Reducing Debt Made Easy
Tackling Money Problems with a Debt Solution and Better Budgeting
Aug 10, 2009
Reducing debt can be achieved through better budgeting; this involves gradually alleviating money problems over time through better money management. Others use a debt solution, such as a Debt Management Plan (DMP), debt settlement plan or choose to declare bankruptcy. Both methods will help to reduce or write-off debt, although a debt solution may have negative repercussions for personal FICO scores.
The Importance of Reducing Debt
Unpaid credit card balances, small loans and overdrafts quickly increase in value due to the high rate of interest they attract. A high debt-to-income ratio means that an ever-increasing percentage of disposable income goes towards servicing debt repayments. It is important that this issue is tackled before problems deteriorate further.
Better Budgeting
Unless income is equal to or greater than expenditure, money problems are inevitable. It is a lot easier to save money than to make extra cash so perform a fundamental analysis of all spending activity to identify potential areas where savings can be realised. Reducing debt becomes possible when additional disposable income is created. Consider doing a few of the following:
- Drink less alcohol and smoke fewer cigarettes.
- Walk or cycle more to reduce gas/petrol consumption.
- Take a packed lunch to work rather than buying prepared food from a bakery or supermarket.
- Use online price comparison sites before making a purchase.
- Switch from branded to generic foods.
Debt Solutions
- Debt Management Plan (DMP). Instead of making multiple payments on credit card balances and small loans, a single, affordable payment is made to an intermediary. After paying a management charge, the rest is distributed to creditors based on the amount each one is owed. Many creditors agree to freeze interest payments and further charges.
- Debt settlement plan. A negotiation process is performed by a financial professional who aims to write-off up to 50% of the amount owed. Reducing debt is then achieved by making a monthly payment for a period of 12 to 36 months. Any remaining debt is written-off at the end of this term. Debt settlement plan fees are front-loaded which means that the amount owed will go up in the short-term.
- Declare bankruptcy. Provided that income is below the state median and no non-exempt assets exist, it is possible to write-off debt and become debt-free in just 4-6 months with chapter 7 bankruptcy. Those who don't qualify can restructure debt with chapter 13.
Reducing debt can be achieved by using a combination of better budgeting and the right debt solution. It is relatively easy to reduce or write-off debt by making a few sacrifices. Always consult a qualified debt counselor before proceeding.
Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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