From Budgeting to Chapter 7 Bankruptcy - Your Options for Getting Out of Debt

Debt among American consumers is escalating, and it’s creating enormous stress, especially for young people saddled with student loans and the costs of setting up a home and starting a family. While some debt is positive, if it’s used responsibly to invest in a home and education, used unwisely, debt puts people at tremendous financial risk.

According to statistics from the Federal Reserve, average household debt is up to $132,529 (including mortgages), a jump of 11% in the past decade. Credit card debt and auto loans are up to $1 trillion, and student-loan debt has hit $1.3 trillion. Data reported by the Urban Institute in a new national map of indebtedness, shows that 33 percent of Americans hold debt that is currently in collection, with a median amount of $1,450.

 

How to Reduce Debt

Fortunately, there are ways to reduce debt, if you have the desire and self-discipline to do so.  The following are suggestions, ranging from budgeting to bankruptcy, for what you can do if your debt is becoming overwhelming:

 

1. Budgeting – Budgeting allows you to get a handle on daily living expenses, understand where your money is going, and learn to live within your means. Set up your budget by taking these steps:

  • Know how much money you take in and how much money you spend. List "fixed" expenses like mortgage payments or rent, car payments, and insurance premiums. Then list varying expenses, identify which expenses are necessary, like food and medicine, and prioritize the rest to see what you can cut.
  • Start cutting anything unnecessary from the bottom of the list, and keep doing so until you have eliminated enough for your income to cover expenses.
  • Consider a budgeting program. Budgeting software and smartphone apps are available that keep a log, deduct purchases from income, and track trends in your spending habits.
  • Commit to managing your money. Set aside time twice a month to manage your finances -- pay bills, balance your checkbook, and analyze your expenses.

 

2. Credit cards -- If you are making only minimum payments, you are paying huge interest charges.  Here are some ways to handle credit cards:

  • Stop making credit card purchases until you pay off current balances, and then do not charge anything you can’t pay off immediately.
  • Start with your highest interest rate credit card and pay that off first; then keep paying off the next highest.
  • If you can qualify for a zero-interest credit card, see if it pays to transfer what you owe from high-interest cards.
  • Call your credit-card companies and negotiate a better interest rate or discuss a lump-sum payment to clear your debt.

3. Professional help -- If you can’t do it on your own, consider getting help from one of the following:

  • Debt Relief Services -- check out the firm you're considering, know what services cost, and get everything in writing.
  • Credit Counseling -- Certified credit counselors help consumers build an affordable budget. Nonprofit organizations may offer credit counseling to determine how to pay your debts, but often there are fees involved.
  • Debt Management Plans -- You deposit money each month with the credit counseling organization, which reduces interest and gets you a more affordable monthly payment.
  • Debt Settlement Programs -- a company negotiates with your creditors to allow you to pay a lump sum less than the full amount that you owe. You transfer an amount every month into an account to pay off the settlement.

 

4. Bankruptcy -- If you still find yourself drowning in debt, you may want to consider filing for bankruptcy, a legal way to have many debts eliminated. The most common type for consumers is Chapter 7.

Chapter 7 can discharge (eliminate) most or all consumer and/or business debts so they no longer have to be paid, and it is over in a few months, so you can begin rebuilding credit quickly. You might have to sell property to help pay off creditors, but there are many Ohio bankruptcy exemptions. If you do not own a great deal of property, your possessions may all be exempt.

 

After bankruptcy, you will still be responsible for certain debts, including child support, spousal support obligations, student loans and most unpaid taxes.  However, bankruptcy can eliminate credit card debt, medical bills and unsecured loans, stop harassment by creditors, and give you a fresh financial start.

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