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As the credit crunch continues to affect workers and the unemployed alike, managing debt is the key to getting back on track.  So how do you avoid mounting debt?  What can you do to get out of debt? At some point in our lives, most of us have borrowed too much. If you find yourself in over your head, there are strategies you can implement right now and learn to live on what you earn.

First, accept the situation, forget making excuses.  Talk to someone about your situation, a friend, family member or a professional organization.  Be prepared to sit down and calculate how much you owe.  You may like to start with a budget.  There are a number of free tools available online. For example, if you find yourself addicted to credit cards this debt reduction planner is a great place to start.   However, if your debt consists of multiple sources, such as personal loans, a mortgage and credit cards, you may like to consider using the “rollover method”.  This strategy begins by sorting out the loan balances from smallest to largest, then paying off the smallest loan first.  You then use the amount available to pay off the next loan (add the amount available to the current payment requirement).

Another alternative is to consolidate your loans .  Although rolling all your loans together into a single loan may seem like the best option, bear in mind that it comes at a price.   There may be loan establishment fees, which will only add to the debt.  Enquire about penalties for paying the loan off early.  Is the new interest rate, including fees and costs, lower than what you’re paying now for individual debts? If you do decide to consolidate, make sure don’t wind up paying higher interest.  Use consolidation to break  free from the spiraling debt and stop spending more than you earn.  Cut up your credit cards, make the commitment to clearing the debt, otherwise consolidation becomes a temporary solution.  If you decide to consolidate your loans using home equity, your home may be at risk.

Consolidation could lead to borrowing more money, exacerbating the problem. If you decide to transfer existing credit card balances to your home loan, as part of the debt consolidation, then you might be tempted to put new debt on to your credit cards.  If you have a line of credit, your borrowing limit may be greater than your current limit.  In this case a consolidation loan will increase your debt, making your financial problems even worse.

No matter what you decide, an element of discipline is required to get out of debt and stay out of debt.  Consider the following when dealing with debt:

What caused your ever increasing debt?

What is your current income?

What are your basic living costs?

How much of your income is left once the basics are covered?  Use this excess to kick-start your debt reduction.

Consider increasing your income through a second job, reducing expenditure or selling items no longer required.  Are you eligible for government assistance?  Have you considered approaching your creditor to negotiate a better deal?  Work out what you can reasonably offer, considering both your living costs and all your debts.

Bankruptcy should be considered as a last resort. Although it releases you from your burden, you will lose your home and any other assets.  You may be forced to pay some of your income to the bankruptcy trustee and you may face other restrictions and potentially negative consequences. Seek advice before applying for bankruptcy.

For further guidance consider our ebook and bonus audio program.

Tags: bankruptcy, bankupt, debt, debt consolidation, Debt Reduction, loan consolidation

This entry was posted on Saturday, December 12th, 2009 at 4:47 am and is filed under Debt Elimination, Debt Reduction. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.