It can be demoralizing to send hundreds of dollars a month to lenders without making a dent in your overall debt balance. The good news is that there are ways that you can get out of debt promptly. In some cases, it may be possible to settle a balance for less than what you currently owe.
What are some of the most effective ways to deal with a credit card, auto loan, or another type of debt balance?
The Snowball Method
The snowball method is a common debt repayment strategy that you may learn about by working with folks such as Trout Associates. You start paying down your debt by selecting the smallest balance and making extra payments toward it each month. Once that balance has been paid off, you target the next lowest remaining balance.
This process continues until you no longer owe lender money. While you may pay more in interest with the snowball method, it can be easier to stick with since you can see tangible progress in a shorter amount of time. It is essential that you make the minimum payments on your other debts to avoid damage to your credit score.
The Avalanche Method
If you choose to use the avalanche method, your goal is to make extra payments toward the debt with the highest interest rate. This strategy is ideal for those who are looking to save the most money and aren’t worried about how long it will take to pay down that first balance. Financial professionals such as those from Trout Associates may be able to explain further how this strategy works and whether it is in your best interest to use it.
Create a System That Works for You
There is nothing wrong with creating your custom plan. For instance, you may choose to pay down a $5,000 balance before a $2,000 balance because it has a higher annual fee. Paying a significant portion of the balance can also show that you are a responsible card user who is entitled to having the fee waived. You may also choose to make payments on the credit card that you took out most recently since this is the newest relationship and potentially the easiest to renegotiate in the future. Every credit profile is unique.
Your FICO score is partially determined by the average age of your credit history, and when you cancel an older card, you lose the history that you had with it. Therefore, it is better to get rid of a newer card as opposed to an older one if you absolutely must cancel a card. It should be the last option for those who don’t believe they have the restraint to manage their debt otherwise.
Bankruptcy Can Be a Debt Relief Tool
When creating a debt repayment plan, it is crucial to categorize your debts as secured or unsecured. Because they receive different treatment from creditors and bankruptcy courts. Generally speaking, if a debt is secured by collateral, it may not be possible to both keep the asset and have the balance discharged. If a debt is unsecured, it may be possible to have it discharged without losing any property.
Depending on your income and asset levels, unsecured debts can be discharged through Chapter 7 bankruptcy. It is a liquidation bankruptcy, which means that your assets are sold and the money raised is used to pay your creditors. Many assets such as the equity in your home, a retirement account, or anything that you need to live or work is exempt from liquidation. Therefore, you may pay little or nothing to creditors in exchange for having debt balances wiped away.
If you want to keep assets during and after filing for bankruptcy, you should consider filing for Chapter 13 bankruptcy. It is a reorganization bankruptcy in which secured debts are repaid per the terms of a plan that you propose, and creditors agree. As long as you make plan payments on time, creditors cannot seize your home or other assets while a case is still ongoing. The repayment period is either three or five years, depending on your income.
In some cases, debts cannot be discharged in bankruptcy at all. Examples of debts that can’t be discharged include most private and federal student loans, back tax debts, and child support payments that are past due. If the debt can’t be discharged in bankruptcy, you will need to either ask for a payment plan or pay the balance owed as best you can.
Will Your Lender Forgive an Outstanding Balance?
Repaying your debt is a lot easier when you can pay less than what you currently owe. While there is no guarantee that your lender will agree to reduce your balance, it is almost always worth asking. You can make a request by mail or over the phone, and a debt consolidation or relief company such as Trout Associates can negotiate a lower balance on your behalf.
It is essential to understand that your lender will likely demand a lump sum payment in exchange for waiving a portion of what you owe. For instance, if a credit card company agrees to waive half of a $5,000 balance, you would likely have to pay the other $2,500 immediately or within the next 30 days.
If your lender does agree to a settlement, be sure to get the terms of the deal in writing. It can be handy if a credit card or auto finance company claims that you didn’t comply with the terms of the agreement or that no deal was ever reached.
It is in your best interest to pay down your debts as soon as possible. Doing so can free up more money to create an emergency fund, invest for your retirement, or generally gain more control over your life. Working with a financial adviser can help you create a budget or learn other financial management skills.