For those who are dealing with crippling debt, the thought of becoming debt free and financially stable can feel impossible. Many don’t know what to do other than declare bankruptcy and that leads to years and years with continued bad credit ratings, and a lifetime of having bankruptcy on your credit record. So the big question is “What are the options for those on the verge of filling for bankruptcy?” “Are there any options to get out of debt without destroying your credit any further?” The answer to these questions and worries is yes, there are other options and there is truly a light at the end of the tunnel if you approach your debt correctly! So how do you know where to start and what to do? Follow the steps bellow to start your path to financial freedom.
1. Be knowledgeable about your debt:
The hardest part about starting the process is looking at how much debt you really have. It is very common for those with impossible debt to give up on keeping track of how much they really owe with taxes and fees over time because they feel they can’t pay it and will never get out of it. It is important to be knowledgeable about what you are approaching in starting the process of getting out of debt. It can be overwhelming, but it is an imperative part of the process.
2. Know what to do with revolving debt VS debt in collections:
Now that you have tracked down all of your bills, it is time to sort them into two categories: Revolving Debt and Debt in Collections. There are different processes for each type of debt so this is an important step in the process. One thing to be aware of as well, is that it does not matter what type of debt you are dealing with as long as it is not a federal student loan. It can be credit card debt, medical debt, car loans etc…federal debt is a separate process all on its own.
3. Get Organized:
Now that you have your debt separated and you understand what debt you have in collections VS what debt you have in good standing, make a spreadsheet and organize yourself. This will be important when you are going through each bill and setting up payments, consolidating and setting up your new budget later in the process.
*You can decide if you want o start with your revolving debt or your debt in collections, so steps 4 and 5 are interchangeable depending on how you wan to approach the process.
4. What to do with revolving debt in good standing:
There are a few options to be aware of when it comes to dealing with debt that you have in good standing, that is just too much for you to pay off.
– Debt Consolidation Loan: This can be a personal loan, refinance or home equity line of credit (HELOC.)
-Personal Loans: This type of loan is easier to get from online finance companies because they often approve loans for those who don’t have the best credit. It is a good way to consolidate any debt you have in good standing that is just too much for you to pay each month. This will help because you will only have one payment to make on it and it will take the debt off of your lines of credit, which improves your credit score. Make sure you don’t end up paying a higher interest rate on the loan that you are already paying on the credit cards. If you are given too high an interest rate look into other companies or other options. Also make sure before you decide to apply for the loan that you know how much the payment will be each month and that you can afford to make the payments. Do all of your planning before applying anything, so you know exactly how much you will have going out each month and what you can afford to pay based on your current income.
-Refinance or HELOC: This option is available for those who have a home with a mortgage that is in good standing. You can take equity out of the value of your home and use it to pay off your debt. Once you have done this, all you have to do is pay your new mortgage on time each month. This is a great option, because it takes the debt off your lines of credit and that will help raise your credit score. It also gives you an opportunity to lower the interest rate you are paying on the debt, because mortgage rates are often lower than other interest rates on credit cards and such. Again you have to pay attention to what the interest rate will be, as well as how much your new mortgage payment will be each month. You are trying to fix your problems by consolidating. Not creating another payment you can’t make and putting your home at risk in the process. Find out exactly how much the new payment will be, and make sure not only that you can fit the new payment into your budget, but that you can also roll the closing costs into your payments, so you don’t have to come out of pocket any more that you are planning to. Again, make sure you do all of your planning and budgeting before you commit to anything to make sure it is the best option for you and that you can afford the new payments. This is not a sprint, it’s a marathon, slow steady progress and planning are the best tools for success when it comes to getting out of debt and setting up a new affordable budget.
5. Know what to do with debt in collections:
The best way to handle debt that is in collections is to negotiate the amount you owe and set up a payoff for the new settled amount.
Note: *This option is only to be used for debt that is in collections. Do not stop paying your other debt and let it go into collections so you can negotiate it. This will have a very negative affect on your credit score and will complicate your troubles, not help them.*
1. The best way to approach negotiation with debt collection agencies is to go into it knowing exactly how much debt you owe for each account. (This is where step one comes in and part of why it was so important to start there) When debt is sold to collection agencies, it is not always kept accurately. Very often the amount the debt collection agency is asking for is not the correct amount you owe and if it is more than you owe, you want to be able to prove that they have the incorrect amount, so you have a lower starting point for negotiation.
2. Now that you are organized and ready to negotiate, call the debt collection agencies for each debt amount and negotiate an affordable settlement amount. Depending on how much debt your dealing with, you may be able to negotiate a payment plan to take care of the new settlement amount in small payments to make it more affordable. This does not have to all happen in one phone call. Don’t ever let them bully you into an amount you can’t pay or aren’t sure you can pay just because they want to get the process over with. Make as many phone calls to them as you need, to get a final amount, and make sure you get the name of the person you speak to each time you call.
3. Once you have settled on the amount, get the agreement in writing before you pay them anything.
4. Start making the new payments as a part of your new budget.
If you want to settle your debt, but you don’t feel comfortable making the calls and setting everything up on your own, there are debt settlement agencies who will call and do all of the negotiating for you. Just make sure to remember the warning. Never work with an agency that tells you to stop paying your other bills so they can make more on their fee. There are honest debt negotiation companies out there. Make sure you are working with one and do your research before dedicating yourself to one agency.
6. Set up your new budget and payments:
The last step to starting your journey to financial freedom is setting up your new budget so you can make sure you never fall behind again. Use the spreadsheet you set up earlier in the process to help you stay organized moving forward. Set up all of you bills and plan for when they will be paid. Also make sure to set aside enough money for everyday living expenses and cut back where you have to in order to keep to your budget! Before you know it you will be debt free and building your way to financial freedom. As soon as you pay off each debt amount, make sure you change those payments to savings. Now instead of paying off debt, you will be paying yourself and building your savings account a little bit at a time.