Severe debt can have a variety of negative effects on your life -- aside from limiting your ability to make ends meet and keep your creditors at bay, it can cause intense stress that can lead to poor health, sleep problems, strained personal relationships and even thoughts of suicide. Although you typically cannot reverse severe debt overnight, you can take steps to gradually work your way out of debt and restore your financial and personal life.
Assessment of Debt
If you are drowning in severe debt and dealing with creditor calls and letters every day, you may experience so much stress that you haven't taken time to assess the situation. However, taking an honest look at your debt can help you chart a plan for financial recovery. Get out all of your loan statements, bills and credit card statements. Use a spreadsheet to list all of your debts, including interest rates and balances owed. Sort your debts in descending order of balances and interest rates.
Develop a Recovery Plan
Once you have listed all of your debts, begin a recovery plan. Determine how much of your income you can put toward paying down the debt with the highest balance and interest rate while still maintaining at least minimum payments on your other debts. Paying off your largest, most expensive debt can provide extra funds for paying down the next largest debt. Each time you pay off a debt, you will have more financial power to tackle the next debt.
Reduce Expenses
Reducing nonessential expenses can accelerate your recovery plan by freeing more money to apply toward your debts. Keep purchase receipts and bank statements to determine how much you spend on expenses like restaurant meals, entertainment and transportation costs. Examine each cost to find expenses you can cut out of your budget or replace with less expensive alternatives. For example, you can save money by preparing a meal at home instead of taking your family to a restaurant or by spending a weekend camping instead of shopping. You can also save on grocery expenses by using a store's rewards card, buying nonperishable items in bulk or purchasing organic produce at a farmer's market instead of at a supermarket.
Contact Your Creditors
Ignoring creditor calls and letters prevents you from communicating your desire to get out of severe debt. However, if you stay in contact with your creditors, they may offer solutions to help you regain your financial footing. Because creditors make more money by helping you repay your debt than by turning your accounts over to collection agencies or pursuing legal action, they may agree to lower your interest rates or offer temporary payment suspensions in exchange for your commitment to repay your debts.
Credit Counseling
Contact a credit counseling service if you cannot work out payment solutions with your creditors. A credit counseling service can work with creditors on your behalf to stop calls and letters, lower or eliminate interest rates and help you pay off your debt. Working with a credit counseling service may damage your credit; however, the effect on your credit is less severe than loan charge-offs, bankruptcy and legal judgments.
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