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Debt Options and Reduction
 Jun 08, 2004


Many people become overwhelmed with debt and feel they have no options. This article will help you with debt options and reduction, guide you through making a debt reduction plan, and give you optional tips for getting out of debt.


One of the most difficult things to do is to get out of debt. Indeed, because of interest charges and other fees, debt seems to reduce at a very slow and discouraging pace. However, there are some things that you can remember when it comes to paying off debt.

Here are a few tips for getting out of debt:

  • Budget. The first thing you need to do is take an honest and hard look at your expenses. Cut out those things that you do not need. The only way to get out of debt is to first get your spending under control so that you are not overrunning your income each month.
  • Talk to your creditors. Contact your creditors and explain the situation. If you say you are willing to pay your debts, but that you are having problems, many of them will create a modified payment plan that may make things a little easier.
  • Remember your rights. It is important to note that there are laws restricting what debt collectors can do as they try to get the money you owe them. Know your rights, and understand that your unsecured credit card debt is different from secured debt, like mortgages and car loans.
  • Consider credit counseling. Some people do better with guidance when they are paying off their debt. Think about getting some help through credit counseling services that can help you create a plan and work with your creditors. Watch out for high fees, though, and for scams.
  • Debt consolidation. You can use debt consolidation to get all of your debts in one place. This often makes them easier to pay off, and it can result in lower interest and payments over all. Be careful, though: If you use your home equity to consolidate your debts, it could lead to the loss of your home if you are not able to make the payments.
  • Bankruptcy. This is the last resort. You should only consider this if you have no other options. And you should realize that recent bankruptcy laws are actually written so that you may have to pay more back than you think. Also, bankruptcy can harm your credit score for up to 10 years.
  • Create your own debt reduction plan. This can be a great way to get out of debt. If you have the discipline to see it through, it can also be a faster way to get out of debt.

Creating a debt reduction plan

A debt reduction plan that leads to aggressive reduction of your debts can be a great thing. It allows you to take control of your credit card debt, and it can leader to faster debt reduction. Here is an example of how to create an aggressive debt reduction plan:

  1. Figure out how much money you waste each month. Many experts estimate that most households waste between 10% and 15% of their monthly incomes. This means that if you make $4,500 a month, you are likely wasting between $450 and $675 per month. Go through your expenses and budget the unnecessary out. Figure out how much you can put toward extra debt reduction every month.
  2. Order your debts. The next step is to put your debts into some kind of order. Some recommend that you order them from highest interest rate to lowest interest rate, so that you are paying off the cards that are costing you the most in fees. Others point out that if you start with the lowest balance, you will be more successful, since you will see progress much more quickly. For our example, we'll order debts by smallest to largest.
  3. Apply the waste to the first debt on your list. Now comes the debt reduction part of the plan. For our example, let's say that you can put $275 each month for your debt reduction plan. And that you have these debts, so ordered:
  • Credit card: $775, $25 minimum
  • Credit card: $1,200, $36 minimum
  • Credit card: $2,300, $69 minimum
  • Medical bill: $5,600, $155.55 per month
  • Credit card: $6,400, $192 minimum
  • Car loan: $10,600, $176.66 per month
  • Student loan: $25,000, $208.33 per month
  • Mortgage: $220,000, $1,600 per month

First, then, you add the $275 to the $25 minimum payment on your first credit card for a total of $300. You keep paying the minimum on all your other debts at this time. You can see how quickly your first credit card would be paid off in a little under three months. This should give you the motivation to keep going.

  1. Apply the full amount of the former payment to the next debt. Now, you will take that entire $300 and apply it to the next credit card, on top of the minimum, for a total of $336. You can see how if you keep this pace up, you will soon be applying more and more to each debt, and retiring it, but without making changes to your budget.
  2. Continue. It is up to you whether you want to keep going with the aggressive debt reduction on such fixed payments as the car, student and mortgage loans. Some people pay off up to the student loans and then put the amount they're up to in monthly payments into savings (in our plan that would be $1,137.54 per month).


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