What can you do when you’re deep in debt?
Debt has become a normal part of modern life. From using the credit card for everyday expenses, studying college to getting your first home, it can be said that debt has become quite a staple. It is not surprising to meet another American with some sort of debt. And sadly, many people are aiming to be debt-free but don’t know where to start.
If you are dealing with debt, you must know that this problem is not insurmountable. Getting rid of debt does not happen overnight, but you can surpass it through consistent collective efforts. Over time, your debt should chip away little by little, until such time that you’re totally free from it.
Now, if you believe that your debt is too much for you to handle, you must know where to seek help. Not only does overwhelming debt cause more financial problems, but it can also damage relationships as well as build up more stress. Therefore, debt can impact several aspects of your life, so the sooner you face your debt problems, the sooner you’ll take control of your life.
Many Americans are in Debt
If you are feeling down about your debt situation, think about this: you’re not alone. A lot of Americans are dealing with debt as well. In fact, consumer debt hovers around $3.9 trillion, while revolving debt is around $1.03 trillion. Also, according to The Fool, 81.5% of the millennials have debt, followed by 80.9% of the Baby Boomers and 79.9% of Generation X. Most people’s debts are composed of a combination of a mortgage, student loans, credit card, and auto loans. However, most people file for bankruptcy due to medical debt.
And it seems like the increasing spike of debt is not stopping anytime soon. Household income is lagging behind at 28% while the cost of living in the country has grown to 30%. Therefore, Americans are not earning enough to support their lifestyle expenses, often resulting in using the credit card even for the basic expenses like food.
Do these scenarios ring true for you? Even if you’re currently in debt, strive hard to get out of the pit so you no longer have to be part of this sad statistics. By approaching the right resources, it is possible to get out of debt.
If you’re too saddled with debt to the point that you’re no longer sleeping peacefully at night, you might consider getting debt counseling.
Debt counseling, also known as debt management, is the process of allowing a certified debt counselor to negotiate with your lenders to make debt more manageable for you. The debt counselor may negotiate on your behalf to your creditors to minimize the amount of debt you owe, therefore making it easier for you to settle your debts.
Serving as the mediator, the debt management plan aims to reduce your monthly payments by reducing your interest rates, halting your late fees and waiving any other charges. It does not reduce the total amount owed, but it may help make your monthly payments more affordable.
If you’re considering debt counseling, then you must understand that this is a long-term commitment. Some people who stop midway in their plans find themselves in more financial stress than before. Therefore, you must imagine yourself sticking to this plan for 3-5 years until you’ve fully paid your debt.
How It Works
When you find and hire a debt counselor, the two of you will go over your finances to figure out your debt situation. He will also most likely subscribe you to a new and adjusted budget so that you can make room for the debt payments.
The debt counselor will then contact your creditors. Debts that qualify for debt counseling are unsecured, which include credit card debts, consumer debts, and medical debts. You cannot apply for a mortgage, student loans and other forms of secured debts for debt counseling. The counselor will negotiate with your creditors to lower your monthly payments by reducing your interest rates or waiving fees and penalties.
Now, instead of paying your creditors directly, you will send the payment to the debt counseling agency and the agency will be the one to pay your creditors. While on the plan, it is recommended to stick to your new budget and stop using credit. You may not also open new credit lines. However, you may be allowed to have one credit card for emergency use.
By doing so, you will not be incurring any more debt and making positive progress on chipping on your existing debts. You would have eliminated your debts by the end of the plan.
Debt Counseling/Management: Is It the Right Course of Action for You?
Debt counseling may or may not be the right course of action for you, depending on your level of commitment and how much debt you owe. Your credit score will deflate initially as you’ll no longer use credit, and being under credit counseling will reflect on your credit report. This is much better though than declaring bankruptcy which can stain your credit report for 7-10 years. Also, your credit score should start to improve after religiously and promptly paying the credit agency.
Before you commit to a debt counseling plan, you must figure out how to address emergencies as you won’t have access to credit. Keep a decent emergency fund stashed away so you are both paying down debt and still not worry about unexpected expenses.
Choosing A Debt Counseling Company
There’s a growing number of debt counseling/management agencies in the country and all of them will claim to be able to help you with your debt problem. But before you sign up with one, make sure that the agency is reputable. Check out its track record in the Better Business Bureau as well as Attorney General Office of your state. Also, always opt for one that’s listed in the National Foundation for Credit Counseling.
Apart from reputation, you want to work with an agency with a long-standing track record. It should have been in the business for a couple of years already. Also, pick one with excellent references. A quick call with the Better Business Bureau should tell you whether the potential agency has been tainted by complaints and scrupulous dealings in the past. Try to get a feel with the agency. It helps if you’re comfortable with the debt counselor and feel like you can talk freely about your debt problem. If you can talk with the counselor personally, as well as via phone or email, then that should be good too.
Importantly, ask about any fees related to credit counseling. There are non-profit agencies that provide free credit counseling, but there are also those that charge fees. If you go with the latter, ask for all the fees associated with their service, least you don’t get surprised. After all, the goal is to get out debt, so the program’s fees, if applicable, should be within your budget as well.
DEBT CONSOLIDATION PLAN
The essence of loan consolidation is to take all your smaller loans and roll them over into one larger loan. Now with just one huge loan to deal with, you also only have one interest rate, one loan term, one creditor and one interest rate. Doing it right, this debt repayment plan might be a good way to finally settle your debts. The process might take a longer time, but it also makes paying debt simpler and more straightforward.
How It Works
In loan consolidation, you work with another company or credit issuer that can grant you a large loan. This may be a bank, credit union or a third-party lender. For instance, if you want to consolidate all your credit card debts, you simply add those amount together and obtain a loan equaling to that total amount. The lender will pay off those credit card debts. After which, you will start paying the loaned amount from the lender monthly, essentially at a lower rate than if you’re paying for these debts separately. Also, you now have just one loan term, typically ranging between two to five years.
Debt Consolidation Plan: Is It the Right Course of Action for You?
A loan consolidation plan might work for you especially if you’re struggling to pay even the minimum due amount on your credit card bill. It gathers all your credit card debt and other unsecured debts so you only have to worry about paying one large loan. This is particularly helpful if you wish to settle high-interest loans, such as credit cards.
Interestingly, you may qualify to consolidate your student loans and unsecured debts. It is also possible to pay off your unsecured debts by taking a second mortgage or a home equity loan.
When considering loan consolidation, it helps to know that it doesn’t reduce the amount you owe, but it can the debt more manageable by picking a lengthier loan term and smaller interest rate. However, if you still fall back to the old money habits that got you into nasty debt in the first place, then this might not even help.
How to Choose a Debt Consolidation Program
Debt consolidation is a program that may or may not be offered by your debt counseling agency. Either way, you want the program to work for you, so it is best to go through the details of the program meticulously. Start by picking a reputable debt management company first, and then go through your options for debt consolidation.
Before you sign up for any agency or program, ask around first. Some colleagues and friends may already have experience working with a debt consolidation service provider. Ask for their feedback so you can narrow down your options.
Check out the company’s track record. Unfortunately, there are scrupulous and shady debt consolidation providers who are just waiting to pounce on innocent victims. Worse, these victims are already in debt, so picking the wrong agency might get you into even more financial trouble. Be wary and alert. You should only trust debt counselor or consolidation company if you are confident that it has your best interests at heart.
Getting into debt can be frustrating and getting out requires even more discipline and effort. But if you don’t, debt will only hinder your financial progress and prevent you from totally enjoying your hard-earned money.
Some people only have quite a handful of debts which they can settle with DIY solutions. You can tweak your budget or earn more money from a side job. But there are also those who need professional help and intervention, especially when debt causes you significant stress that it impacts your daily life. This is where debt counseling and debt consolidation comes into play.
But even with these resources, you need to do your due diligence and learn about them as much as you can. Your options are aplenty, so sort through them to find the best and most suitable one for you.