Some people file bankruptcy to dissolve their high debts and start over. But the consequences of a bankruptcy are disastrous. With a recent bankruptcy on your credit file, getting loans presents a challenge. Rather than hurt your credit with a bankruptcy, consider other methods of debt reduction.
Analyze Your Situation
Know what you're dealing with and make a list of all your outstanding balances, the interest rates and monthly payments on debts. Add up your total debts and then review your monthly income to determine your disposable income. This is surplus money after paying essential living expenses such as your rent or mortgage, car payment, insurances, utilities, groceries and transportation costs. Do not include dining out, entertainment and recreation in your budget.
Develop a Plan
The amount of money left over after paying your essential monthly bills determines how long it will take to pay off your debt balances. Divide your amount of debt by your disposable income. For example, if you owe $10,000 in credit card debt, it will take you approximately 20 months to pay off this balance with $500 monthly payments.
Deal with Interest Rates
Interest rates on credit cards are negotiable if you have a good credit rating. Understand the connection between the interest rate and monthly debt payments. Making a payment to your creditor does not reduce your principal by the amount paid. Instead, lenders apply a percentage of the payment to the interest charges. By negotiating a lower interest rate, more of the payment goes to reducing the principal.
Consolidation with Home Equity Loans
If you can control spending and do not plan to accumulate debt again, consider a home equity loan or cash-out refinance to eliminate high-interest credit card debt. Equity loans don't eliminate the debt. Instead, this option lets you consolidate debts into one payment. If refinancing your mortgage, you can roll the debt into your mortgage loan. Equity loans feature lower interest rates, which let you pay off the debt sooner. Know the risks beforehand. Equity loans are good if you can afford the payment. Defaulting can result in losing your home.
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