Debt Relief: How to guide to get help

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There’s no easy way to get out of debt, but following these six steps can help you better manage your money and find debt relief.

Let’s face it, Americans love to spend. Unfortunately, we often spend what we don’t have. At the end of February 2010, total U.S. consumer debt was $2.45 trillion, which works out to nearly $8,000 for every man, woman and child in the country. And this number only accounts for credit card debt; it does not include real estate debt.

If you need help reducing your debt load, there are options available for you. Here are six steps to help you find some relief from your debt.

Step 1: Face reality and be prepared to make changes

Offers to eliminate or reduce your debt sound appealing, but are highly unrealistic (and often not legitimate). Your creditors do not have to agree to reduced payments and the only way to eliminate your debt—without the hard work of paying it off—is to declare bankruptcy, which should be your last resort. The only way to truly crawl out from under your debt is to change your spending habits and begin living within your means.

Step 2: Begin a total money makeover

It’s the six-letter word that most everyone dreads: budget. You must have an understanding of how much money you have coming in and how much you are spending. To do this, you need to create a budget. Write down every bit of income you receive and every last penny that you spend every month. No matter how insignificant the expense may seem—your magazine subscription, that last-minute latte, your lotto ticket purchase—write it down and you’ll begin to see a pattern in your spending habits.

Step 3: Sign up for credit and debt counseling

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Non-profit organizations like the National Foundation for Credit Counseling and many universities, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service offer credit counseling programs. Reputable credit counseling organizations often offer free educational materials and workshops and, for a fee, will work with you to develop a budget and help you manage your money and debt.

Step 4: Negotiate with your creditors

Call your credit card companies and explain your situation. Let them know you want to work with them to reduce your debt and ask for a better rate. Do the same with your mortgage company. Even if you can’t get a better rate, you may be able to stretch out your payments until you can get back on track.

Step 5: Consider your alternatives

Consider other options that may be available to help you reduce high-interest debt.

  • If you own a home and have some equity in it, taking out a home equity loan may be an option. Typically, these loans have fairly low interest rates and the interest you do pay is tax deductible. Be careful with this option, however; you are putting your home up for collateral so don’t miss any payments on your loan.
  • If you have a 401(k) retirement fund through your employer, you can take out a loan against it. This option has also its potential downfalls: you are taking money away from your retirement, you have to repay the loan within five years or you will be charged taxes and penalties, and if you quit your job you will have the pay the loan in full when you leave.
  • If you have life insurance you can borrow against it. There is no time limit to pay back the loan. In fact, you don’t have to repay it at all—however, your loan will be repaid when your policy becomes active, which means less for your beneficiaries.

Step 6: Check into debt management programs

If you still are overwhelmed with debt, your credit counselor may recommend you enroll in a debt management program. These programs will typically consolidate your debt and manage your monthly payments. You should only sign up for debt consolidation after your financial situation has been thoroughly reviewed by a credit counselor. Once enrolled in a program, you will deposit money each month to the debt management organization, which then uses your deposits to pay your debts according to a plan developed with you and your creditors.

Protect yourself

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Before talking with a credit counselor or entering any type of debt management program, find out through your state Attorney General if the company is licensed to do business in your state. Also check with your local Better Business Bureau to learn if any consumer complaints are on file about the organization.

Whatever your situation may be, begin the process today to reduce your debt. If you wait too long, you could end up doing long-term damage to your credit score and your creditors may no longer be willing to work with you. Do your homework, reach out for help, and begin making changes to your spending habits for a future free of unmanageable debt.

This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.

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Source: MSN Money, Bankrate.com, Federal Trade Commission, Federal Reserve
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