If you're stressed out over credit card debts, medical bills and other dues, it's time for you to take action in order to resolve your debt problem. It is not mandatory to seek professional help in paying off bills. You can do it on your own. Try going for a self repayment plan wherein you determine how much you can pay and negotiate an alternative payment plan or settle your debt with creditors/CA.
6 Steps in a self repayment plan
A self repayment plan includes 6 steps as given below:
Analyze your income and expenses:
You need to analyze your household income and expenses if you'd like to dig your way out of debt. Prepare a monthly budget (use the budgeting worksheet
) and look out for ways to reduce your current expenses. You may also try out means to earn extra income.
Calculate how much you owe:
It is essential to determine how much you owe in total. Check out your debt statements for the outstanding balance on each account. Add up the balances on all accounts using the Unsecured Debt Calculator
Prepare a list of your debts:
Make a list of your debt accounts along with the creditor names. Gather the following details on each of your accounts.
Annual Percentage Rate or APR
Monthly payments and payment due date
Amount and date of last payment
Legal action, if any, taken by creditor or CA
Contact details of creditor or CA
Assign a priority to your debts:
A self repayment plan requires you to prioritize your debt accounts on the basis of highest interest rate or lowest outstanding balance. The debt that is ranked as #1 on your list will be the first account to be paid off. You should put all your extra money towards this account while you make payments on other bills. Once this account is paid off completely, start paying extra towards the next account in your list. Keep paying off other accounts in a similar way till you're out of debt completely. In case you have credit card dues, check out the 15 tips to get rid of credit card bills
Communicate with creditors:
If you're struggling with your monthly repayments, speak to your creditors before your accounts are sent to collection. Explain your financial situation in detail and propose a payment plan to the creditor. Most creditors will agree to work with you if you suggest a realistic repayment plan and follow it accordingly. Some creditors may even allow you to settle your debt for less than what is due. Know how to settle your debt yourself
It is better to communicate through letters rather than negotiating over the phone. Use sample debt settlement letters
to find out how to write letters to creditor or CA.
Do not avoid talking to CAs:
If some of your accounts are in collection, negotiate with the CA and try to pay off the dues. In case you can't pay in full, inform the CA about your financial situation and hardship, if any. Make sure you're aware of the debt collection laws under FDCPA
. Dealing with the CA gets easier when you're aware of the laws and consumer rights specified under FDCPA.
While you negotiate your debt with the CA, follow the mailing guidelines that can help you in effective communication. If the CA asks you to pay off dues which you don't think you owe, then request a debt validation with the CA. At times, creditors may be willing to pull accounts from the CA. In such a case, you can directly co-ordinate with the creditor and negotiate a settlement.
5 Tips to make a self repayment plan work for you
When you're in a self repayment plan, you need to follow some tips in order to get the maximum benefit out of it.
Do not transfer balance to cards with teaser rates:
Transferring your outstanding credit card bills to a card with low teaser rate is not a wise thing to do. This is because the interest rate for purchases may not be the same as that for balance transfer. Often credit card issuers charge a high rate of interest for new purchases. In some cases, the rates may be similar, but the teaser rates last for a short while thereby leaving you with a higher balance payable at a higher rate of interest.
Avoid frequent transfer of credit card balance:
It is better to avoid moving your balance from one low rate card to another (to take advantage of low teaser rates) within a few months. In this way you can protect yourself from being charged higher rates or hidden transfer fee that may raise your outstanding balance.
Do not tap retirement funds:
Avoid tapping retirement funds in order to pay off your bills. For instance, the money you contribute towards 401k account is deducted from your salary prior to calculating your income taxes. So, if you borrow from your 401k plan, you won't be able to get tax-deferred returns on the account. Moreover, you'll be paying taxes twice - once when you repay the 401k loan with after-tax dollars and next, when you access the funds at retirement.
Avoid purchases with credit cards:
You should stop using credit cards for purchases, as otherwise you'll keep on accumulating debt on your credit card accounts. So, your balance will never go down and any effort to lower your debt level will fail.
Make extra payments:
Try to pay extra towards high interest credit card debt instead of making extra payments on your mortgage. You won't get into a default if you can't pay extra towards your mortgage. But you can save thousands of dollars if you pay off high interest credit cards fast.
Self repayment plan is a good way to pay off your bills and have control over your money. All you need is proper planning, realistic budgeting and good negotiating skills. However, if you don't feel comfortable negotiating with creditors and CA, you can go for professional debt help services. Finally, it depends on your debt level and your affordability as to how fast you'll get out of debt.