Getting Out Of Debt Continued

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Contact Creditors

Being late on vehicle loans is especially risky because most financing agreements allow lenders to repossess your vehicle at any time you are in default. If your vehicle is repossessed, you may also become responsible for the cost of the repossession. In addition, repossession will hurt your ability to obtain credit in the future. Because of this, it is better to sell the vehicle yourself to pay the loan if you cannot work out an agreement with your creditor.

Reduce your interest rates. If you can, move higher interest rate balances to lower interest rate cards or loans. You may be able to take advantage of a low introductory interest rate on a new credit card. Before doing so, be sure you understand what will happen to the interest rate at the end of the introductory period.

Consolidate your debt. You may be able to consolidate several debts into one obligation with an interest rate that is lower than the interest rate you were paying on the consolidated debts. Debt consolidation is not the answer for everyone. It works only if you are disciplined enough to avoid taking on any new debts.

Review your insurance deductibles. You may be able to improve your cash flow by increasing your insurance deductibles which will generally decrease your insurance premiums. The deductible is the amount you pay before the insurance company pays for a loss. By asking your insurance company to raise your deductible, you agree to assume more for each loss.

Remember to set aside the increased deductible amount in your emergency fund which should equal 3 to 6 months of basic living expenses.

Pay high interest debt first. Focus your repayment efforts on the debt with the highest interest rate. When you have identified your highest interest rate debt, continue making the minimum required payments on your other loans but apply available excess cash to paying down your highest interest rate obligation first. Once you have paid it in full, take the payment and extra principal you were paying on that loan and apply it as additional principal payments on the remaining loan that has the highest interest rate. As each debt is paid in full, you will have an increasing amount of cash to use toward paying in full the next one.

Sell assets. Consider selling possessions that are no longer wanted or needed and using the cash to pay your debt in full. Spare appliances, an extra vehicle or rarely-used exercise equipment may all be items for sale that will simplify your life while also raising funds for debt reduction.

If your debts are well above recommended levels, consider redeeming investments or using your savings to pay down debt. Generally, you should only do this if the expected return on your investments or savings is lower than the interest rate you are paying on the debt. Because selling investments may have tax consequences, you may benefit from consulting a financial planning professional.

Downsize. For many consumers, house and vehicle payments make up the majority of their debt obligations. If your debt is above the recommended thresholds, consider downsizing to a less expensive home or vehicle. In addition to reducing your debts, you may find additional savings resulting from lower insurance premiums and maintenance costs.

Where To Get Help

Consumer Credit Counseling Service counselors will develop your budget with you to determine how much is available to repay debt. Then they will negotiate on your behalf with creditors to develop a debt repayment schedule.

Under a CCCS debt management plan, you send a monthly check to CCCS for the amount you have calculated as available for debt repayment. CCCS distributes payments to creditors according to the proportion of debt owed to each.

Depending on the circumstances, some creditors may suspend finance and late payment fees for individuals participating in CCCS debt management programs. Some major national creditors have agreed to consider successful completion of a CCCS program as an acceptable credit history, so that if you qualify for credit on other grounds, your previous history may not prevent you from being approved.

Be sure any counseling service you use is affiliated with or recommended by the National Foundation for Consumer Credit (NFCC). Avoid firms advertising that they can resolve debt problems by removing negative information from your credit report.

Personal Bankruptcy

• Chapter 13 reorganization
• Chapter 7 liquidation

Both forms of personal bankruptcy should be avoided if at all possible.

Under Chapter 13, you are protected from collection efforts. A bankruptcy judge will make the final determination about how much you can afford to repay. Finance charges cease as you make court-approved payments to creditors over 3 to 5 years.

Under Chapter 7, you are released from the obligation to repay your debts, usually after a court-ordered sale of your non-exempt assets to pay as much as possible on your outstanding balances.

Some individuals mistakenly believe they will emerge from bankruptcy with a “clean slate”. Once you have filed bankruptcy you will find it more difficult to qualify for credit or to obtain it on favorable terms. Remember, bankruptcy should only be used as a last resort. Consult your legal adviser for more information.