Road to Debt Freedom

Living without the burden of consumer debt equals freedom of choice. If you're willing to make a serious commitment, there are several free or low-cost methods that are easy to use. If you're looking for instant gratification, you've come to the wrong place; if not, then know that the rewards of living a debt-free existence are subtle, but worth the effort. The keys to success? Don't incur new debt, and live cheaply.

The Power of the Telephone

Consumer debts such as credit cards often have interest rates as high as 16 percent, sometimes more, and every dollar you pay off equals that rate's percentage return on your money.

Make a list of your debts, including all the pertinent financial information, such as the interest rate and outstanding balance. Call each lender and simply ask for a rate reduction; you'd be surprised at the power customer service agents have. Most consumers are unaware that this easy request can be accommodated with a quick phone call (if your account is current, you'll have a better chance of success).

Once your interest rates are lowered, maintain your payments at the previous levels. This ensures that more of your money is paying off the principal balance, and lessens the amount of time you'll be in debt.

Snowballing Your Payments

In the debt "snowball" reduction method, one debt is selected and all available funds are "pushed" toward eliminating the balance. Pay only the minimum payments on the remaining accounts. Pay the highest interest debt first; this ensures you will pay out the least amount over time. However, you may opt to pay the smallest balance first; this is a good method to use if you'd like to feel success earlier.

The key to the snowball is to add the first payment to the next once the first debt is paid off. Continue in this manner until your debts are paid, remembering to allocate every extra dollar toward debt reduction, while living frugally at the same time.

Debt Consolidation Loans

The financially savvy consumer may find that debt consolidation loans, such as cash-out home equity loans or credit card bill consolidation offers, offer much lower interest rates (home equity loans may also offer tax advantages). However, be honest with yourself. If you take out a debt consolidation loan, have a clear plan in advance to pay it back quickly. Ask yourself: Are you in debt because you overspent? If so, this route is too risky for you.

Remember that consolidation loans borrow from Peter to pay Paul. If you're using a home equity loan and you default, you have placed your home in jeopardy -- all for debts that would have been eliminated in a bankruptcy proceeding.

Debt Management Plans

If you are in over your head and don't know where to turn, your first call should be to the National Foundation for Consumer Counseling. This organization is a reputable nonprofit whose counselors are certified in credit management and provide free budget consultations. If you are late or are about to be late, you may elect to participate in a debt management plan (DMP).

In a DMP, unsecured credit accounts you select will be closed and you will be placed on a payment plan that will eliminate your debts within five years. Interest rates may be lowered, and your accounts will be reported as "current" to the three major credit bureaus. Your credit scores may suffer a temporary hit, but participation in a plan is much less severe on your scores than delinquent payments, settled debts or bankruptcy.

Debt Settlement Options and Bankruptcy

Your last resorts, and those with the most serious consequences, are debt settlement and bankruptcy.

Debt settlement, a completely legal tactic, allows consumers to pay a fraction of what they owe, usually in a lump sum payment. To qualify, you must be several months behind. You may hire a professional negotiator or attempt to negotiate on your own; usually, about 40 percent of the outstanding balance is agreed upon. The debt is reported as "settled" to the credit bureaus, but not paid in full.

Bankruptcy requires hiring an attorney, but your debts may be eliminated or settled for as little as 10 percent of the total. However, it is the solution with the longest-reaching consequences. It may affect your employment status, and it may be years before you can qualify for a loan.

Regardless of the path you choose, a fresh, debt-free start will provide a financial peace of mind that can't be duplicated by the thrill of instant gratification.

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How to Consolidate Debt With Bad Credit

You're up to your eyeballs in debt and your credit is shot. The layoff you experienced a few months ago has taken a toll. You've been searching diligently for work, but in this poor job market, it hasn't been easy. Stop! Before you consider filing for Chapter 7 bankruptcy or enrolling in a bogus debt management plan, consider these alternatives. Seize control of your credit again! With a little planning, patience and persistence, you will be back on top again.

Instructions

1

Tell yourself that it can be done, and you will overcome your current financial situation. Start out with a positive outlook. Be determined to become debt-free, repair your credit and get on with your life.

2

Understand that getting out of debt is a process, one that will take time. Remember, you didn't get into this mess overnight, and you certainly won't get out of it that quickly. Be mentally prepared to keep track of your monthly expenses, and maintain a tight budget. Learn to live frugally. You don't have to buy everything name-brand.

3

Take a good, long look at your current financial situation. Determine if you truly need to seek the services of a credit counseling or debt management service. There are plenty of these so-called providers out there waiting around like vultures to make empty promises and take your money. Invest the time to shop around and do plenty of research before deciding which one to use. Realize that, despite what these companies insist, there are other options.

4

Assemble your current and past-due bills. If you receive unemployment benefits, this will help because some (although very few) lenders actually consider it income. The first thing you should do is call each creditor and try to reach a settlement with them directly. Explain that you've been laid off but still wish to pay your bills. Ask if they are willing to work out a revised payment schedule and offer to pay a lesser amount than normal until you find a job. You'll be surprised at how anxious they are to work with you. Contrary to popular belief, they are not your enemy.

5

Consider consulting with a credit union or bank, preferably one that you already have an account with, to see if they are willing to approve you for at least a small personal or signature loan so that you can get you caught up on some of your monthly payments. Some of them may even approve you for a debt consolidation loan and make a check out to each individual creditor, if you qualify. All of this will be depend on your overall FICO credit score.

6

Check into applying for financial aid if you attend college. Not only will it help pay for tuition and books, it can also be used to pay some of your debts. You may qualify for several types of aid, including grants (which don't have to be repaid), scholarships and/or loans. Some loans, such as the Federal Perkins Loan, are backed by the Government, so your credit will not be checked. Contact your school's Financial Aid Office for more information.

7

Use a consumer credit counseling service if none of the above suggestions work. Exercise extreme caution, and check the websites for the Better Business Bureau and the Federal Trade Commission to see if any complaints have been filed against the company you're considering. Many of these companies claim to be non-profit, but still may charge a monthly service fee if you decide to enroll in their debt consolidation or debt management program.

8

Examine your entire financial situation, and decide what works best for you. Whichever option you choose, be consistent in making your monthly payments. The sooner you pay off these debts, the better your credit will look and the less stressed you'll be.

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A Guide to Eliminate Debt

Debt elimination can reduce monthly expenditures. Debt accumulation can result from overuse of credit cards or living beyond your means. If you're tired of making high monthly payments, consider ways to get rid of credit card debt or reduce your outstanding balances.

Increase Income

Additional income each month helps speed debt elimination. Check your finances, and if you don't have disposable income to pay down balances, look for part-time work temporarily to generate extra income. This can include working after your full-time job a few days a week, or asking your present employer for overtime hours.

Sell Items

Getting rid of personal belongings can create extra cash to pay down smaller credit card debts. Rummage through your closets, garage or basement and look for old items such as jewelry, furniture or electronics. Have a yard sale or list these items for sale in classified ads. Use the proceeds to eliminate a credit card bill or at least pay down the balance.

Reduce Expenditures

Resolve to cut back on extra spending to help pay down balances. Stop eating out or spending excessively on shopping, entertainment and recreation. Learn how to entertain yourself on the cheap and start preparing meals at home. Apply the monthly savings to credit cards and other debts to lower the balance.

Minimum Payments

Get away from only paying the minimum on credit cards and start increasing your payments to credit card companies. Do whatever you can to reduce the balance. Start slow and perhaps double your monthly payment. As your income increases, begin to triple or quadruple the minimum payment. Higher payments will knock down the principal quicker.

Destroy Credit Cards

Take a pair of scissors and destroy credit cards if you have a problem controlling credit card use. Whipping out credit cards to pay for items will keep you in debt, unless you're committed to paying off the balance in full each month. Carry cash and save for purchases to alleviate debt.

Interest Rate

Help pay down balances quicker by negotiating a better interest rate on your credit cards. Some credit card companies will reduce your interest rate on the spot if you have a good credit history. A lower rate reduces how much you're required to pay in interest charges each month; thus, creditors apply a higher percentage of monthly payments to the outstanding principal.

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When Must a Resident Be Informed of a Foreclosure?

If you are facing possible foreclosure on your home, take the time to become familiar with your state's foreclosure laws and time lines. Every state handles foreclosures differently, including notification steps and scheduling of the foreclosure auction. Foreclosure proceedings can be completed in as little as two months in Texas or can take as long as six months in Nebraska. Each state also regulates when a resident must be informed of a foreclosure, whether they own the property or rent it.

Notice to Accelerate

You are considered to be in default on your mortgage after 30 days without making a payment. Typically, after 60 days the lender will begin the foreclosure process, but you may be able to stall the process if you have been in contact with the lender since the first month of missing a payment. Once your payment is late by 60 days or more, you may receive a Notice to Accelerate, and if you fail to bring the loan current, the lender may accelerate the due date on the loan and begin foreclosure proceedings.

Demand for Payment

If the amount due is not paid by the date indicated by the lender in the Notice to Accelerate, the next document you may be receiving is a Demand for Payment letter, drawn up by the lender's attorney. The demand letter is to formally notify you of the next step the lender will take if you do not respond with a payment, and typically, you would have 30 days to bring your mortgage current or the foreclosure process will move forward.

Notice of Default

If you fail to respond to the demand letter, the lender would choose the appropriate type of foreclosure to pursue for your state or in accordance with your mortgage contract. The lender will initiate a judicial or non-judicial foreclosure; whereby, a judicial foreclosure must be processed through the court system and a non-judicial foreclosure is handled solely by the lender through a power of sale clause in the mortgage contract. You will receive a Notice of Default, usually anywhere from 60 to 90 days after your first missed payment, and this is your formal notice of foreclosure and lists the total amount due.

Notice of Sale

If you fail to respond to the Notice of Default within 20 to 30 days, you would be presented with a Notice of Sale. The notice establishes the foreclosure auction date for your property, and it must be posted in an adjudicated local newspaper and somewhere on your property, for a specified period of time prior to the auction. Once all publication time period requirements have been met, the property will be sold at auction to the highest bidder.

Renters

The Protecting Tenants at Foreclosure Act of 2009 protects renters who are subject to possible eviction when the property owner loses the home to foreclosure. The act provides that leases signed prior to foreclosure proceedings will continue, and the tenant will be allowed to stay until the end of the lease. Month-to-month renters are entitled to 90 days notices before having to vacate the properties, which is longer than any states non-foreclosure notification period.

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Is My Spouse Liable for My Mortgage?

For most homeowners, a mortgage is their largest personal debt. The consequences of not paying a mortgage loan include foreclosure, credit damage and a possible lawsuit.

Joint Contract

Lenders determine mortgage liability by whose name is on the original loan contract. If you and your spouse applied for the loan together and the contract reflects both of your names, the mortgage is a joint contract and you are both equally liable. If, however, the loan is in your name only, your spouse isn't responsible for the payments unless you live in a community property state.

Features

Some states, such as California and Nevada, have special laws regarding the distribution of marital debt. These states are community property states. In a community property state, any property that either spouse acquires over the course of the marriage belongs to both parties equally. The same rationale also applies to debts. Your spouse, therefore, is liable for your mortgage if you live in a community property state and acquired the property after getting married.

Misconceptions

If your spouse is legally liable for your mortgage, she cannot merely fill out a quit claim deed and place the full burden of repayment on your shoulders. A quit claim deed will legally transfer property ownership, but doesn't exonerate the homeowner who has filed it from the responsibility of paying off the original loan.

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What Is a Debt Agreement?

A debt agreement is a contractual arrangement in which one party, a creditor, agrees to work with another party, a debtor, who is unable to meet the previously stipulated obligations of a loan repayment. A debt agreement is sometimes referred to as a right of claim for money against a debtor. Debt arrangements can be either formal or informal.

Debt Basics

Debt is established by contractual arrangements, submissions into public records, judgments of debt by the court, issuance of bonds, and many types of consumer and business loan contracts in which terms of the debt are spelled out in the loan contract, according to The 'Lectric Law Library website's legal definition of debt. In some instances, debt agreements are verbally established between two parties. While usually legally binding, a verbal debt agreement is more difficult to substantiate in court. When you repay your debt in total, your debt is discharged.

Debt Remedy

When a debtor fails to meet his obligations under the contractually agreed upon terms and conditions of a debt agreement, the creditor may seek legal action to recover the debt and any money owed, notes The 'Lectric Law Library. This legal action to recover debt is called a debt remedy. A creditor may take a debtor to court, for instance, and sue for recovery of unpaid debt as well as financing fees, if applicable.

Formal Debt Agreements

Formal debt arrangements are called Part 9 Debt Agreements, according to the Debt Advice website. These are formalized arrangements established between a debtor and his creditors that offer an alternative approach to debt repayment. Added to the bankruptcy act in 1996, these formal agreements are intended to offer both parties a remedy that avoids bankruptcy, where no one would benefit. Often negotiated by a third-party debt solutions company, these formalized contracts help the debtor repay the debt over a longer time frame, or they may reduce the total debt. Creditors do not have to go along with a debt agreement, but may do so to avoid a total loss when a debtor files for bankruptcy.

Informal Debt Agreements

Informal debt agreements are less formalized and are not legally binding. Debtors that have personal loan and credit card obligations that exceed what they can manage may approach a creditor on their own to discuss an informal agreement that either suspends repayment, extends the repayment period, or reduces the debt obligation. The Debt Advice website indicates that creditors often have "hardship departments" that work specifically with debtors on these arrangements. If you lose your job and cannot meet upcoming payment obligations, a creditor may work with you directly to avoid expenses and delays with more formalized debt agreements.

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How Is Bad Credit Removed From My Credit Report?

Negative entries such as charge-offs and repossessions can remain on your credit report for up to seven years. A bankruptcy can remain for as long as 10 years. By law, the three major credit reporting bureaus--TransUnion, Experian and Equifax--must remove outdated negative information, according to the Fair Credit Reporting Act. However, federal law gives you the right to challenge any information on your credit reports, and that information must be removed within 30 days if the credit bureau cannot verify its accuracy.

Misconceptions

So-called credit repair agencies advertise that they can clean up your credit by removing negative information, but that's often wishful thinking. There are no legal grounds for removing negative information from your reports unless it is outdated or incorrect. The Federal Trade Commission advises that you should stay clear of credit repair firms and work directly with the credit bureaus through a disputes process if you think information on your report is inaccurate.

Benefits

Removing negative entries from your credit reports could cause your credit scores to increase, making it easier for you to obtain credit and qualify for loans at lower interest rates.

Time Frame

Those benefits are among the reasons some consumers challenge information on their reports even though they know that it is accurate. The Federal Trade Commission says the burden of proof is on the credit bureaus. When you file a dispute with the credit bureaus, the credit reporting agencies immediately contact your creditors to verify the information. Time is often on your side, because creditors have to respond to the credit bureau within the 30-day window. If they don't respond in time, the credit bureau must acknowledge that the negative information could not be verified and is being removed from your report. On the other hand, negative information that is confirmed remains on your report.

Potential

The disputes process is a common tactic used by credit repair agencies. You can take the same action and potentially gain positive results. It is common for some credit repair firms to simply dispute multiple entries at once in hopes that the original creditors will not verify all or most of the information. You can dispute entries in your credit reports by writing the individual credit bureaus or contacting them through their websites. Also, by law, you are entitled to free copies of your credit report every 12 months from each of the three major credit bureaus. You can get free reports at AnnualCreditReport.com.

Warning

The Federal Trade Commission says credit bureaus can ignore frivolous disputes. For example, a letter from you challenging previously confirmed information might be considered frivolous.

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