 2) the avalanche method.
In snowball method, you need to concentrate on the lowest balance account and pay it off slowly. On the other hand, in avalanche method, you have to pay off the credit account first that bears the highest rate of interest. Either way, as soon as the first one is paid off, go for the next target debt. Gradually, all of your debt problems will be gone.
DIY Debt reduction is possible if:
- You have a specific plan and want to stick to it.
- You can stop taking on new credit card debts during the whole program.
- You have enough income to make payments on your balances in approximately 3 years or less.
2. Debt consolidation
If you can consolidate your debts, you can opt for a new loan for paying off other debts. After they are paid off, concentrate on paying off the new loan as soon as possible. You can consolidate with a personal loan, you can go for balance transfer method or you can opt for 0% credit cards. The new loan will help you to reduce the load a little bit, but soon you’ll be paying one loan instead of multiple.
Consolidation can be possible if:
You have the income to pay off the new debt as soon as possible, may be within three years or less. You can also combine a DIY debt reduction plan along with the debt consolidation method. Hide your credit cards in a safe place so that they won’t be easy to get to you either. By this way, you won’t run up new debts while still paying off the current loan.
3. Credit Counseling
You can consult a reputable credit counseling company for reviewing your budget absolutely free of cost. They’ll provide help to figure out a Debt Management Plan for you so that you can get out of debt faster.
If you sign up for a DMP, your credit card company will lower your interest rates. You need to make single monthly payments to the credit counseling agency and they’ll pay each of your creditors every month. Educate yourself by communicating with the agency and get benefitted by their support programs.
A DMP may be possible if:
- Your creditors reduce the interest rates to give a breathing space in your budget.
- You have sufficient income and cash flow to pay off your outstanding debts in five years or less.
4. Debt Settlement
If you have high credit balances to pay back within a limited time, or if you have a particular kind of debt that can later trigger the collection process, you can consider trying a debt settlement program. Through this program, you may have to negotiate settlements with your creditors and they might agree to accept less than the full balances to settle the debts once and for all. You may have some stressful months to encounter while negotiating with the creditors. But, you may ease up the process by getting some suggestions from a debt settlement attorney. Also, make sure you investigate upfront whether you will owe taxes on canceled debt.
Debt settlement may be possible if:
- You have 30% to 50% of the total debt amount in your hand.
- You can settle your debts in a relatively short period of time.
- You can generate the fund from your savings account or by taking a gift from a family member.
If you file for Chapter 7 bankruptcy, you can eliminate most of your debts soon enough. But in Chapter 13 bankruptcy, it may take 5 years or less. If you are in a financial crunch and being threatened with debt collection lawsuits, it’s a good idea to talk with a bankruptcy attorney. Ask several financial professionals for referrals, meet your attorney with all the documentation he or she recommends. Don’t hide any financial secrets from him/her, be totally honest about your situation.
Bankruptcy may be possible if:
You have a significant amount of debts that can be eliminated and your total earning allow you for doing that.