Desperate young woman with debts reviewing the billsDid you know that creating a plan to get yourself out of debt is an essential step towards feeling in control? It doesn’t even have to be the ideal plan. Taking steps, exploring your options and making a plan of attack puts you back in the drivers seat.  It tells your subconscious you are in control, relieving the survival pressure and subsequent financial stress you may have been feeling.

The plan might be a long road and you might not be able to see the end point yet but you will be moving forward and addressing those feelings of being out of control. In Step 4 of the 7 Steps to Get out of Debt, we discussed the very first plan you should make is to ensure you keep up your minimum payments and make efforts to pay what you can towards any defaults you have. When it comes to debts, committing yourself to the minimum is the very basic you need to keep your head above the water.  After that you can focus on eliminating them one by one.  We will discuss eliminating debt first, but if paying the minimum has become out of reach for you, or your budget is so tight that there is no room for any unexpected expenses, then it is time to explore your options for negotiation.

Eliminating Debt

Eliminating your debt will require a basic knowledge of how you got into debt in the first place. Changing your lifestyle and financial habits will certainly help you avoid a messy debt scenario into the future. However, if your debts were a result of personal reasons, health related, business related and not just lack of financial planning then there is not much you can do but pick up the pieces and start again a little wiser.

The best trick to eliminating your debt is to know exactly what your financial situation is. Know your income, expenditure, assets and debts to the dollar. Know what your money is doing and create budgets based on the information you’ve tracked. To eliminate debt you will need to live frugally until the debts are finalised. You will need to cut back on expenses and perhaps reduce your assets and look at ways to increase your employment capacity. It is not easy but changing your mindset and setting yourself up with financial goals that motivate you will make it possible.

Using different types of repayment methods to achieve the same goal might mean the difference between taking four years to pay off your debts or five, incurring lots more interest along the way. Examine your options and pick the best one that isn’t going to hurt you in the long run.

You need to pay more than the minimum to work down the principal of the debt and common methods are:

  • Snowballing: Paying off smaller debts first, regardless of the interest rates. Helps your overall credit history and offers breathing space by eliminating smaller accounts faster e.g. bills.
  • Highest interest first: As the name implies you pay the highest interest debts first.  Frees up your cash faster.
  • Balance transfers: Clear the balance of one debt by moving it to another with a lower or no interest rate. Lowering the amount you’re paying towards the debt. WARNING!!  This strategy is only recommended with a very clear debt pay off plan, many people have been caught out with this strategy.
  • Debt Consolidation loans: Combining all your bills and debts under one loan, managing it with one repayment. Read all the terms and conditions, do the calculations.  Make sure you are better off with this option.

You maybe eligible for financial or government assistance or you may be eligible to apply for a debt agreement to negotiate a pay out of your debts, which involves freezing the interest and reducing the debt amount owed.  With a debt agreement arrangement allows you to completely pay off your unsecured debts over a three to five year period whilst maintaining control over your secured debts like your home. Three to five years can be over in the blink of an eye and you’ll be faced with a fresh start matched with new financial skills to begin again.

Depending on you specific circumstances, if you are not able to get ahead on your own steam, using discipline and pay down strategies, then head for the strategies that enable negotiation.

Negotiating Debt

Generally speaking it is possible to negotiate your debt if your personal circumstances have changed since you entered into your credit contract. There are different approaches to tackling debts depend on what your current financial difficulties are.  Firstly, are your current financial difficulties short or long term? Your options for negotiating your debts will be affected by this. Losing your job or managing loss of income due to injury or illness may mean you only need to seek short term fixes until you find more work or your health turns around.  Options include requesting financial hardship assistance or negotiating an informal arrangement for 3 to 6 months with your creditors.

A long term situation, where

  • you can’t meet your minimum repayments;
  • you are unlikely to increase your income in the near future; or
  • there are no further options for cutting expenses

require you to investigate longer term debt management solutions to allow you to gain control.  A Debt Agreement may be the strategy you are seeking.  It is a legal option that enables people, with the help of a Debt Agreement Administrator to completely renegotiate their debt repayments.  When you enter a debt agreement with your creditors all interest on your debts are frozen and the total amount of debt owed is reduced.  Only unsecured debts are included in the agreement meaning you can avoid becoming bankrupt, allowing you to keep a hold of your assets, and maintain control over your finances.

Negotiating your debt requires communicating with your creditors to reach new mutually acceptable terms of payment. If you are struggling with debt, whether your situation is long or short we encourage you to get in contact with your creditors as soon as possible.  Lenders and utility providers are required to review your situation when you apply for hardship. Together you can discuss a variation or perhaps a hold on payments for a three month period depending on what type of debt you are tackling. Talking to your creditors is essential to the process of staying in control of your financial situation. If you keep in contact and let them know what happening, they are going to be more amiable to helping you get through this hard time. If you ignore them things can spiral very quickly and you may find yourself facing a worse situation like losing your home or having services cut off.  Sometimes handling creditor negotiations on your own is too difficult to manage, particularly when you have too many creditors making competing demands.  Seek help from an experienced debt negotiator, like Debt Cutter, it can make the difference to the negotiations and help relieve the stress.

Consolidating Debt

Consolidating your debt by moving all your separate balances into the one account means you’ll be paying one monthly repayment, as opposed to several. If juggling multiple payments means that you keep missing them, then it may be worth considering.  The catch is that many lenders require you to have a good credit history to take out one of these loans. Although, there are lenders out there who will approve debt consolidation loans for those with bad credit however they usually charge an increased interest rate to mitigate their risk. Before you consolidate using a loan it’s important to understand that you will be required to service the consolidation for 12 months before you can look at other options like a Debt Agreement .  Another option, if you are behind on payments is looking at an Informal Debt Negotiation arrangement that also includes a consolidated debt payment plan.

Many lenders can charge penalties if you pay off loans early because a consolidation loan involves taking out one new loan to pay off your current loans.

It is possible to consolidate your credit cards onto one credit card with no interest for a set time period if you transfer the balance over to a new card. Don’t get caught transferring all your credit over then using the old card to rack up more debts. You must be committed to closing the credit card entirely to give yourself a fighting chance of reducing your debts and not dig a bigger hole.  Only consider this option if you have already set up and are committed to a debt pay off strategy, too many people get trapped without the right mindset.  To gain the most benefit you need to pay the card off within the honeymoon period. To find the best credit card balance transfer options do your research through trusted comparison sites and talk to a financial advisor. You could also consolidate via a personal loan.   We would not advise refinancing your home loan to consolidate your unsecured debts.  The pitfalls of stretching your home loan too far, include losing your home and stripping the equity is too great. Also interest on a home loan is over 30 years so when you take this into account the interest you pay over the longer term can be much higher than it first looks. How much are your purchases costing you now in interest?

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If you’re facing financial hardship we are here to talk about a solution. Call us on 1300 887 211 or Book a Free No Obligation Phone Consultation with our friendly team and we can discuss debt management options specially focused on your personal situation.