Rising interest rates and unexpected emergencies can cause a manageable debt to snowball into a huge debt in a very short space of time. However, you can take certain measures to reduce your debt burden and ultimately enable yourself to climb out of debt. You cannot clear your debts overnight but you can take immediate steps that will eventually help you to reach that goal.
Budget
Before you cut your spending you first need to get a clear idea of your income and that means reviewing your pay check, retirement check and other sources of income to determine take home, or net pay, as opposed to pre-tax pay. Having determined your take-home pay, consider writing a list of essential expenses, such as utilities and your mortgage. Gym memberships, premium cable subscriptions and your daily newspaper delivery are all examples of discretionary spending. Set yourself a reasonable weekly limit for other expenses like food and gas and try to stay within this budget. You can use surplus funds that you previously spent on discretionary items to start paying down debt.
Prioritize
You should review your credit card statements and other loan payments to see which debts have the highest interest rates. Use surplus funds to make principal payments on the debts with the highest rates so you can pay those debts down faster. However, if you cannot afford to pay all the bills, pay your secured debts, such as your mortgage and car loan, first so you do not end up being foreclosed on or having your car repossessed. If you can afford to pay the bills before the due date, doing so enables you to prevent a couple of days worth of interest from accumulating and little savings like this can go a long way as part of your debt reduction plan.
Negotiation
Contact your creditors and attempt to negotiate principal or interest rate reductions if you cannot afford to pay all of your debts. Try to negotiate debt reductions yourself rather than going through a debt reduction company since those companies have no power to do anything you cannot do yourself and you end up paying fees that could have gone toward the debt. If you have equity in your home, try consolidating other debts into a low-rate home loan. If you do so, you put your home at risk so do not take on a home payment you cannot afford.
Last Resort
Sometimes creditors refuse to negotiate and income levels are just not high enough to pay down debt. If you find yourself in this situation you have one other option: bankruptcy. Chapter 13 bankruptcy enables you to keep assets like your home and set up a payment plan to settle debts. Chapter 7 bankruptcy involves selling all of your assets and clearing all of your debts. Bankruptcy stays on your credit report for 10 years and makes it very hard to borrow in the future, but you may prefer to have no debt and a limited ability to obtain future credit rather than having more debt than you can afford.
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