Loans & Borrowing

Reducing Debt

by mike on January 21, 2013

4105722502_a442444bb9Have you found yourself under a pile of debt?  This time of year can be especially scary when the credit card bills start coming due from Christmas.  There are several ways to get rid of this debt, some better than others.

1) Go to a credit counseling company.  Unfortunately, most of these companies are no good!  The first thing they will do is tell you to stop paying on your current debts.  Even if you have the money to make the minimums, they will advise you to stop.  I never recommend doing this if you have the money.  I once had a client who had signed up with one of these companies and they started taking out around $600 per month.   My client was under the impression that they were taking that money and paying their debts with it.  After 9 months, they realized that the company had paid nothing yet, so far the $600 per month had just covered the company’s fee!  Over $5,000 worth of fees and nothing had been paid on a debt!  Unfortunately, this happens to many other people.  Needless to say, I do not recommend going this route!

2) Default.  I recently came across an article at Market Watch titled “Why U.S. Might Be A Nation of Deadbeats.”   The basic gist of the article is that Americans are defaulting on their loans like never  before.  In fact, it has been widely celebrated that personal debt has decreased over the last few years.  This is a good thing except that 60% of that debt reduction has come from companies just writing it off.  In other words, for every $2 Americans have paid off, they have just not paid back $3.  I never recommend this as a plan of action either.  You spent the money, you need to pay it back.  There are rare exceptions (much more rare than it is used) when bankruptcy and default are necessary, but it should be a last resort after you have tried EVERYTHING else.

3) Extreme hard work.  This option doesn’t really sound fun, but it is the best one.  It starts with getting organized.  You have to list all of your debts and figure out what your balances are for each one so you know what you are up against.  That is usually the hardest step of all.   The dreaded budget is next.  Are you willing to make the cuts in your budget to get rid of your debt.  That includes getting rid of things like cable, expensive gifts, and potentially selling your way too expensive vehicle.  Then it is just a matter of getting to work: overtime, an extra job, etc.  Getting extremely intense will cause most people to become debt free in 2-3 years time.

Just over ten years ago, Mandy and I decided to go for option 3 to get rid of our debt.  It was intense, but extremely rewarding.  We have never regretted for a second taking the needed steps to change our financial future.

Is this year the year you do the same?

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