Debtors can gather debt from many sources, including large loans for houses and cars, lines of credit, such as credit cards, and appliance installment debts. If these debts begin to exceed 40 to 50 percent of the debtor's gross monthly income, the debtor should seek some type of debt assistance before she goes into default on some of her debts and has to deal with legal actions taken by creditors. It can be difficult to decide what type of debt consolidation option is best for you and what process will benefit you the most as the debtor. Your best options depend on your current financial situation.
Equity
If possible, consolidate your debt using equity. Equity refers to the value that you have in assets, the worth these assets intrinsically have based on market conditions. You have the most useful equity in your house. Consider refinancing if you have a mortgage that you are struggling to pay off -- a refinance replaces this mortgage with a new version, preferably with better terms, paying off the old mortgage completely. You can also choose to take out a second mortgage to pay off a large collection of other debts. Equity is a dependable source of funding for debt consolidation and often the simplest method to get out of debt difficulties. If your home does not have enough equity to create a new home loan, you may have to take out a debt-consolidation loan instead.
Debt Restructuring
Debt restructuring is the process of re-arranging your debts to make payments easier. The first step in a restructuring plan is to contact your creditors and see if they will be willing to switch out your current loan with a new version that extends the life of the loan but lessens your monthly payments, or a similar deal that allows you to make payments. The second step is choosing the debt with the highest interest rates or the most associated penalties and quickly paying off that debt first, slowly working down to lesser forms of debt. As a general rule, spend as much as you possibly can per month to take care of the most dangerous forms of debt.
Avoid Further Debt
This step may seem easy, but many debtors can struggle with it. The best methods of consolidating debt always involve avoiding further debt. This can often mean a lifestyle change, but it is necessary. When making your plan, include steps to stop using any credit cards and stop making any purchases on credit at all. Create a strict budget for yourself and resist any temptation to spend money unnecessarily.
Choosing Organizations Wisely
One of the worst mistakes you can make is putting your debt problems in the hands of another organization. Some government programs exist to help you manage your debt, but many debt-consolidation companies are scams that are only interested in making money by charging you fees in exchange for your financial information. Whenever possible, contact your creditors directly to work out a payment plan. If you have to use a firm to help out, research it carefully before agreeing to any type of service.
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