Debts can be frustrating and overwhelming, besides making your life a living hell. No wonder most people plagued by debt opt for bankruptcy to unshackle themselves from debt.
Filing for bankruptcy can give you a respite from creditor and debt collector calls and letters. Bankruptcy also gives you a clean start with a fresh slate. On the flipside, bankruptcy also comes with its fair share of disadvantages, including negatively impacting your credit score.
According to Supreme Court Chief Justice John Roberts, bankruptcy filings dropped from 1.6 million in 2010 to 770,000 in 2018. So what changed that made fewer people file for bankruptcy and seek other means of getting out of debt? Are there alternative options for getting out of debt other than bankruptcy?
The answer is yes. If you want to get out of debt without going through bankruptcy process, you have these alternatives available.
1. PLEASE READ FIRST
The most important thing to understand is that you have options. You just need to understand which option is best for you. The following calculator compares the costs, pros and cons, and options for 5 different debt payoff options if you are trying to decide how to get out of debt and avoid bankruptcy. It also includes bankruptcy if you want to compare that option. The calculator takes about 2-10 minutes, and will provide results specific to your data.
2. Debt Payoff Planning
As far-fetched as it might sound, you can get yourself out of debt without resorting to the other two mentioned options, or bankruptcy. But this method is only feasible if you are not far behind and you can afford to make some minimum payments on your debts. There are three vital steps that you can follow:
a. Find Out How Much Debt You Have
This is the initial step to getting out of debt. By ignoring your debts, they won’t just disappear, so you have to tally up your entire debts. After this, you calculate your debt-to-income ratio.
The debt-to-income ratio can be termed as the total debts-minus mortgages-as a percentage of your gross annual earnings. This will tell you how much in debt you are, and what it is going to take to get you out.
A Debt Payoff application may be extremely helpful to aid you in your debt payoff journey. We devised the Savvy Debt Payoff App on iOS and Android that uses a newly developed Savvy Debt Payoff Method that saves on average over $2,000 over the Snowball Debt Payoff Method.
b. Do Away With the Patterns that Got You into Debt
Bad financial habits are some of the causes of financial problems. If you are a terrible spender, even winning the lottery won’t save you from yourself! So it is vital that you cut back on your spending and live within your means. Another factor that ensures that you get into debt faster than you can blink is taking out more loans after you have lost your job or source of income. But the most documented reason for debt problems is easily spending more than you earn.
c. Make Enough Money to Pull You Out of Debt
There is no magic, really. You just need to move from a situation where you are spending more money than you make, into one where you earn more than what you spend. This means that quicker you want to get away from debt, the more you have to make lots of money above your spending. Remember, you have to earn enough to live on and pay off your debts, so it can be a tall order, but with the right mindset, it is possible. Here are a few tricks of making extra money that can get you out of debt faster:
- You can sell stuff that you don’t need. From Craigslist to eBay, to a simple yard sale, this can give you easy and fast cash. The downside to this is that sooner than later; you will run out of stuff to sell.
- You can get an extra job or even decide to work longer hours. There are lots of jobs out there that you can add to your schedule, including babysitting, driving for Uber or Lyft, waiting tables, and freelance writing.
- The other option is to find another higher paying job. This involves getting that promotion at work or even finding a better paying job.
3. Debt Settlement
This is suitable for when you are already behind in your payments. You might have come across dozens of ads in the media about debt settlement plans. This is where you retain a debt-settlement company to negotiate with creditors so that you can pay less money than the amount you owe. This involves parting with a lump sum figure and being done with the debt. There are pros and cons to debt settlement, so these should be observed. For example, your credit score will often be negatively impacts, so you should consider the debt settlement credit score impact.
While going the debt settlement way seems like a pretty good idea, in some cases, the exercise takes as long as three years, and your credit score gets ruined. Besides, it has some severe drawbacks:
- For instance, some creditors won’t accept debt settlement as a way of paying off your debt. To make it worse, there is no law obligating the creditors to settle your debt.
- Even with the debt settlement negotiation, you will not get off paying your debt as you still have to honor part of it. Though some ads say that you will only have to pay an insignificant amount, I some cases, the figure might not be as negligible as advertised and some people have even paid up to 75% of what they owe.
- On top of what you’ll pay, you will have to pay the debt settlement company from 15% to 25 % of the money saved. And that is not all as the government will consider that as income and tax you on your next returns.
Don’t let the above factors discourage you. With a debt settlement plan in motion, you can lower the total figure you owe while lowering your loan’s interest rates. It also creates a strategic plan to settle your debts and better yet, in 2-4 years rather than in up to 9 years. Besides, while your credit rating will take a hit when you choose debt settlement, it will not be as severe as choosing bankruptcy.
4. Debt Management
As a means of pulling yourself out of debt, debt management is where a non-profit company negotiates for lower rates of interest with the creditors. This arrangement is suitable for people who are not behind in payments and mostly have credit card debts.
After the debt management services provider consolidates all the bills, you can end up paying a single monthly payment that is less than all the combined payments you were making earlier. In addition to the lower overall rates of interest, debt management also comes with longer terms of repayment and ultimately, an overall trimming of the debt.
Debt management is one of several options that you can settle for to take charge of your debt and reduce the payments you make monthly. Ultimately, this will save you lots of money in fees and interest. Below is what you can expect from a debt management plan:
- It takes between 36 to 60 months to repay debts.
- During this period, you might be restricted from applying for additional credit.
- If you are late on your payments, you might end up losing any progress on the decreasing debt or lower rates of interest that you had made.
While this option may be preferable to debt settlement, the debt management company will also charge a fee. You should consider reviewing debt management vs debt settlement before proceeding with either arrangement.
Track Your Income / Expenses
If you want to win the debt battle, you have to keep track of your money. By crafting a budget and sticking to it, you can ensure that you maintain good spending habits. Although you can use a variety of ways to track your expenses, including the good old fashioned pen and paper method, there are other means. One of these is utilizing a spending tracker app.
When you are not tracking your money, you will always be wondering where it went, But with a great spending app at your disposal, you will start having financial victories. After all, has been said and done, it will be up to you to choose the most suitable method of getting out of debt. Keep in mind that your choice should be determined by several factors, including how far behind you are in your payments plus a host of other considerations.