Whether you lived beyond your means for too long, life threw unexpected costs you couldn’t afford or some variation between, you’ve come to realize that you’re in way more debt that you can handle.
It’s a scary feeling — when every dollar you have to your name isn’t actually yours, and every payment you make is costing you more than the balance you initially racked up. To continue on like this feels unbearable, and as you’ve lately come to realize, not even financially possible. Suddenly, you’re not able to afford your minimum payments.
Let’s look at how to deal with debt when it’s out of control.
When you’re dealing with big debt, the one absolute thing you cannot afford is to continue accumulating it. Cut up your credit cards immediately to stop the bleeding.
Budget for Improvement
If you can’t afford your monthly minimums, budgeting won’t solve your problems, but there’s likely still some areas you can easily improve upon if you’re motivated enough. Maybe it’s a subscription service you barely use or excess food you order when you feel like indulging yourself. Identify the most wasteful parts of your spending to start trimming fat.
Know Where You Stand
It can be scary to look in the mirror when you have large debt, but it’s the only way to see things clearly. Calculate your overall debt amount, how much you owe each of your creditors and their varying interest rates. You need to figure out how to make progress on them. If a leaner budget doesn’t afford enough additional money to make more than the minimum payments, you might want to consider debt relief options, such as debt management, debt consolidation or even debt settlement depending on how much you owe.
Decide on a Plan
The above steps should give you enough information about your financial picture to help you decide on a plan to pay back your debt. If you haven’t had big debt for a long time, then you can ask your creditor for a lower interest rate or to restructure your debt to make it more manageable. Remember: at the end of the day, creditors want to get paid, and they’ll usually work with you to ensure that happens.
In most cases, a debtor won’t be able to solve out-of-control debt on their own. This is because they’ve already either maxed out credit cards or missed payments. If you’re in this situation, debt management, debt consolidation or debt settlement become your options.
Debt Relief Options
With debt management, you’ll make one monthly payment on one interest rate to a credit agency, which will split up that payment to your various creditors.
Debt consolidation plans formally do a similar thing as DIY approaches, but with the help of a third-party company that attempts to consolidate your debts into one bulk payment and lower interest rate.
Debt settlement involves working with a third-party company that negotiates with your creditors to reduce your overall debt amount.
Then, there’s declaring bankruptcy, either through Chapter 7 or Chapter 13.
How much debt you have will ultimately dictate whether some or all of these strategies are available to you, but regardless the option you choose, invest time to research each company. Review sites, company reputation and customer service are criteria to keep in mind. Trustpilot is good for reviews and customer service can be assessed by calling the provider yourself. Company reputation, on the other hand, will take a little digging between the lines.
Some questions to keep in mind:
- How long has the company been in business?
- How much debt have they resolved?
- How many debtors have they helped?
- Are they accredited by American Fair Credit Council (AFCC)?
The answers to these questions should give you a good idea of a company’s track record. If executives within the company have been recognized for awards, like Andrew Housser and Brad Stroh of Freedom Debt Relief, that’s a bonus, but shouldn’t cement your decision by any means.
Making Good Habits Stick
Whether you choose a milder strategy like debt management or debt consolidation, or a more longer-play approach like debt settlement or debt relief, you can’t allow yourself to end up in debt again. Don’t take this to mean you can’t use credit ever again. Once you’re able to get a credit card again, be sure to only charge money that you can afford to pay back in the same month. If it helps, start by only purchasing things you need and have money to buy, like groceries or gas.
Keep on top of your budget, contribute to an emergency account, and once you have a nice cushion, start some kind of retirement account. I know this all sounds world’s away from where you’re currently at, but you can get there. Develop the discipline and put in the hard work now to enjoy a life free of financial limitations.
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