Create a Debt Reduction Plan

Debt Reduction Countdown

• One for the money
• Two for the show
• Three to get ready
• And four to go!

Not every debt problem can be solved by using the nursery rhyme above, but don’t underestimate the simple structure it provides as a framework for assessing the depth of the problem and then putting in place a solid, workable debt reduction plan.

If you have money troubles, barely keeping up with your bills or falling further behind each month, you probably know that you need to make a change. Coming to that conclusion is not the hard part. What can be paralyzing and overwhelming is the financial problems themselves and the stress that goes with them. And money problems are the number one source of stress, according to the American Psychological Association.

It can be tempting to avoid the problem and hope that it will just go away. It won’t. But when you are under that kind of pressure, it is very difficult to find the best debt advice.

The nursery rhyme helps you see that solution takes steps and is a process. There is no one-size-fits-all debt reduction plan. Your individual situation determines what options are available. Once you break down all the parts of the puzzle, you can put together a successful reduction plan.

One for the Money: What is your situation?

It isn’t enough to know that you are having debt problems. Examining your budget, debts, and income is a first step to understand the severity of your debt problem. You also need to review the assets you have to pay for your debt reduction plan. The more disposable income and assets you have, the more flexibility and choice you will have.

Start by focusing on specifics, such as:

• Are you struggling to make payments or already behind on them?
• What is causing your financial hardship? Is it a temporary or permanent circumstance?
• Making a budget, looking at all your expenses, figuring out what changes you can make to improve your cash-flow, and determining a realistic amount you can commit to paying each month.
• Do you own any assets you can use to fund your debt reduction plan?

Two for the Show: What kind of debts do you have?

The types of debt you have is important to examine. The harm you can suffer if you default on the debt and the options available for getting out of debt can vary drastically. Miss some credit card payments and you will be hit with fees and collection calls. Miss some car payments and your car could be repossessed.

When you lay out all your debts, pay attention to:

• Who are your creditors?
• How much do you owe?
• What are the interest rates?
• What are the required monthly payments?
• Which of your debt are secured and which unsecured?

Three to Get Ready: Matching your Financial Situation with a Debt Reduction Plan

Debt problems plague people from poor to rich. No one is exempt from suffering financial harm if disabled, loses a job, gets divorced, or has a spouse die. However, some people with debt have greater resources to use to solve the problem.

Debt problems plague people from poor to rich. No one is exempt from suffering financial harm if disabled, loses a job, gets divorced, or has a spouse die. However, some people with debt have greater resources to use to solve the problem.

Once you have reviewed who you owe and how much, looked at your finances to see what expenses you can trim, create a monthly payment amount that you can afford to make your debt reduction plan work.

1. If you are able to free up enough cash to make more than your minimum payments, then you should look at paying off the debts on your own by targeting either the account with the smallest balance or with the highest interest.
2. If you have strong credit, you should also look at a debt consolidation loan and see if you qualify for an interest rate that will save you money and get you out of debt faster. Strong credit and own a home with equity? Look into a cash-out refinance loan.

Some debt problems are so severe that they require professional assistance. Here are the most common professional debt relief services:

1. Credit Counseling If high interest rates are your biggest problem, see if the Debt Management Plan offered by credit counseling firms will reduce them, and your costs, significantly
2. Debt Settlement A debt settlement program will deliver a lower monthly payment, reduce your total costs to get out of debt, and get you out of debt faster than any debt reduction while avoiding bankruptcy. The negatives of debt settlement include your exposure to collection calls and creditors pursuing legal collections.
3. Bankruptcy: Depending on the type of bankruptcy you qualify for, you can reduce all or part of your debt. Bankruptcy requires a serious hardship. It is very hard to qualify for a Chapter 7 bankruptcy, and many people are not able to make their payments on a Chapter 13 Bankruptcy. Bankruptcy will also severley damage your credit.

Four to Go: Doing your Debt Reduction Plan

Choosing the right debt reduction plan is not enough, No debt reduction plan is going to work if you don’t stick to it.

Each solution, even bankruptcy, costs you money. Most solutions take years to get you out of debt. That is reality. That isn’t good or bad. It does mean that you have to be persistent. Maximize your debt reduction plan’s chances for success by being extra careful about any spending during the period you are paying off debt.