What are the most common ways to get out of debt? If you are like me and so many others in the US, you have some form of debt associated with you. Be that credit cards, a mortgage or student loans. We are a society that is raised in debt, and no one seems to think that it is a serious issue. My wife is from Peru, and she thinks debt in any form is a bad thing, and to a degree, she now has me convinced of the same thing. But I still do think some debts are considered good and worthwhile, such as a first home mortgage that is a conventional 15 or 30-year fixed mortgage. And even to a degree, some student loan debt may be considered acceptable provided the skills you obtained lead to a higher paying job.
So what are your options when it comes to debt? You will be glad to know that there are basically four viable options that you have to pick from. The first is, in my opinion, the best and least traumatic for you and your life. And that is to sit down and do a detailed budget that allows you to know where your money is going and what your bills are. As a financial planner, I always insist on people creating a budget before they proceed with any planning. Paying off high-interest debt is the number one priority for any successful financial plan. And by having a detailed budget, you are able to cut here and save there in order to pay off your debts without any outside intervention. As I stated, we all have debts of one form or another, and this approach with the snowball debt payment method is extremely effective in getting you out of debt and on the road to financial freedom.
A second method is to ask a credit counseling firm for assistance. Here you need to ensure that the firm you are working with is accredited and honorable as not all are. What they will do is assist you in creating your budget and spending plan for your income. And for these firms to work with you, you must have a steady form of income as they insist on monthly payments. What they will do is contact and negotiate a lower interest rate with your credit card companies, and you will then make a single payment to them for the new lower payments due to the reduction in interest. They perform these services for a fee of about $50 or less per month and can save you thousands in interest payments on high-interest cards. The fact you will have a monthly payment to the firm is why they insist on you having a steady income in order for this to work properly. They will also ask you to stop using your credit cards while in the program, and they last anywhere between three and five years before you are debt-free at least with credit card debt.
A third and more dangerous way to tackle your credit card debt is a debt settlement company. These are less favorable than a counseling firm, and there are just as many firms that are actually fraudulent in nature. Here they will advise you to actually stop making your payments to the credit card company and paying the firm the payments that are to be placed in an escrow account. Then once you have saved up enough in that account, the firm will literally take a gamble that what you have saved is enough to settle the debt with the credit card company. In some instances, the settlement is between 10 and 50 percent of the original debt owed with now late charges and fees added to the amount. By using these firms, you are taking a chance that they are legitimate and that the credit card company will settle the debt, not a guarantee by any stretch of the imagination. And these companies will also charge you significant fees to do this for you. In many instances, the fees and the settlement will equal what you owed in the first place. Then there is the potential for tax issues as forgiven debt is a form of miscellaneous income as far as the IRS is concerned. Also, this approach will also hurt your credit score as you will be defaulting on your credit card payments and then the account will show that it was not paid in full which will be on the report for up to seven years.
Finally, there are two types of bankruptcy that are available to you if that is the route you decide to go. First here is Chapter 13 which is the path that will allow you to repay your creditors over a five-year period provided you have a steady income. Then there is Chapter 7 in which most debts are forgiven, and you will not have a steady income stream in which to make repayments. A Chapter 7 bankruptcy will not clear alimony, child support or student loans. Other than that most debts will be discharged by the courts. Here the negative impact of bankruptcy will stay on your credit report for up to ten years although your credit score can recover much faster, say in a few years. But bankruptcy should be your last resort to eliminating your debts.
While the reasons people get into debt vary a great deal, the methods of getting out are fairly straightforward and simple. But they all take a commitment from you, and you must change your future spending habits in order for these techniques to have a lasting impact on your lives.
If you need or require additional information, please leave a comment here or contact me directly.
