Getting Out of Debt When Your Budget Won’t Budge
In our society, debt is often associated with excessive consumerism and poor discipline. Because of this, much of the advice tied to getting out of debt usually focuses on zero-sum budgeting and curtailing spending within one’s means.
But what if you don’t live beyond your means? What if you made a few costly mistakes and no matter how lean you trim your lifestyle, you’re not making any headway on your debt?
Around 38 percent of U.S. households carry credit card debt, at an average of $16,000 per household. Add high monthly interest rates and a potential mortgage, auto payment or student loan to balance, and even a lean budget can only do so much.
If this is you, consider the following ways to get out of debt even when your budget won’t budge.
With the average monthly credit card interest rate at 16.49 percent, even modest balances can get out of hand when debtors can only afford to make minimum payments. A balance transfer, which involves applying for a new credit card to transfer your existing debt to, can be a game-changer. Balance transfer cards usually have a zero-percent APR period between three and 15 months, allowing you to pay your old debt with your new card without incurring monthly interest. The main thing to look for in a balance transfer card is how much money it allows you to transfer, as the limit might be less than the amount of debt you have. Also pay attention to the balance transfer fee, which should be around 3 percent.
Debt consolidation is similar to a balance transfer except that it is used to pay back multiple balances with varying interest rates and doesn’t include a zero-interest card to do so. Instead, a single loan is taken out with a lower interest rate to pay off various balances. This saves debtors considerable money in interest, and also simplifies the repayment process. Keep in mind that debt consolidation loans may carry loan origination fees and other costs that eat into your interest savings.
The above two options are definitely the initial routes to pursue when trying to make a dent in your debt. However, if your credit score is less than stellar, you’ll have a hard time qualifying for a good debt consolidation loan or balance transfer card. Likewise, if your income isn’t steady enough to guarantee you can make the payments on your zero-interest card or consolidation loan, your agreement can disappear as soon as your payment lapse.
This is why many debtors with poor credit turn to debt settlement. Debt settlement involves working with a third-party company who attempts to negotiate with creditors to lower a debtor’s balance(s). While the thought of working with a debt relief company might make you uneasy, the industry goes far beyond scammers looking to make a quick buck. Reading debtor reviews on organizations like Freedom Debt Relief showcase transparency, hands-on service and a long track record of settling consumer debts at reduced amounts.
Like all options, debt settlement has its drawbacks. If your credit is still decent debt settlement will make it a lot worse. The process also takes anywhere from two-to-four years, and if the company is successful in lowering your debt (and you’ve agreed to pay it), they’ll charge a 15-25 percent fee on the original debt sum. Finally, you might be liable to pay taxes on your forgiven debt, as the IRS views it as income.
Then there’s the older half-brother of debt settlement, bankruptcy. Your income and assets will dictate whether you’d want to opt for chapter 7 or chapter 13 bankruptcy. Chapter 7 can eliminate your debts, but the court will liquidate some of your assets to pay back creditors. Chapter 7 is by far the quickest debt relief option, only taking four-to-six months. However, declaring chapter 7 will stay on your credit report for a decade, the longest of any debt relief measure.
Chapter 13 bankruptcy resolves your debt by requiring you to court payments for three-to-five years. While it’s a much longer process than chapter 7, you’ll maintain possession of your assets and the bankruptcy will only stay on your creditreport for up to seven years. On top of these things, both bankruptcies carry lawyer fees, court costs and mandatory financial management courses (that also cost money).
It’d be much easier to slash excessive spending across the board and get the satisfaction of living a more moderate lifestyle while climbing out of debt—all because of better budgeting. But this isn’t possible for debtors who’ve made a few mistakes and are operating on lower incomes, which is why the above strategies are worth exploring for anyone low on options and looking for a fresh start.
The views and opinions expressed herein are the author’s own, and do not necessarily reflect those of EconMatters.
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