Read about ways to get out of debt and how to create a budget.
Although it can be difficult to know how to begin climbing out from under a pile of bills, there are government-endorsed methods of debt management and consolidation that may help someone get out of debt. The Federal Trade Commission offers advice to Americans struggling with debt. It suggests four primary ways of approaching debt:
The FTC warns against using debt negotiation programs, which can sometimes lead people to incurring more debt and worsening their credit ratings rather than helping their ratings. If considering using a debt negotiation program, contact your state attorney generals office to find out about local licensing requirements and to ascertain whether the program you are considering is licensed. Once you have established the legality of the program, visit the Better Business Bureau to check any customer complaints about the program.
Begin the path out of debt by making a budget. Keep track of all the money coming in and all of the money going out. It is important to include even what may seem like minor purchases in this assessment so you can realistically develop a plan that prioritizes basic needs. To help build a budget, use online tools that provide help every step of the way.
It is also important to get a handle on what you owe. One option is to divide your debts into two categories: good debt and bad debt. Good debts are things like student loans and mortgages that can be looked at as investments and may grow in value over time. Bad debts, like auto loans and credit cards, are not long-term investments and often carry high interest rates. Just as you must prioritize basics like food and health care in a financial budget, prioritize the elimination of these bad debts after having fulfilled all of your basic financial obligations.
It is also important to be in touch with your creditors before they hand over your debt to a debt collector. It is often in the best interest of creditors to work with you on making debt manageable, so don't wait until it is too late. Be particularly aware of your secured debts (debts tied to possessions, like your car or house) because falling behind on these means your car can be repossessed or your home may be foreclosed. If you are unable to create a successful budget, work out a plan with creditors or stay on top of your secured debts, it may be time to find a reputable credit counselor. Access to a nonprofit credit counseling program may be available through your bank, job or university; if not, ask around for dependable recommendations, as not all credit counseling programs are reliable. If a certified credit counselor deems your debt to be serious, it may be suggested that you enroll in a debt management plan (DMP), which is a long-term commitment to paying off debt that must be made in cooperation with your creditors.
You may also be able to consolidate loans by applying for a second mortgage or home equity credit line. This consolidated debt is secured to your home, so it is important to be able to make the payments. If none of these options work, you may need to consider filing for bankruptcy. To learn more about bankruptcy and the other debt payment options in this article, visit the FTC.