The Dos and Don'ts of Debt Consolidation
Joe Sinkwitz
Being in debt over your head can cause considerable stress. Not knowing what to do about it can cause even more. This article will give you an idea of what you need to do to start climbing out of debt.
First, here are the two big don'ts. Do not simply ignore the problem. It will only get worse. Ok, so now you're paying attention to the problem. Do not simply stop paying your bills. That will only cause you to lose your house, your car, and ruin your credit.
Now that you're paying attention to the problem and resolved to pay back your debts, what do you do? Do you have a budget? It is absolutely essential that you have an accurate budget or you won't know how much you owe and how much you are able to pay. First, make a list of all your income. This includes income from your job, interest earned on investments, alimony payments (if you're on the receiving end), rental income, social security and disability payments. Include everything that comes in. Lottery and gambling winnings don't count here as they're not steady. Next, make a list of your expenses: mortgage/rent, car, insurance, utilities, taxes, groceries, meals out, alimony (if you're on the paying end), movies/entertainment, those three iced mochas with two extra shots per day at Starbucks, lunches at work, and anything else you spend money on. If your expenses are less than your income, you're in good shape. You can still use some of the techniques below to improve your financial position.
However, if your expenses are greater than your income, you've got to do some thinking. The first order of business is to cut out unnecessary expenses. You don't really need three iced mochas with two extra shots from Starbucks everyday. Even if you're only buying them on work days, that's $300 per month. Don't buy them. Stop going to the movies, and cook at home more. Basically, cut out all the luxuries. Next, see if you can get a better deal on the non-luxury items you use. Phone companies have all sorts of plans available. Call them and see if there's a plan that will be cheaper for you. Power companies often have on peak and off peak hours with different rates - try to schedule your major power usage (think clothes dryer and air conditioning) during the cheaper hours. Call up your credit card issuers and ask for a lower rate. If possible, transfer credit card debt from your higher interest cards to your lower interest cards. Call your insurance agent and ask for a lower premium. For any expenses that go to a company in a competitive industry, like insurance and credit cards, call up the company and try to get a lower rate. If you cut your expenses, you may be able repay your debt without resorting bankruptcy or further loans. If not, maybe a second job could get you the extra cash you need.
So you're living in a house with the air conditioning off, dirty clothes, eating ramen, working two jobs and you still can't pay off your debts. What now? You need to prioritize your debts and expenses. Mortgage or rent come first, then car payments, utilities, and anything that could get you put in jail if you don't pay. Subtract the sum of these expenses from your income. That number is what you have left to pay your other debts and expenses. Now you need to call up you creditors and explain your predicament. Be honest - don't make up a story about you grandma dying and how much her funeral cost, unless, of course, she really did die and her funeral is part of the reason you're in debt. Almost all of your creditors will be willing to work with you. They want their money back and working with you is cheaper for them than sending your account to collections. In the case of credit card, the may lower your interest rate and perhaps waive accrued late fees and some of the accrued interest. They will also probably freeze your card to prevent you from spending more on it. When you're talking to your creditors, don't offer to pay them more than you can afford. Be honest with them. Tell them you've got $X total per month to go towards debt payments and you've got $Y of debt in total - not just to them - to pay off. Ask them what they'd be willing to accept, but don't commit to that figure until you've talked to all your creditors first.
What if that's still not enough? Then it's time to consider consolidating your debts via some sort of loan. If you own your home and you've got enough equity in it to be able to consolidate your debts, that might be a good option. Just be sure that you can cover the payments on that loan, or you'll lose your house when you fall behind on the payments. There are other sorts of loan options available, but the problem is the same: be sure you can cover the payments on the new loan. It's no help to take out a loan that you can't pay for.
The last resort option is bankruptcy. You want to avoid bankruptcy if all at all possible, as it will stay on your credit report for many years and hurt your chances of obtaining new credit. However, if you've done all the steps above and still can't pay off your debts, bankruptcy is your only option. The bankruptcy process varies, but in all types, a plan will be worked out via the courts whereby you will pay back a portion of your debts over a period of time based on how much income you have available.
After reading this article, you may be thinking that it sounds like a lot of work. It is a lot of work, but it's doable. If it still sounds daunting to you, you may want to consult one of the various debt management organizations available. Be careful, many of the ads you see for debt consolidation are scams. Your local Better Business Bureau and sites like MyMoney.gov can help you find a reputable organization that can help your manage your debt.
For more information, please visit www.creditcardresource.net.
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