Ask Question X

5 Ways to pay off debt and establish a solid financial footing

Have a look at the 5 ways to pay off debt that can lead you to a more comfortable financial life.

1. Interest rate arbitration: You obtain a secured or an unseceured loan at a low interest rate to pay off your existing higher interest unsecured debts. It helps you manage debts by reducing your interest rates and monthly payments.
   Interest rate arbitration pros
   • Interest rate reduction
   • Lower monthly payments
   • Gradual increase in your credit score
2. Debt management Plan: This is where you get debt counseling and debt advice from credit counseling organizations. They help you plan your budget, and arrange a plan with your creditors to lower your interest rates.
   Debt management plan pros
   • Lower interest rates
   • Elimination of late fees and penalties
   • One easy monthly payment
   • Re-aging accounts (bringing them current if you fell behind)
   • Predictable debt payoff time frame of 5 years or less
3. Debt settlement: In this debt plan, the settlement company/law firm consults with you about your financial and personal goals. If settling some or all of your unsecured debts for less than what you owe is an appropriate solution, they will create a trust account in your name and negotiate with your creditors/collectors to settle debt.
   Debt settlement pros
   • Lower payoff amount
   • Out of debt sooner than by enrolling in a debt management plan, or when filing chapter 13 bankruptcy
4. Chapter 13 bankruptcy: This is where you can arrange full or partial payment of your debts in a period of 3 or 5 years (the vast majority of plans in chapter 13 are 5 yrs) under supervision of the court. Chapter 13 can help those who want to keep their personal and real property, and have a regular source of income. This is also known as a wage-earner's plan..
   Chapter 13 bankruptcy pros
   • Payments toward debts are fixed with no interest
   • Principal amount is reduced in many instances
   • You cannot be sued by creditors while making payments on your chapter 13 plan
   • No need to sell assets and properties for debt repayment
   • You can cram down second mortgages in some instances allowing you to keep your home
5. Chapter 7 bankruptcy: This is where your non-exempt assets are sold by the court-appointed trustee. The sale proceeds are used to pay off your debts. You can discharge your debts within a period of 4-6 months.
   Chapter 7 bankruptcy pros
   • Your unsecured debts are discharged
   • Liens, bank account levy and garnishments are stopped
   • You cannot be sued by creditors listed in your bankruptcy after the debts are discharged
   • You can protect several types of retirement accounts from creditors
   • You can often reaffirm secured debts like a mortgage or car loan and keep those assets

Suppose you have accumulated debt on 2 credit cards, and medical bills. The details of these accounts are:

Outstanding balance on credit card X (15%) - $15000
Outstanding balance on credit card Y (20%) - $12000
Amount you owe on medical bills (13%) - $13000

So, the average interest rate = (15% + 20% + 13%)/3 = 16%

After you enroll in a consolidation program, the interest rates on your debts are negotiated down to:

Credit card X - 10%
Credit card Y - 16%
Medical bill - 10%

So, the average interest rate = (10% + 16% + 10%)/3 = 12%

Now if your total debt amount is $40000, you'll save = (16% - 12%) * 40000 = $1600 per year

Debt consolidation solutions for people with various debt problems

1. People who are going through payday loan hell
   Payday loan consolidation: An option for those who are unable to get out of the payday loan cycle. The payday loan consolidation companies offer debt assistance to people going through payday loan hell. They give effective debt advice and help to consolidate payday loans into a low single monthly payment.
2. People who are going through credit card debt problems
   Credit card consolidation: It helps you in consolidating your debt into one easy monthly payment. Debt consultants coordinate with your creditors to convince them to allow you to pay credit card bills in small monthly installments. If you're in the military service, you may enroll into a military debt consolidation program to get rid of credit card debt.
3. People who want to lead a Christian life by getting rid of debts
   Christian debt consolidation: It works just like a conventional debt consolidation program and is based upon Biblical principles. This program helps Christians to free themselves from the bondage of debt, so that they can worship God whole-heartedly. Christians can use debt consolidation services to eliminate debts and give their full attention to God.
4. People who often miss bill payments
   Bill consolidation: This is where the interest rates on credit card bills, hospital bills or store card bills are reduced, and the late fees and penalties are eliminated. You can pay off your delinquent bills through small monthly payments and save money.
5. People who are unable to manage unsecured debts
   Debt consolidation loans: You can take out a secured or unsecured debt consolidation loan to pay off your multiple bills at once. After the consolidation of debt with this new loan, you'll make one easy monthly payment to the lender. This is also referred to as loan consolidation. If you a have poor credit score, then your bad credit can make it difficult to qualify for consolidation loans.
6. People who want to pay nominal fee while consolidating debts
   Debt consolidation non profit: This program/debt service is offered by a company that has received non-profit status from the IRS. However, keep in mind that this is not a free debt consolidation program. The non-profit debt consolidation companies charge a nominal fee for helping you in paying off debt.

Debt consolidation statistics

Debt consolidation statistics show that consumers can save as much as 90 percent, on their existing debts provided they follow 6 basic financial principles:

1. Send regular payments to the debt consolidators.
2. Spend and stay within your financial means.
3. Make timely payments on other accounts.
4. Avoid spending unnecessarily.
5. Avoid acquiring new debts.
6. Create and stay within your monthly budget.

The debt consolidation success rate will be higher when the consolidators can:

• Review your financial condition accurately and make recommendations that are suited to your needs and goals.
• Negotiate with the creditors/collectors competently.
• Persuade creditors to reduce your interest rates.
• Set up a suitable repayment plan.
• Negotiate reduced balance pay offs
• Send the agreed monthly payment amount to the creditors/collectors.

Finally, keep in mind that debt consolidation, no matter the version you decide will help you the most in repaying your debts. However, it will not help you pay off debt within a few days or weeks. You haven't incurred debt in a single day. So, clearing your debts is not an overnight matter. It takes commitment and focus to accomplish your financial goals.

Our community offers 8 tools to fight debt

Check out the 8 tools you can use to resolve your debt issues.

• USA debt relief companies: You can check out company credentials and start working with a reputable settlement, consolidation or management firm to pay off debt.
• Comparison chart: Compare various debt relief options like debt consolidation vs settlement and debt consolidation loan vs program before reaching any decision.
• 32 Sample letters: You'll need to communicate with your creditors/collection agencies (CAs) in writing at various points of time. You can print and fax letters to the creditors/CAs/credit bureaus while negotiating, validating and disputing debts.
• Forums: This is a platform to share your financial problems and get free debt advice from our community members.
• DebtCC answers: This is where you can ask our experts any financial questions you may have. They can give you useful advice on debt consolidation, management, settlement, etc.
• Free debt calculators: These are smart financial tools that help you compute your debt amount and figure out the amount you can save through various debt plans.
• Earn dollars: Check out the 8 easy ways to earn money and use them in paying off your debt.
• Get rewards: The community offers various rewards ("Hall of Fame", "Debt Samaritan", "Moderator") to members for their active participation.

Post your comment

 

Put your comment

*

(Enter the code appearing in the image)