5 Solutions to Get Rid of Debt
Thursday, December 30, 2010 at 5:57PM
Alban is always a welcome pressence at Financially Digital. We haven't heard from him in a while but, here is with a great piece about getting out of debt. Just in time for those that might have stretched a little farther than they should have this holiday spending season. Hope you enjoy!
There are many ways you can get into debt, and luckily there are just as many ways for you to get out. Whether you have credit card debt, a myriad of personal loans, an expensive mortgage or mounting overdrafts, following are five of the most effective solutions to get rid of that debt.
1 – Bridging Finance
If you are struggling with debt, your mortgage will be one of the most demanding bills you have and also one of the most important as you want to be able to maintain a safe and stable home for your family. Often the best solution to unaffordable expenses is to downsize your life and that can often mean moving your family to a smaller home – because after all, when you really look at it do you need two studies, a home theatre and four bathrooms?
Luckily when you do have a large house and are looking to downsize you will be aiming to repay your debts from the sale of your home, and buy a smaller house. However, to make the move as soon as possible, you may want to buy your next home before you have sold your old one to put the property on the market as soon as possible, for as long as possible to get the best price.
This is where you can use bridging finance to allow you to buy your new home before you have the proceeds of the sale of your old home. You’ll then usually have a period of six to 12 months to sell your old home. Depending on your lender you may not be required to make loan repayments during this time, or you’ll just be making interest only repayments.
Once your existing property sells, the proceeds pay off the mortgage on that property and you are left with a final mortgage which is much less than you were paying previously, and the profits from the sale to get rid of your other debts such as credit cards or personal loans.
2 – Debt Consolidation
It can be hard to control your debts not only because of the high interest rates, but also because it can seem like there are repayments due every week for every different credit card and personal loan you have. One way to get rid of this sort of debt chaos and give you a better chance at repaying the debt to zero is to consolidate the debt into one loan.
There are two ways you can consolidate debt – firstly you can consolidate high interest personal loans and credit cards into your comparably low interest rate home loan account. If you have a $200,000 home loan and $15,000 worth of personal loan and credit card debts, then your consolidated loan amount will become $215,000.
If you choose to consolidate your debts into your home loan, it is important to do so as a separate balance so you can focus your repayments on these debts, because if you were to pay off credit card debt over the course of a 30 year home loan, you would be paying a significant amount of interest than if you had just paid it off outside of your loan.
Your second option is a debt consolidation loan which is like a personal loan, with a set term and set monthly repayments. You will be paying a higher interest rate than a home loan, but a much lower rate than a credit card and at the end of the term you will be debt free.
3 – Savings
When you have debt, you will be advised to stop saving and empty your savings account into those debts because the interest you are paying on your debt will be much more than the interest you are earning on your savings, and so the benefits of saving are moot.
However, this doesn’t mean you should abandon your savings habits and mindset all together. Instead, simply save straight onto your debt. Instead of transferring money from your wages each week to a savings account, transfer it to your credit card or personal loan. If you resist the temptation for dinner out or a new pair of shoes, put the funds you have saved into your debt. In this way you are instantly reducing the interest by reducing the principal amount owing.
4 – Bankruptcy
Bankruptcy is a very serious solution to getting rid of debt, and should be considered as a last resort option. There are two types of bankruptcy you can declare.
Chapter 13 bankruptcy is when you want and intend to repay your debt, but you need the protection of bankruptcy court to allow you the time to do so. You can file for Chapter 13 bankruptcy if you are behind on debts such as your mortgage or car loan, and you want to make up those missed payments over time, to continue the original loan agreement.
Filing for Chapter 13 bankruptcy will also leave you free to pursue Chapter 7 bankruptcy in the future if you need to because you have incurred new debts. Chapter 13 bankruptcy can also be used to help you repay tax debts.
Chapter 7 bankruptcy is a quick solution to getting rid of your debt if you are not able to meet the repayment conditions of a Chapter 13 bankruptcy. A Chapter 7 bankruptcy gives you a fresh start, but will remain on your credit history for up to 10 years, where Chapter 13 bankruptcy can be removed after seven years.
5 – Debt Agreement
A debt agreement is an alternative to declaring bankruptcy which allows you to pay what you can, get your creditors off your back and avoid having bankruptcy on your credit report. A debt agreement can include:
- You agree to pay some of the amount due on your debts.
- Your debt payment is delayed, or suspended all together.
- You transferring the ownership of your property to your creditors as a payment.
- A periodic payment agreement to some or all of your creditors, for some or all of your debt amounts.
A debt agreement becomes binding when you and your creditors agree, and while not all of the people you are in debt to need to agree, many are likely to be happy getting some of their money over time, rather than none at all.
As part of your agreement you then make one payment which is distributed to your creditors and this means the harassing phone calls and letters will stop. While you are not declaring bankruptcy, you are committing an act of bankruptcy, and the fact that you are under a debt agreement will be registered on your credit report for up to seven years.
Alban is a personal finance writer at Home Loan Finder, a home loan comparison website
Reader Comments (4)
Perhaps a number 6 might be to take a 2nd job or moonlight on the side. Getting paid money for doing the same work that you do at your job direct to you can be a great cash spinner. It also puts you on your way to perhaps starting your own business!
Take a look at the loans and the credit card debts showing on your credit report. Close those accounts that you won’ t need in the future because too many open accounts will hurt your credit scores.
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