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Debt Relief Options

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credit cards

The average credit card debt of an American household is $15,799.

The average student loan debt among graduating seniors is $23,186.

The average amount financed for a new vehicle is $26,673.

 

It seems the average American household is in a huge amount of debt trouble. If you are trying to pay off debt, chances are you won’t be able to save much for emergencies or retirement. This is putting your future in jeopardy and you need to have a plan to deal with all of these debts. Ignoring the debts and just paying minimal payment won’t be enough.

The first step is to figure out your income and expenses. Use Personal Capital or a simple spreadsheet to keep track of all your income and expenses for 3 months and see where the problems are. If you are like the average American household and owe more than $10,000 then you will need to cut some expenses somewhere and/or earn more income.

Reduce Expenses

The first step to reducing expenses is to create a monthly budget that will work with your income. If you earn $5,000/month then your expense needs to be less than $5,000/month. You might need to reduce luxury spending for a few years until the debt is paid off, but it will be worth it.

Increase Income

If you have existing debt, it will be difficult to reduce the debt with just minimum payments. In this case, you might need to earn more income. In this economic environment, it could be difficult to get a raise at your current position. You can try to apply for a job with higher pay. The unemployment rate is high, but many companies are still looking to hire well-qualified employees. The best time to get a new job is when you already have a job.

Another option is to get a part time job like delivering pizzas or another flexible time positions. This is difficult, but if you want to pay off the debt, extra income will be very helpful. We have been working on this website and recently got our first check from Google. You can do it too!

Debt Consolidation

What if you have a student loan, a new car loan, and some credit card debt? If we use the average debt numbers above, then you may owe more than $65,000. This is a huge amount of debt and it will be difficult to pay off by reducing expenses or even getting a 2nd job. In this case, you probably need some help and debt consolidation maybe the way to go.

Here are some debt consolidation options:

  •  mortgage refinancing. If you have over 20% equity in your home, mortgage refinancing is a great option right now. You can refinance your home with a cash out option, and then use the extra money to pay off the debt. The interest rate is at a near historic low and you will save a lot of money by consolidating all the debt into a lower rate. You still need to do your homework and make sure you can make the new payment every month. If the payment is too much to handle, then this is not a good option because you can lose your home by not paying the mortgage loan.
  • debt consolidation loan. If you have excellent credit, then an unsecured debt consolidation loan from your bank might be an option. These loans are more difficult to obtain with the current credit crunch, but you can try talking to your bank/credit union to see if they can help you.
  • debt settlement. Another option is to get professional debt counselor help. You can sign up at a debt settlement company and they can work with you to settle the debt. This aggressive tactic will hurt your credit. You stop paying your debt and save the money in your bank account instead. The debt settlement company will negotiate a lump-sum payment with your debtor.
  • peer to peer lending. You can sign up on a peer to peer website such as Prosper or Lending Club to borrow money to pay off your debt. The interest rate is usually quite high though so you have to crunch the numbers to make sure it will work.

All in all, paying off debt is difficult, but you need to do it. A crushing debt will prevent you from saving for retirement and you will have a lot of problems later. The longer you put off paying debt, the bigger problem it will become. You have to face the problem head on and work on paying the debt off aggressively ASAP.

 

 

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{ 20 comments… add one }
  • 20'sFinances September 12, 2011, 5:40 am

    I like that you put reduce expenses first. So many people, to my surprise, think that their life would be better if they just earned a little bit more. What they fail to realize is that when they get a raise, the increase their expenses and don’t save any more money. Great tips.

    • retirebyforty September 12, 2011, 10:04 am

      Reducing expense and making a budget is absolutely essential to getting out of debt. If you can’t spend less than you earn, then you’ll never get out of debt.

  • Little House September 12, 2011, 6:58 am

    Yikes! It’s scary to think people have in excess of $15K in just credit card debt. I’m still paying off our car (under $5K to go!) and student loans, but the first thing I did was get rid of all my credit card debt! I think I’d add, prioritize paying off debt; get rid of credit card debt first, then work on auto loans, student loans, then mortgage loans in that order for the most part. Great tips!

    • retirebyforty September 12, 2011, 10:05 am

      I agree that we should prioritize paying off the high interest debt first. Credit card debt are the worse!

  • MoneyCone September 12, 2011, 7:50 am

    Paying off debt is hard, but not doing so will be cause even more grief. Retiring with debt is never pleasant.

  • Aaron Hung September 12, 2011, 5:46 pm

    I’m in a rude awakening when my wedding is over, we have so much debt rack up for our wedding I’m starting to think if it’s worth it. But the lady wants it so what can you do?

    • retirebyforty September 12, 2011, 10:10 pm

      Wedding expense has gone way out of control over the last 10-15 years. Hopefully you won’t go into debt to pay for the wedding. Good luck!

  • Funancials September 12, 2011, 5:54 pm

    A few thoughts:
    Glad you mentioned earning more as a means of debt relief. Many people think there is always some sort of loan they can receive to restructure their debt, without them having to work any harder. They’ll miraculously reduce their monthly payment, reduce their term and all will work out.

    Second, it’s important to tackle the debt in a specific manner. Pay down credit cards first, followed by other loans, and lastly mortgage. I have witnessed too many people wanting to pay down their car/home (roughly 4% interest) while carrying extremely large balances on 15% credit cards. Doesn’t make sense…

    • retirebyforty September 12, 2011, 10:11 pm

      It’s extremely important to make a budget first and commit to lowering expenses. If they can’t do that, then it’s close to hopeless even with a debt restructure. They’ll just rebuild the debt back up again. I agree with paying off the credit cards first too.

  • SB @ One Cent At A Time September 12, 2011, 7:19 pm

    That’s a scary picture Joe. Main problem is we are short sighted and not long term planners.

  • krantcents September 12, 2011, 7:43 pm

    Reducing expenses first is the best way to identify your problem areas. Taking control of your spending follows. Then you can step up your repayment or paying down debt.

  • youngandthrifty September 12, 2011, 7:59 pm

    Wow.. that’s scary- that’s a lot of consumer debt. I personally would try my best not to ever finance a vehicle. The monthly payments are such a killer.

    My boyfriend (I can’t control him despite no amount of nagging) got a used luxury car (Infiniti) and is paying $500 a month for car payments and about $300 a month in gas. That’s almost $800 a month for a car.. (even though he makes quite a bit now, but still). yowza.

    • retirebyforty September 12, 2011, 10:13 pm

      I financed two vehicles in the past, but I think I’m done with that. We paid cash for our last vehicle and it’s great to not have that monthly payment. $800 month for a car is quite expensive. Hopefully he’ll keep the car for few years after it is paid off.

    • Kellen September 13, 2011, 6:07 am

      Plus maintenance – my gas is an average of $150 per month, but repairs and maintenance seem to be averaging another $150 – $200 per month. I just started tracking my expenses, but even owning a paid-for Corolla is pretty expensive!

      • retirebyforty September 13, 2011, 2:14 pm

        The repair and maintenance is creeping up. I hate going to get things fix at the mechanic… I always hope the repair will be it for a while, but things are always cropping up on an older car.

  • Everyday Tips September 12, 2011, 8:50 pm

    These people have some crazy debt. The AVERAGE amount of debt for a car loan is almost 27k? Not to mention the high amount of credit card debt? Yikes. I cannot even imagine how long it would take to pay off $15000 in credit card debt with the ridiculous interest rates.

    Wake up and stop spending foolishly America!

    • retirebyforty September 12, 2011, 10:15 pm

      That auto loan number sounds suspicious to me too. I’m thinking that is how much they owe when they signed up for the auto loan. Cars are not cheap these days. Even an econo box cost almost $20k now right? A luxury car cost way over 30k and I can see them pushing up the average.

      • Kellen September 13, 2011, 6:08 am

        Yeah, but I know plenty of people living on tight budgets who elected to buy a 50 – 60k Yukon because it’s “safer” for their new baby to ride around in. When so many people are buying SUVs, I’m sure that pushes up the price.

  • Marie at FamilyMoneyValues September 13, 2011, 8:07 pm

    I can’t even imagine having the ‘average’ amount of debt. Wonder how those figure are calculated. We have zero, zip, nada debt and it is great!

    • retirebyforty September 14, 2011, 9:01 am

      Right! The average amount of debt are so high. I can’t imagine having all that consumer debt. Mortgage debt on the other hand, we know about….

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