What To Do When You’ve Got Too Much Debt

by Silicon Valley Blogger on 2011-04-208

A lot of people who seek the help of a financial counselor are doing so in order to manage their debt. Now if your finances are strained because your debt is growing much too fast for your comfort, or if you’re beginning to realize that things may just be spinning out of control, then you may want to do something quick or drastic.

Unfortunately, when you’re backed into a corner, the way out is no longer that easy. But here are few tips to look into if you are preparing to face your growing debt:

1. Know all your options. Get to know all the debt solutions that are available.

Make yourself a debt expert if you can. Study different plans and find out which solution can fit your needs the most. These debt solutions are not a “one size fits all” situation — usually what’s good for one person may not be good for another. The best approach for you will be based on your particular situation and the type of debt you have. But I’ve said it before and I’ll say it again that the more you know, the more you’ll be helping yourself. As a review, let’s look at the several ways to go about handling debt, such as:

Debt Consolidation – You typically go this route because you’re seeking the convenience of paying one amount to cover all the different loans you have. It usually has the overall effect of lowering your rates or making sure your rates are pegged. But of course, there are costs. Nothing is free, after all, and it’s even more true when it comes to dealing with our finances.

Credit Counseling – You may decide that it’s best to visit a financial counselor to help you create a debt management plan. I know a family who did this sort of thing and was able to wipe out their debt in a few years. But there’s a catch though — for this solution to be truly successful, the onus is upon the debtor to make sure they don’t slip into bad habits after they’ve finally conquered their debts. The bad news is that many people give up on their plan and don’t really get a chance to work it through. This is going to take will power!

Debt Settlement – This solution seems like a tempting fix for someone who’s drowning in debt. After all, who wouldn’t feel relief when they hear about the possibility of shrinking their debt load into half of what it originally is? Sounds great, but this approach is rife with risks. First of all, you’ll need to play a game of bluff with your creditors (credit card issuers, lenders) to make this work. In order to get your debt settled, you’ll need to withhold making payments first and this will have quite a negative effect on your credit. Also, if you hire a debt settlement company, you’ll need to make sure you pick a legitimate outfit as this industry is full of unscrupulous souls. These companies can charge a lot to represent you in a debt settlement case.

Bankruptcy – Then there’s the last resort that’s offered by various bankruptcy options. Should you go this route? Right off the bat, this has the largest effect on your credit. There are a lot of rules involved along with different processes and consequences that are associated with each type of bankruptcy option that is available. As with debt settlement, “retiring” your debt this way will depend on the type of debt you have, your debt and income limits, what assets you can still keep and what you’re willing to let go of.

Study your options well and see what you and your family can accept.

2. Don’t go in denial.

Whenever we’re faced with something unpleasant, it’s way too easy to put up the defense mechanism called denial. I know this guy who is clearly broke, with $100,000 in debt, but refuses to work out any serious solutions to make a dent on things. Every year, he gets the “surprise of his life” when the tax bill comes and shows how much money he owes the tax man. His taxes are a big part of his debt (he pays the IRS in installments each year) and somehow can’t or won’t accept the fact that he needs to plan for taxes and that it’s something he’ll owe the government each year, like clockwork. Instead, he reacts with shock and great surprise every time his tax bill gets calculated, and treats this bill like an unexpected emergency. It’s really no excuse since he can afford to spend his money on unnecessary things throughout the year. Denial can be pretty expensive in the end.

3. Act before it’s too late.

There’s a tipping point when it comes to debt. If you wait too long, it’s going to be much more difficult to resolve your case. That’s because the power of compounding here is going against you. Even if you do nothing, your debt grows and lives and will require more and more money to vanquish over time. The higher your interest rate, the greater the growth of your debt, and the more money you’ll need to erase it. Seems like a very easy concept, but people forget about this when they use their credit cards. It’s too easy to go in denial (see #2) when you’re shopping and you’re carrying around plastic. Well, my only real advice here is to spot the problem early and stomp on it right away. If you are aware of your growing debt, make sure you keep on top of it and know when to pull back on your spending. Make some serious headway on your debt before adding on to it.

If you insist on using a card when you shop, try out a prepaid debit card from our list. You won’t be incurring any form of debt this way (but watch out for the accompanying fees).

4. Go the low cost way — do it yourself?

The debt and credit industry is huge and is more than ready to separate you from your bucks. That is, if you are suffering from debt, there will be many companies that will be happy to help you, for a fee. Usually, these fees are quite large, and it’s been said that because the debt industry is not really regulated, there have been certain debt-affiliated companies that have been getting away with abusive behavior. Debtors are easy pickings and are the ideal victims because they are often desperate, so if you’re a debtor seeking help, be careful whom you work with. There are also pros and cons to getting out of debt on your own or tackling a DIY debt reduction program: it’s definitely cheaper to work out your own debt management plan. But if things get out of hand, it may be best for a professional to step in and help you as they can give you an objective look at things. They may also have the experience and relationships with your creditors and lenders that could help your cause. Check out our post that delves into the question of whether it makes sense to seek debt assistance or do things on your own.

You can work on managing your own debt by exploring the site SavvyMoney.com with the service called SavvyMoney Pro. It’s a great resource for those who want to develop their own debt management plans, if you are interested in a paid subscription plan for working out your debt matters.

5. Know and be prepared to accept the consequences of your debt solution.

The path to solvency may not be easy. But hopefully you don’t feel and stay in debt limbo for too long. I have relatives who have happily bounced back from the depths of financial loss, as if nothing has happened. I guess they’ve got resilience in spades. Hopefully you’ll be able to adjust to the new realities of having to deal with debt head on. Handling debt will take serious financial changes and an attitude adjustment, and won’t be a walk in the park. But it will help if you stay determined and committed to your goals. It’s important though that you take your plight seriously, that you face reality and make sure you don’t fall into the same trap as you’ve done in previous years.

Copyright © 2011 The Digerati Life. All Rights Reserved.

{ 5 comments… read them below or add one }

Derek April 21, 2011 at 1:43 pm

Totally agree, but you may want to add one more… don’t add additional debt. It sort of fits with denial (#2). Either way, before someone can find a solution to get out of debt, they need to find ways to avoid accumulating more debt. Thanks for the great post.

Silicon Valley Blogger April 21, 2011 at 3:03 pm

Thanks Derek. I can see how reversing a trend can be hard for most of us. If you’re used to spending a certain way, one of the toughest things is to change that habit, particularly for the long term. It’s also one of the reasons why I try to focus my limited energies and time to building out income channels, because living with less, while I believe is doable as a temporary measure, may be harder to execute for the long term. At any rate, living modestly and not taking anything for granted , even when your finances are on an uptick is a good approach. I try to live by this rule: if you’re fortunate enough to experience income growth, do refrain from increasing your expenditures even though there is a great temptation here to expand your lifestyle accordingly. Always be aware (and therefore live with the knowledge) that one’s fortune can change on a dime.

Yemi April 21, 2011 at 5:14 pm

Good advice…read Dave Ramsey’s Total Money Makeover and use the baby steps to get back in good financial shape.

Roxie April 28, 2011 at 7:42 am

Also, don’t take some bank’s or credit cards or pay day loan person’s recommendations on how much debt you can afford to be in. Figure it out yourself. The best personal finance advice I ever got was out of this book at wakeupordiepoor.com and I have been debt free since I paid my school loan.

Elin April 28, 2011 at 7:20 pm

Act on it. Don’t be afraid to so something different like visiting a financial counselor. If we keep on doing the same thing, we will simply get the same results.

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