Credit agencies view overwhelming debt as risky behavior and a lack of personal responsibility, but the truth is that overwhelming debt can happen to anyone. Perhaps the mortgage, car note, and credit cards were manageable with full-time income, but then along came an illness or traumatic injury. Suddenly, there is less income and medical bills can be added on to existing debt. In other cases, people mistakenly borrow more than their ability to repay.
Regardless of how it was incurred, there are steps that others have used to successfully end their problems with debt and return to the good graces of the credit agencies. The first step is to make an accurate accounting of existing debt, income, and assets. Bankruptcy should always be the last option, especially if significant assets are involved.
Reducing Interest Rates
Having multiple debts means dealing with multiple interest rates. Some will be higher than others, and these debts should be the primary focus unless other debts are tied to significant assets, like the home or only car. There are other ways to reduce the cost of interest, but the first methods should be to simply pay them off as quickly as possible.
If this is not possible, it may be worthwhile to consider a consolidation loan. These became extremely popular when private banks were still in the federal loan program, and they are now commonly used by other consumers. A consolidation loan from a bank will have lower interest rates than credit cards, but the option is not available for everyone.
Become an Active Negotiator
You will need to have all information about options ready for negotiation. Creditors have one goal, namely to get their money back. Approaching them with the same goal will usually begin a productive negotiation. They may be willing to lower the interest rate, reduce the monthly payment, or even provide a deferment. Be ready with one or two realistic proposals for repayment.
Most creditors have an active interest in you not filing for bankruptcy, and they may be willing to settle for a lower amount. After all, they are in the game of risk management. Settling for a lower amount becomes more possible, if you can swing a lump sum payment. Staying calm and taking your time are critical negotiation skills. If this proves to be a problem, continue reading.
Not surprisingly, debt management companies are a popular option. They have experience and expertise in negotiating with creditors, and they have the resources to perform similar functions as a consolidation loan. It is possible to lump multiple debts together into one monthly payment that is at a lower interest rate than the highest one.
There are several precautions to keep in mind when going this route. A sound plan will stipulate all conditions and the monthly payment in writing. It will have a repayment time of five years or less. The monthly payments will be manageable. Before signing, it is necessary to ensure that all creditors have in fact agreed to the company’s plan as proposed to you. It’s a good idea to read consumer reviews on any debt management company before signing an agreement.
Debt can overwhelm anyone, and creditors can make life a nightmare. If these options are unattractive or not possible, it may be time to consider bankruptcy. The best advice anyone can give is to be proactive in dealing with debt and creditors, because they will not go away.
Andrew Greene is a freelance financial writer who blogs for debtmanagement.org.uk, a site he likes to recommend after they helped him recover from being buried in debt through debt management.