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Guide: Getting Out of Debt

Most of us have had to deal with debt in our lives at one stage or other. For some of us, it spirals out of control, and we end up getting trapped in an endless cycle of repayments, spending money that we don’t have, and never seeming to have enough in order to make ends meet. Here’s a complete guide to ensuring you get out of debt once and for all:

 

The first thing you need to do to begin the process of getting out of debt is to look at what caused you to get into debt in the first place – it’s about addressing the cause, rather than the symptoms. For example, overspending is a symptom, not a cause. You could be overspending due to a lack of self-worth, or for some other personal reason. In order to break the cycle, it’s the personal issue that needs resolving.

The reality of debt is that there’s no quick and easy solution for getting out of it – it takes time, patience and effort, and involves giving yourself a thorough reality check.

Step 1 – Defining the Problem

This first step in this process is easy – it’s overspending and living beyond our means that causes debt.

Step 2 – Becoming Your Own Detective

In this step, you need to determine how long you’ve been overspending for, as well as figure out what impact this behavior has had on you, your friends, family and even your job.

Step 3 – Identifying Possible Causes

Next up is figuring out the times, places and events that cause you to overspend. Think about when, where and how you’re likely to overspend, or if there are any particular triggers in your life that cause you to do so.

Step 4 – Identifying Root Causes

Ask yourself what the root cause of your overspending problem is.

Step 5 – Finding Possible Solutions

This is possibly the hardest part, because this is where you have to figure out how to overcome your debt problem.

Two Points to Remember Before Finding Your Solution

1. Remember that you didn’t get into the situation you’re in overnight, so don’t think you’re going to get out of it overnight either – and don’t fool yourself into thinking you will. Be careful not to fall into the trap of trying to get out of debt quickly. You might end up in a worse situation than when you started.

2. Keep in mind that failure is likely at the beginning of the process. Don’t let failure dishearten you – redouble your efforts to ensure you’re successful the next time around. In fact, a failure will ultimately bring you closer to addressing the root cause of your debt.

Debt Solution 1: Doing It Yourself

While seeking help is sometimes necessary, you should start by trying to work your way out of debt yourself. This will allow you to learn a lot about your finances, which will serve you well in the future. In addition, if you manage to get out of debt all by yourself, just think of the sense of accomplishment that you will feel.

Start by setting yourself a budget so that you understand exactly how much you have coming in, going out, and where it’s going. You can try Excel spreadsheets or use software such as Power Wallet or You Need A Budget. Once you’ve done this, you’ll be able to handle your money better, as well as put as much of it as possible towards paying back your debt.

Next, start a debt payoff plan. The snowball method is an excellent one to employ. Furthermore, you can also think about making additional income - but it’s not a prerequisite for getting out of debt. Just keep in mind that you still need to go through the process of getting to the root cause of your debt, otherwise any additional work you take on will be a waste.

Help yourself to stay on track by finding an accountability partner. This could be a friend or family member. Tell them what you’re going through - that you’re in debt and in the process of paying it off. Their eventual questions about how you’re doing will help you greatly with keeping on track and will motivate you to share exciting news with them about your positive progress.

Another thing you can do is set mini-goals. For example, if your debt is $10,000, focus on a percentage of that, such as 10% ($1,000). Your first mini-goal would be to pay back $1,000, your second to pay back $2,000, and so on. Marking each mini-goal you achieve will help you stay motivated throughout the entire process.

Debt Solution 2: Getting Some Help

It’s understandable that you may want, or need, someone to hold your hand along the way to debt freedom. There’s a great online service called Ready For Zero, which comes in both free and paid versions. The free version works just fine in the majority of instances.

Once you input your information , it will show you the total amount of debt you have, how much interest you have to pay on that debt, the total amount of money you will have to pay out to cover your debt and the interest on it, and also when you can assume to be debt free should you continue to make your minimum monthly payments.

Determine an amount you can allocate each month toward achieving your goal, and you can see the payoff date changing. Settle on an amount you can manage to put toward your debt each month, and Ready for Zero will do the rest for you. Don’t worry if you want to make changes at a later stage – the program allows you to do so.

 

Debt Solution 3: Consolidate Your Debts

Some of us have such high monthly repayment obligations that they’re higher than what we can actually afford to pay. This doesn’t mean it’s impossible to make good progress towards being debt free, but the first priority in this instance is to make monthly payments affordable.

There are three options for doing this. The first is to negotiate with your creditors. While such negotiations aren’t successful 100% of the time, they’re definitely worth a shot. You can start off by trying to get any late charges you owe them, waived, and you can also ask if it’s possible to have your interest rate lowered.

The second option is to try a peer-to-peer lending company. These companies give personal loans that have been funded by other people. The monthly repayments you make on a personal loan from a peer-to-peer lending company are disbursed, with the funds given back to the people that funded the loan in the first place. This is a great way of bypassing the bank.

Option three is to contact a debt consolidation company. While there are some great companies of this type out there, you must act with caution, because there are many that will try to take advantage of you. Avant is an excellent example of a customer-focused debt consolidation agency.

Debt Solution 4: Credit Counseling

If your debt is overwhelming you, then you can seek credit counseling. A credit counselor will walk you through all the steps, as aforementioned in Debt Solution 1. While such a counselor will be there to help you, this doesn’t mean that they will do all the work for you. You are still responsible for managing your finances and paying your bills.

A credit counselor can negotiate with your creditors on your behalf, allowing you to stop making further payments to them. Negotiations from that point on will be handled by your counselor.

In addition, a credit counselor can also assist with lowering interest rates on credit card repayments by negotiating with your credit card company, meaning that your future credit card payments will be easier for you to make.

Visit the National Foundation for Credit Counseling to find a credit counselor that has your best interests at heart, rather than his or her own. Any credit counselor that asks you for money upfront is giving you a sign to leave immediately. A legitimate one will offer you a free initial meeting, and only charge you once you’ve gone over your finances together and created a repayment plan.

Debt Solution 5: Bankruptcy

You should only consider declaring bankruptcy as your very last option – you must try the other four debt solutions first before considering bankruptcy. It’s a big deal, which will greatly impact your future financial life.

This is because you will find it very difficult to get a loan for a house or a car, or even for education in the years ahead if you declare bankruptcy. The same is true for a credit card. You might not be granted one at all, and if you do, you can expect to pay a sky-high interest rate.

There are two main types of bankruptcy – Chapter 7, which is a liquidation bankruptcy and means you’ll have to sell some of your assets to pay back some debt while the rest is written off, and Chapter 13, which involves the restructuring of your debt by a court followed by the creation of a payment plan.

While bankruptcy may not seem so bad on the surface, there are some things to keep in mind. Not all debts will be discharged after you file – you’ll still be liable for paying back taxes, child support, alimony and student loans. Furthermore, a declaration of bankruptcy is public information and can be looked up by anyone. Last but not least, if you think taking this action is a quick fix to your debt problems, think again. With that attitude, you’re guaranteed to set yourself up for a bad financial future.

If you do decide to go ahead with bankruptcy, find yourself a good bankruptcy attorney. The aforementioned NFCC is a good place to start for this.

Final Thoughts

Look at the pros and cons of each of the solutions proposed in this guide, and think long and hard about what you would need to get out of debt. Believe in yourself, take action and you will be successful.

Also remember that you will not be debt-free overnight, but with effort, you can get out of it. Your ultimate goal is financial freedom, so start taking steps toward it now.

Content Source: MoneySmartGuides

 

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