It is easy to ignore that we may be falling into debt. Especially if you are unemployed right now or your wages have been cut. Reaching for a credit card may seem like an easy solution to your temporary shortage of cash flow. Or you are spending more than you earn and cannot account for where all the money is going. Sound familiar? Well you may be heading into too much debt and not be able to get yourself out if you don’t recognize the signs.
How to Recognize that you are in Debt
The first step towards getting out of debt is being able to recognize that you are in debt. Here are some signs that indicate you are in financial trouble:
- Cannot account for where your money goes.
- Don’t pay your credit card balances in full each month and only make the minimum payments accruing interest.
- Late paying your bills, and incur late fee charges.
- You have no emergency funds set aside.
- Credit applications are turned down.
- You borrower additional money to pay other debts.
- Checks bouncing.
- Post date checks.
- Creditors call you daily.
- False belief that you don’t have to pay your debts and can walk away.
Five Steps to Get Out of Debt that Really Work
Step 1: Make a Budget and Stick to It
List your income and debt. Set aside a portion for savings as well. Follow the budge and don’t get tempted to overspend. Cut back where you can.
Step 2: Pay Off Credit Card Balance with High Interest Rates First
If you cannot pay the entire balance, start paying a larger amount and pay more on the credit cards with the highest interest rates first. Do not charge any more until the balance is paid in full. Close some of your credit card accounts if you have too many. You really only need one or two cards at the most.
Step 3: Obtain a Copy of Your Credit Report
Check your credit report and see just how much you owe. Not knowing is not going to help. Also, if you find any incorrect items, report it to the credit reporting agency and ask them to delete the item from your report. Once you have a list of your creditors and the balances, you can contact each of them and work out a payment plan.
Step 4: Don’t Borrower Any More
Avoid borrowing money to pay off the old debt. Try and consolidate some of the debt with the lower interest cards.
Step 5: Negotiate with your Creditors
Contact your creditors and ask if they are willing to negotiate and settle for less if you pay off the amount now. You may be able to cut your debt substantially. Most creditors will work with you. They understand that there are emergencies in people’s lives. Also with today’s economy, creditors are more willing to work out payment plans. If you have a mortgage, you may want to contact your lender and work out a mortgage modification or refinance your mortgage to lower your monthly payments.
However, there is a price to pay, if they report a charge off or negative item on your credit report. Also try and negotiate that they do not report negative items if you agree to pay the negotiated balance now.
Step 6: Set Aside a Nest Egg
Put money aside each week or whenever you get paid for emergencies so that you can build your savings account balance back up. Your goal should be to save at least six months to a year of income for emergencies such as job loss or illness.
Step 7: Do Not Write Post Dated Checks
If you don’t have the money budgeted, don’t spend it.
Step 8: Avoid Late Payments or Skipping Payments
Late payments affect your credit. Many creditors charge a late payment fee so avoid making late payments or skipping payments, unless you negotiate this with your creditor and they waive the late fee or do not report the late payment history. Do not make a habit of paying late though.
Most creditors will work with you. They understand that there are emergencies in people’s lives. Also with today’s economy, creditors are more willing to work out payment plans. If you have a mortgage, you may want to contact your lender and work out a mortgage modification or refinance your mortgage to lower your monthly payments.
Step 9: Don’t Ignore Your Debt
Ignoring your debt will only make things worse. The only way it will go away is for you to be proactive and do something about it by cutting your spending, negotiating with your creditors and coming up with an affordable payment plan to get out of debt.
Step10: Talk to a Credit Counseling Agency
If you cannot work out a budge or solution to your debt problems on your own, then you may need to hire a credit counseling agency to help negotiate your debt with your creditors. Make sure their fee schedule is reasonable so you don’t incur more debt that you cannot afford.
Legal Help
You may need to seek legal help from a bankruptcy lawyer if you cannot resolve your debt on your own, or if you have tried to seek the help of a credit counseling agency and that has failed also. If you are in jeopardy of losing your home you will need to consult with a real estate lawyer and a bankruptcy lawyer or a lawyer that practices in both areas. However, bankruptcy should be used as a last resort.
There are many reasons why consumers get into debt. The solution to getting out of debt is recognizing the problem and then dong something about it right away. You may need to seek the help of a professional such as a debt consolidation or credit counseling company or a bankruptcy lawyer. However, bankruptcy should be the last resort as that can affect your credit for 10 years. You must learn to be responsible with your credit and correct bad spending habits.
