Popular Debt Reduction Strategies

For many people, debt reduction has become the number one priority. The economic recession forced Americans to evaluate spending habits and investment strategies. Although the economy is beginning to improve, consumers are still trying to dig out of the financial mess caused by bank failures and long-term unemployment.

To be successful with debt reduction, consumers will need to research each available option to determine which is best suited for their needs. The required strategy depends on the type of debts owed. Some debtors might benefit from one debt help strategy, while others may need to incorporate two or more tactics to reach their goals.

Some of the more popular debt relief options include: budgeting, debt consolidation, debt settlement, credit counseling, and personal bankruptcy. Each requires debtors to commit to reducing expenses and adhering to required protocol until debts are eliminated. Let's take a brief look at each.

Budgeting is the most affordable debt reduction strategy, but does require self-restraint. Those who spend more than they earn must find ways to reduce expenses or increase income. To find out where you're at financially it is important to create a list of income and expenses.

First, make a list of fixed expenses that must be paid no matter what. These can include mortgage payments or rent, utilities, transportation costs, daycare, child support, alimony, and food.

Next, create a list of "extra" expenses. These might include morning lattes, carry-out lunches, salon visits, newspaper or magazine subscriptions, or cell phone bills.

Finally, create a list of income. This should include fixed income earned from employers, child support or alimony, as well as extra income that may or may not be earned on a regular basis.

If income is less than expenses, it's time to figure out where to reduce expenses. If you're subscribing to unlimited cell phone plans, consider changing to a less expensive plan. If you receive the daily paper, consider only subscribing to the Sunday paper or reading news online. If you're spending too much at the grocery store, start clipping coupons. With a little ingenuity, commitment and patience you can overcome debts.

It can be helpful to spend time researching budget strategies. Two trusted sources for learning money management skills are Dave Ramsey and Suze Orman. These financial gurus have published numerous personal finance books and offer an abundance of debt help information via their websites. Their books and budgeting courses are often available at no cost through local libraries.

Ramsey urges people to track daily expenses for a minimum of 30 days. This can be accomplished by recording every dime spent in a notebook or piece of paper carried in your wallet.

Most people are astounded at how much money they waste when they begin tracking expenses. Believe or not, Americans spend an average of $1,000 per year just on gourmet coffee drinks. Over the course of 10 years, this equates to a whopping $10,000 or nearly enough to buy a new economy car. Wouldn't you rather have that money earning interest in a savings account or use it to pay off high interest credit cards?

Individuals who do not engage in budgeting often find themselves living paycheck to paycheck and never getting ahead. The only way to ensure you'll be a winner in the money game is to engage in budgeting and stick to the plan.

Debt consolidation involves taking out a loan to pay off all outstanding debts. This strategy is usually reserved for homeowners who possess sufficient home equity and adequate credit ratings to qualify for a home equity loan.

Lenders provide home equity loans based on the level of accrued equity; meaning the difference between the principal balance and appraised property value. Borrowers use funds to pay off credit cards, unsecured debts, personal loans, or student loans.

Home equity loans are assessed with a much lower interest rate than credit cards and unsecured loans. While this can be a good strategy to pay off high interest loans, it is not without risk. If borrowers are unable to remain current with home equity loan payments, lenders can foreclose on the property, even if the original mortgage loan is current.

It's important to weigh the pros and cons of this debt reduction strategy prior to applying for a home equity loan. The Internet can be a good source for conducting research, as can local libraries. Some people prefer to talk to a mortgage professional or personal finance advisor. Regardless of where you obtain information it's a good idea to research all available debt relief options before making a final decision.

Debt settlement might be helpful for debtors carrying excessive levels of debt. However, careful research should be conducted before signing a contract as many debt settlers are under investigation by the Federal Trade Commission for making promises they cannot keep.

The way debt settlement works is consumers hire a debt settlement company to negotiate outstanding balances with creditors. Many debt settlement companies claim they can reduce debts by as much as 60-percent. What many consumers do not realize is that these service providers charge an upfront fee, along with monthly maintenance fees. These costs can amount to as much as the reduced debt.

When debt settlers are successful in negotiations, borrowers pay a lump sum cash to pay off outstanding balances or enter into a repayment plan. Creditors' write-off remaining balances once the negotiated amount is paid in full.

Debt settlement plans cannot be used to reduce balances on secured loans, mortgage notes, tax liens, creditor judgments, or delinquent child support or alimony.

Debt settlement can be used to negotiate balances with credit card companies, medical bills, and unsecured loans.

Debt settlement will adversely affect credit ratings for several years. Skipped payments to creditors are reported as late to the three major credit bureaus and may incur late fees, penalties, and interest.

Debtors must understand that creditors are under no legal obligation to reduce outstanding balances. When creditors do write-off debts the discharged amount might be considered taxable income under IRS guidelines. Therefore, debtors should consult with a tax accountant to determine if taxes will be owed.

Credit counseling can be beneficial to nearly everyone, but this debt reduction strategy can be particularly helpful to debtors drowning in debt. Credit counselors review debtors' personal finances and assist them in developing a get-out-of-debt plan. Credit counselors may also be able to help debtors negotiate with creditors to remove late fees and penalties, reduce interest rates, or lower principal balances.

Credit counseling agencies are located in most metropolitan cities. Agencies charge fees for services rendered. Debtors who cannot afford credit counseling should seek out non-profit agencies that use a sliding scale based on earned income to determine fees.

Debtors who are considering filing personal bankruptcy should seek out agencies approved by the U.S. Trustee. New bankruptcy laws require petitioners to complete credit counseling before approving their bankruptcy petition. In many cases, debtors can avoid bankruptcy by entering into credit counseling.

Debtors who obtain credit advice from agencies outside the Trustee program should conduct thorough research before signing a contract. One of the most trusted sources for verifying credit counseling agencies is the Better Business Bureau website at BBB.org.

Another good source for debtors in need of consumer credit services is MyMoney.gov. This government-sponsored website is presented by the U.S. Financial Literacy and Education Commission to provide money management information and credit repair resources.

Personal bankruptcy should be the last resort because it is expensive, time-consuming, and causes serious harm to credit scores. Bankruptcy remains on credit reports for 7 to 10 years and can prevent borrowers from obtaining credit for many years.

Personal bankruptcy is governed under Chapter 7 or Chapter 13. New bankruptcy laws enacted in 2005 require debtors to reorganize debt under Chapter 13 and develop a payment plan which can extend no longer than 5 years.

Debtors are required to remit regular payments to the bankruptcy trustee until reorganized debts are fully paid. During the Chapter 13 payment plan, debtors are prohibited from incurring new debt without court approval. If debtors do not comply with bankruptcy plans their creditors can request dismissal. When this occurs debtors lose protection from the court and fail out of bankruptcy.

It is estimated more than 70-percent of debtors fail out of bankruptcy within the first year of their plan. This is particularly harmful to debtors who filed bankruptcy to stop foreclosure. Mortgage lenders can immediately commence with foreclosure action once debtors' bankruptcy petition is dismissed.

If bankruptcy is the only viable option it is crucial to consult with a bankruptcy attorney. The new laws have made it nearly impossible for debtors to file bankruptcy without legal counsel.

Regaining control of debts is empowering. Numerous options exist for those who truly want to get out of debt. By taking time to become educated about the different credit repair strategies, debtors can learn how to become debt-free and invest in their future.