How To Reduce Your Debt

Unless you live on Mars, you likely have outstanding debts to pay. You can throw the bills into a garbage can, but that won’t make them go away and you can’t simply wish them away. But you can pay it down with determination. Here are but a few ways to reduce your debts:

1. Pay more than the minimum
First, break the habit of paying only the minimum required each month. Paying the minimum, usually 2% to 3% of the outstanding balance, only prolongs the agony. Besides, it’s precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don’t play their selfish game.

Instead, bite the bullet and pay as much as you can each month. If your minimum payment is $100, double that to $200 or more. Examine your normal expenses, you can find the money. We all have “luxuries,” and you know what yours are.

2. Snowball your debt payments
Take a long, hard look at all your credit cards. Pay particular attention to the one with the lowest interest rate. Have you reached the maximum limit on that card? If not, consider transferring a higher-interest bill to that one. Many credit cards permit this, and it’s positively foolish not to trade an 18% debt for one at 12%.

3.  Borrow against your life insurance
Do you have life insurance with a cash value? If so, borrow against the policy. Yes, you’re borrowing your own money. But the interest rate is typically well below commercial rates, and you can take your time repaying the loan. Do repay it, though. If you die before it’s repaid, the outstanding balance plus interest will be deducted from the face value of the policy payable to the beneficiary

4. Finagle family and friends
Perhaps your family or friends could lend you the money. Who else knows, trusts, and loves you like they do? Unless you’re really the black sheep of the flock, chances are you’ll get a very favorable interest rate. They may even tolerate a late payment or two. But if you want to maintain the relationship, it’s best to keep things on the straight and narrow by using a written agreement. You should clearly establish the interest and repayment schedule in writing to avoid misunderstandings and hard feelings. And it goes without saying that you must be scrupulous about adhering to that schedule. Otherwise, you can forget the family reunions and birthday presents.

5. Borrow from your 401(k)
Do you participate in a 401(k)qualified retirement plan at work? Most 401(k) plans have a feature that lets you borrow up to 50% of the account’s value, or $50,000, whichever is smaller. Interest rates are usually a point or two above prime, which makes them cheaper than that found on credit cards. Not only is the interest typically much lower than that on credit cards, the best part is you pay it to yourself. That’s right, every dime in interest paid on a 401(k) loan goes directly into the borrower’s 401(k) account, not the lender’s. Check with your accountant or financial adviser for more detail for any possible drawbacks.

6. Renegotiate terms with your creditors
OK, you’ve done all you can. Savings are gone; relatives have been tapped out; you don’t have a home or 401(k) to borrow against. You feel like you’re against that proverbial wall. The money just isn’t there. Is bankruptcy the only way out? No way. Try pulling an ace out of your sleeve prior to taking that step. What ace? The threat of bankruptcy, of course.     Let your creditors know your situation. Tell them that if you are unable to renegotiate terms, you’ll have no other recourse but to declare bankruptcy. Ask for a new and lower repayment schedule; request a lower interest rate; and appeal to their desire to receive payment.

7. As a last resort, file bankruptcy
What if you decide you can’t pay down your debt using any of the methods listed above? What should you do? The absolute last resort is bankruptcy. Although we firmly believe everyone has a moral obligation to repay their debts to the utmost of their ability, there are times when repayment may be impossible. In those cases, bankruptcy may be the only available course of action. Nevertheless, be aware of the significant drawbacks.

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