It’s not uncommon for debt to feel like you’ll never get out from underneath it. Thankfully, there are steps that you can take to improve your finances and be done with debt once and for all. As you start your payoff journey, use these tips to choose strategies that get you closer to your goal — and avoid some of the common scams that could put you deeper in financial trouble.
How to handle your debt
From DIY to working with professionals, there are several options available to you when you’re in debt.
Cut unnecessary spending
In order to pay off high-interest debt like credit cards, you need to pay more than the minimum payment each month. A good way to find the extra money to do that is by cutting unnecessary spending from your budget, such as canceling subscriptions.
If you’ve already cut your spending as much as you can, starting a side hustle to bring in extra money to put towards your debt may be worthwhile.
Use a debt payoff method
There are two popular debt payoff strategies that you may want to consider. Choose between the snowball method and the avalanche method to pay off your debt and take control of your money again.
Negotiate with creditors
It may seem counterintuitive, but your creditors may be willing to negotiate with you if you’ve fallen behind on payments or need assistance. Note that they may be unwilling to consider negotiation or settlement if you’re still in good standing and able to make payments on time.
This is why debt relief companies often encourage you to stop making payments on accounts — but if you negotiate on your own, you may be able to request a payment plan or other modification to your account.
Sign up for debt relief
If you prefer not to negotiate directly with your creditors, you can work with a professional debt relief company instead. There are pros and cons of debt relief, and all companies have their own benefits and drawbacks. Expect settlement fees of up to 25% of your enrolled debt and a negative impact on your credit score at minimum.
Even still, you may feel peace of mind knowing that someone else is helping to get you out of debt. They are also working to settle your debt for less than you owe, which is another win for you.
Work with a credit counselor
While not a way to reduce your debt, working with a nonprofit credit counselor can help you see through the fog and overwhelm of paying off debt. Credit counselors work with you to improve your finances by helping to create a budget and debt management plan. A debt management plan could help you lower your interest rates and make monthly payments easier on your budget.
Apply for debt consolidation
For those who qualify, debt consolidation can streamline your debt into one manageable payment, often with a lower interest rate as well. On-time payments on a debt consolidation loan also help to improve your credit score more than payments made to revolving credit, like credit cards.
There may be origination fees you’ll have to pay, and it’s possible that the cost of debt consolidation may be higher than the debt you are consolidating. Compare at least three debt consolidation loans before applying to make sure the cost doesn’t outweigh the convenience.
File for bankruptcy
As a last resort, you may want to consider filing for bankruptcy. There are two common types of bankruptcy for individuals — Chapter 7 and Chapter 13. Chapter 7 bankruptcy will involve selling all your assets to pay off creditors. Chapter 13 bankruptcy involves a court-mandated payment plan that lasts between three to five years.
Consult with an attorney on what your options are. Since bankruptcy can stay on your credit report for up to 10 years, it’s important to approach it with an informed, trustworthy professional.
3 things to avoid when in debt
Stay vigilant while on your debt payoff journey. If it sounds too good to be true, it probably is. Here are three common red flags to avoid when in debt and looking for a way out.
Services that offer guaranteed results
Be wary of any debt relief or credit counseling service that offers guaranteed results. No company can know for certain what the outcome of any negotiation will be. Instead, they should be able to give you a general idea of what you can expect without making any promises or collecting payment before a creditor agrees to a settlement.
Account fees and savings payments
If you work with a debt relief company, you will likely need to pay a monthly fee to maintain your account. You will also make payments into a savings account for future settlements. These are normal charges and are different from upfront payments non-reputable companies may require.
High pressure, quick decisions
You’re already under pressure to get out of your overwhelming debt, but don’t be pressured to make any decisions before you’re ready. No matter who you speak to or who you’re working with, they should be patient with you as you take whatever time you need to make the best decision for yourself. Legit debt relief companies offer free consultations to discuss your debt and options — with no obligation to sign up.
Upfront payments or other signs of a scam
The Federal Trade Commission (FTC) has made it illegal for debt relief companies to ask for upfront fees before successfully completing a settlement. All fees should be in writing, and you should be able to agree to them before entering into a contract to work together.
Another sign of a scam is a credit counselor who promises to improve your credit within a certain timeline. Unfortunately, it takes time to rebuild credit and there is no quick fix.
Bottom line
Debt doesn’t have to be a constant source of overwhelm in your life. Take control of your financial situation by utilizing tools such as debt relief or consolidation, committing to a debt payoff strategy or employing the help of professionals.
And while you’re on your debt payoff journey, be on the lookout for scams or too-good-to-be-true ways of getting out of debt quickly. Take the time you need to pay off your debt the right way and build systems to prevent being in this situation again in the future.
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