Debt Elimination

In a down economy, this story is all too familiar.  Individuals wake up one day to find themselves overwhelmed by debt.  Money has been spent faster than it's coming into the household.  At the extreme, the household's debt load is so out-of-balance that bankruptcy appears to be the only alternative to eliminate debt.

Options to Eliminate Debt

Every day, people face a similar financial crisis. The crisis might be caused by the sudden loss of a job, the onset of an illness, or a pattern of overspending.  But this financial situation doesn't have to go from bad to worse.  It's possible to turn back the financial tide, and get debt back under control.

If you find yourself in this situation, then you probably have a short list of real options to eliminate your debt or get it under control.  Viable options include budgeting, credit counseling, debt negotiation, debt consolidation, or, as a last resort, bankruptcy.  The best option to choose depends on how deep you're in debt, how quickly you want to eliminate your debt and improve your financial prospects in the future.

Let's take a quick look at each debt elimination choice, starting with the self-help options of budgeting and debt negotiation.  Next, well look at the debt elimination options that make use of external resources such as credit counseling, debt consolidation, and bankruptcy.

Eliminating Debt on Your Own

These next two sections will describe your first line of defense against a growing debt problem:  budgeting, and negotiating with creditors.  For many individuals, this may be all they need to eliminate their debt, or get it back under control.  In fact, if there was one single best recommendation on eliminating debt over the long haul, it would be to create a budget.

Using Budgets to Control Debt

We talked about budgeting in our article dealing with credit card debt elimination.  The same process applies here.  Start putting together a household budget by listing all your income sources. Then you need to list out your expenses, and make sure you highlight the important ones.  These are mandatory expenses.  This includes rent, mortgage payments, travel expenses to work, utilities, auto loans, and insurance premiums.

Now make a list of your less important expenses.  These are discretionary expenses.  This list should include costs you could cut back or eliminate if necessary.  Expensive clothing and entertainment are good examples of discretionary expenses.

Add these expenses and income items up, and make sure the "money in" is greater than "money out."  Your budget needs to be realistic and not one that is built on future income that may never materialize.

We have three articles dedicated to this particular topic, if you want to learn more about putting a budget together:

• Budget Worksheet - a two part series, describing how to put together a budget, as well as a budget sheet you can download.
• Family Budget Basics - this article allows you to create a budget, and compare it to national average spending patterns.
• Household Budget - another "how to" budget article that emphasizes mandatory versus discretionary expenses as well as providing a personal budget to download.

Debt Negotiation

When we talk about negotiating down debt, we are not talking about calling creditors on the phone and asking them to forgive all your debts.  That's just not realistic.  In this situation, we are talking about contacting companies that you owe money, and making more realistic payment arrangements.

For example, you might be carrying a balance of $300 on your water bill.  Instead of trying to pay the entire amount in one lump sum, you can probably negotiate a debt payment arrangement.  This is sometimes referred to as a deferred payment arrangement or DPA.  This type of arrangement allows you to pay off the $300 over a longer period of time.

Keep in mind that these same companies that you owe money want to actually collect that money.  Forgiving this debt, or making an arrangement, will take some work on your part.  The best approach to take is an honest one.  Make an arrangement that you can meet, or you'll be calling them again, and the next round of negotiations will be even tougher.

In fact, if you're not sure what type of arrangement you can live with, or you simply don't want to deal with creditors, then you might want to seek the help of a professional credit counselor.

Finding Help Eliminating Debt

If you've failed to get your debt under control on your own, or you just think your situation warrants the help of a professional, then you basically have three options:  credit or debt counseling, debt consolidation services, and bankruptcy.

Credit Counseling

If you have problems sticking to a budget, or you're not really sure how to create a realistic budget, then you might want to consider contacting a credit counseling organization. Many credit counselors work for nonprofit organizations that are well-equipped to work with you to solve your financial problems.

In our articles on Debt Counseling and Christian Debt Consolidation, we provide some good advice on how to identify a legitimate credit counselor.  But as mentioned in those articles, just because an organization says it's a "nonprofit," that does not mean that its services are free.

Remember, the goal here is to eliminate debt, not make it grow.  In the articles mentioned above, we tell you what types of services a good counselor will provide.

Consolidating Debt

Debt consolidation might be one of the fastest ways to eliminate debt offered today.  By taking all your individual "loans," and putting them together in one place, you have a chance to pay back what you owe on more reasonable terms.

Most debt consolidation loans will require collateral, and your home is a likely choice.  This type of loan usually provides you with income tax advantages over some of the other personal loan options.  If you're considering debt consolidation to help control your monthly debt payments, then we have the following articles that can help:

• Debt Consolidation Mortgage - this article provides you with an introduction to home equity loans, cash out loans, as well as mortgages.
• Debt Consolidation Service - here we offer a primer on debt consolidation, including what to expect from this kind of service provider.

Online Debt Calculators

We also provide online calculators that can help you to better visualize what a debt consolidation loan can mean to you.  This includes our debt reduction calculator, consolidation loan calculator, and our credit card payoff calculator.

Bankruptcy

If you've been told that bankruptcy is the easiest way to eliminate debt, then hopefully you've been told that it's also the most painful.   You can lose your home, your car, and still wind up owing people money.  Legal fees are expensive, and judges don't always show compassion.

If you think bankruptcy is the answer to a five-year shopping spree, think again.  It doesn't work that way.  But if you think you have no other choice, then consult an attorney.  Bankruptcy is a very serious legal matter.  Your attorney should be able to give you an idea of what your financial future might look like after bankruptcy.

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