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Drowning in Debt: Sensible Steps to Survival

written by: •edited by: Donna Cosmato•updated: 8/23/2011

Most people find it easy to get into debt and not as easy to get out of debt. Achieve freedom from excessive debt by making an honest review of income and expenses, and find ways to pay down debt that has already been incurred. Find help overcoming barriers to becoming debt-free.

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    Evaluating the Problem

    Evaluating the Problem Those who are interested in debt elimination without bankruptcy must honestly evaluate their financial status, engineer a plan that works and begin the needed steps to eliminate their debt. Those who make a firm commitment to getting out of debt will need to be committed to the end goal.

    Evaluation Process - The evaluation procedure of debt elimination helps to understand how significant the debt is. This means that all debt must be acknowledged and listed. This is a three-step process which is required for anyone who is considering methods of getting out of debt.

    1. Request a credit report - While most people are fully aware of to whom they owe money, credit reports are crucial to getting a complete picture of a debtor's financial status. Consumers are allowed to request a free credit report on an annual basis. To obtain these reports, consumers may write to the three major credit reporting agencies as follows:

    • Experian (formerly TRW) P.O. Box 2002 Allen, TX 75013-2002 888-397-3742
    • Equifax Credit Information Services P.O. Box 105873 Atlanta, GA 30348 800-685-1111
    • Trans Union Consumer Relations Center P.O. Box 1000 Chester, PA 19022 800-888-4213 OR 440-779-7200

    All three credit reporting agencies will also provide a one-time copy of a "3-in-1" credit report, which provides not only all credit information but may provide credit scoring as well. This report may incur a charge so it is important to determine this ahead of time. Sending a letter with the individual's name, social security number and current address is typically sufficient to request this free annual report. Couples should each request their own reports.

    2. Verify the debt - After receipt of the credit report(s), it is important to carefully review all the information. This includes balances due, names of creditors and dates of last payments. All information should be verified for accuracy. In the event that any information is incorrectly reported, a letter should be sent to the credit reporting agency to update the information. If credit balances are recorded incorrectly, the creditor should also be notified.

    3. List debt in order of importance - While all of the debt will have to be listed, it is important to understand that it may be better to pay off some debt sooner. While a credit card balance of $500 may look worse than a balance of $200, if the interest rate on the $200 is two times as high as on the $500 then the $200 should be paid off first. Carefully review all fees and late payment charges that might be incurred.

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    Engineering a Solution

    Engineering a solution Finding solutions to reduce and eliminate debt is also a three step process. This step involves evaluating all of the options that are available for paying down debt. This means looking at current income, possible additional sources of income and if appropriate, consolidation of some debt.

    Engineering Process - This is the time to get down to brass tacks and find out what works for your personal situation. This is the time when it will be critical to discover what assets you really have and how to best utilize them to eliminate your debt.

    4. Income verification - List all sources of regular income. This includes payments from retirement plans, rental income, employment income and any other regular payments that can be counted on to be received on a regular basis. It may be helpful to record all sources separately in order to ensure that nothing is missed.

    5. Asset verification - List all possible assets that may be available to be liquidated to reduce debt. Some options may be to sell items in the home that are not needed or used any longer, stock positions that are not in retirement accounts or savings bonds or certificates of deposit that are not in retirement accounts. Generally, it is not a good idea to use retirement accounts to pay off debt.

    6. Verifying options - Some debtors may have some options available to them that should be considered. Some of these include taking out a home equity loan, consolidating all credit card payments on a single card with a lower interest rate or simply paying off credit cards from the monies available in savings or other assets. These options should be carefully reviewed before going on to the elimination stage.

    These steps are crucial to the overall completion of a successful plan. This step allows a debtor to make a careful evaluation of their overall financial status and to begin the process of taking the necessary steps to financial freedom. Having a complete understanding of the assets that are available to help form a final solution to debt allows debtors to take the final steps towards complete elimination.

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    Elimination Process

    Debt Free Beginning the process of eliminating debt can be a challenge. However, once all of the evaluation has been completed, this step should help a debtor begin the exciting process of becoming debt free. The elimination process has three steps that must be followed in order to finally start the final journey to financial freedom.

    Elimination Process - Debtors who are prepared to become free of their debt have completed a full evaluation of their financial status. This includes a making a complete list of debt, income and available assets. The next three steps can help determine the final path towards reaching their goals.

    8. Decision making process - Now that you have a complete picture of your financial status, it is time to begin laying out a final path towards complete debt elimination. The decision making process should involve looking at all options that are available including:

    • Consolidation - determine if it is possible to eliminate some debt by consolidating it with debt that is accruing interest at a lower rate. If a low credit score is hampering your ability to consolidate debt on a lower interest credit card, it may be time to consider a debt consolidation service;
    • Counseling services - consumers who are uncertain that they can successfully stick to a plan should consider contacting a reliable credit counseling service. The Federal Trade Commission offers consumers several tips on how to find a reliable provider;
    • Create a plan - begin creating a plan for debt payoff and maintenance. This process will require additional steps that must be adhered to carefully.

    9. Plan creation - Debtors who lay out a plan to pay off their debt should take specific steps to help them stick to their plan. This involves a number of small steps that require discipline to maintain.

    • Create a budget - debtors should create a strict budget "no frills" budget that reflects their commitment to eliminating their debt. This budget should allow for normal living expenses including rent (or mortgage), insurance payments, auto maintenance and repair, a food budget and utilities;
    • Evaluate the budget - after a budget is created, debtors should look for additional methods of saving money. This may include elimination of specific items such as extended cable television services, extended telephone services such as call forwarding, etc. Money saving steps such as eliminating lunches out with co-workers, clipping coupons, etc. should become a part of the overall budgeting process;
    • Set goals for payments - once a budget has been created and evaluated, then goals for debt payment may be set. This takes debtors to the final step in their debt elimination plan.

    10. Preparing for debt elimination - Finally, debtors are ready to begin the final stage of eliminating their debt and getting their credit back on track. This final step is imperative for long-term success.

    • Contact creditors. If payments are going to have to be reduced in order to pay off all debt, consumers should contact all credit card and revolving credit holders. Advise them of the changes that are going to be necessary to eliminate the debt. Make sure that a record of the correspondence is kept in a file;
    • Begin payment plans. Starting the payment plan as quickly as possible helps consumers begin the process of not only eliminating their debt but also puts them on the path to restoring their credit standing. Once a plan has been put into place, begin payments as quickly as possible.
    • Automate the process. For consumers who are concerned about not being able to adhere to their plan, automating the process of payments may be helpful. Using electronic funds transfers, automatic payments and so forth can be very helpful in these cases.

    The steps to debt elimination are very time consuming. However, for a consumer who is trying to take the steps necessary to debt elimination without bankruptcy, these steps are crucial. The entire process requires a commitment to the end goal and a determination to succeed. Long-term success depends on careful planning and wise money management decisions.

    Getting out of crushing debt is never easy, but once consumers have freed themselves from overwhelming debt it is often much easier to get back on solid financial footing. Once you have successfully eliminated current debt, staying out of debt is crucial. Sticking to a budget, paying cash for purchases, and living within your means are all necessary components of successfully managing debt. Strong measures are required to avoid filing bankruptcy to overcome debt problems. Bankruptcy is far more challenging to remove from a credit report than a few late payments. In the long run, creating and sticking to a plan is a better option.

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    Federal Trade Commission

    1. Money Matters
    2. Free Credit Reports
    3. Before You File for Personal Bankruptcy: Information About Credit Counseling and Debtor Education

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