If you're losing sleep over debt, you're not alone. The Federal Trade Commission notes that at some point in their lives, many people experience financial difficulties that lead to collection notices and fears of losing a home or car. The good news is that you have options. With good planning and discipline, you can get smart about your debt and look forward to a prosperous future.
Budget
The first step toward managing debt is to create a realistic budget to track income and spending. Begin by totaling your monthly income from all sources, including salary, alimony, child support and pensions. Next, add up your fixed expenses -- the ones that stay the same from month to month, like your mortgage or rent, utilities, loan and credit card payments and insurance. Include gas and groceries in this category. Finally, list your elective spending: clothing, entertainment and dining out. Chances are, you're spending more electively than you realized. Make it a priority to redirect some of that money to paying down your debt.
Self-Help
Contact your creditors if you're having trouble keeping up with your payments. Some creditors restructure struggling customers' accounts in order to reduce their minimum payments. The best time to make such a request is before your account is in collection. This is especially true in the case of secured debt like mortgage and car loans, as the lenders can take the assets if you fail to pay. In the case of a mortgage loan, this means foreclosure. For a car loan, it means repossession.
Credit Counseling
If you're unable to reduce your payments or direct more elective spending toward paying down debt, contact a credit counseling agency for help. Look for one affiliated with the National Foundation for Credit Counseling that employs certified consumer credit counselors. The counselor will analyze your debt and income, help you make a budget, and, if necessary, work with your creditors to develop a debt management plan to help you repay your debt. If you enroll in a debt management plan, you'll make one payment to the credit counselor each month. The counselor will disburse the money to your creditors. Your creditors might reduce your minimum monthly payments, cut your interest rate and even waive some fees in exchange for your agreement to pay off your balance within the agreed-to period.
Debt Consolidation
Debt consolidation loans are home equity loans or home equity lines of credit that allow homeowners to tap into their equity to pay down higher interest debt. Debt consolidation loans incur fees, but they're often less than fees credit card companies charge for repeated late payments. In addition, the debt consolidation loan interest and fees may be tax deductible. Even if not, however, the much lower interest rate you're likely to pay can make consolidation a smart alternative to carrying unsecured debt. On the downside, your consolidation loan is a second mortgage. Failure to repay it could cost you your home.
Debt Settlement
Debt settlement is an agreement by which a creditor accepts a lump sum payment of less than the borrower owes. Debt settlement companies facilitate these agreements for a fee -- oftentimes, an exorbitant fee. Settlement isn't a perfect solution. It damages the borrower's credit. It's also risky, as neither the federal government nor most state governments regulate debt settlement companies. The companies often advise customers to stop paying their bills in order to amass enough cash to pay the lump sum payment. If the company fails to negotiate an adequate settlement agreement, the borrower can find himself in even worse trouble. However, settlement is, for some, a viable and preferable alternative to Chapter 13 bankruptcy.
Bankruptcy
The two types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Chapter 7 eliminates a consumer's unsecured debt -- credit cards and most loans other than mortgage and auto. Chapter 7 is highly damaging to one's credit report, but it gives consumers a fresh start and allows them to begin rebuilding their credit immediately. For this reason, it's often preferable to debt settlement for consumers who qualify. On the other hand, Chapter 7 bankruptcy exposes all of the consumer's assets to liquidation, including homes. Chapter 13 bankruptcy restructures, rather than eliminates, unsecured debt. A trustee works with the consumer to create a budget that includes repayment of as much debt as the consumer can afford over a period of several years. A Chapter 13 bankruptcy safeguards a consumer's home and cars. In addition, it acclimates the consumer to living according to a tight budget, which may help her avoid financial problems in the future.
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