Consumer debt and the burden of debt has risen in recent years. A 2018 article by Reuters notes that consumer debt reached $13.29 trillion dollars in the second quarter of the year. The year before, consumer debt stood at $454 billion for the same quarter.
Clearly, more and more people have become burdened by debt, and many of them are hard pressed to find a way out.
Indeed, one of the most common questions that fielded by the debt consolidation company Hornet Partners is “How can I escape the burden of my debt?” This question (or one along the same vein) typically comes from a person who has become overwhelmed with his/ her debt load.
How People Get into Debt
Myriad reasons exist for why a person gets in over his/ her head with debt. Maybe he/ she had a season of unemployment or maybe there is an issue of underemployment. Maybe a family member experienced a catastrophic illness, which chipped away at their finances. Some face a monstrous amount of student debt.
Many of the people who come to Hornet Partners for help have faced some variation of these issues. The advice given about how to escape their debt burden varies from person to person. The options are many, and not all of them are right for everyone. The options include budget revamping, debt consolidation, and even bankruptcy in extreme cases.
Here’s a look at the most common ways to alleviate large debt burdens.
1. The Debt Snowball: Extreme Budgeting for Debt Relief
Financial guru Dave Ramsey has made the extreme budget famous, and while it may be extreme, it does work. He and many other financial advisors advocate a debt-reduction principle called the “snowball.”
Basically, what the debt snowball does is it makes you pay every extra penny you get toward your debt. You start with the smallest amount so that you can build psychological momentum. In other words, it’s easier to feel motivated to pay off your bigger debts once you’ve paid off a few smaller debts.
Once some of your smaller debts are paid, then you use the money you previously earmarked for those smaller debts to pay off the larger debts. You repeat this process until all of your debts get paid off.
To roll out this plan, you must first know how much money you bring in each month. Then, you must compare your income with your expenses. How does it stack up? If you don’t have this information written down, then you may not know how much you’re spending.
Additionally, if you use payment tools like credit cards on a regular basis, you may not even know where all of your money is going each month. If that’s the case, you may need to gather up all of your statements and go through them. You should look for where you spent money on necessities, like utilities and rent and where you spent money on things you didn’t need, like a daily lunch out with co-workers.
Some people even find it helpful at this juncture to keep a financial notebook. They record each of their expenditures in their notebook each time they spend money. This budget book gives you an idea where you’re overspending and where you can find extra money to pay down your debt.
The idea being that if you have money to spend on a cup of coffee at your local coffee shop every day, then you have money to put toward your debt. Your coffee habit (and others like it) cost you plenty of money that you could be putting toward your debt.
For example, a daily coffee trip can cost you $100 or more each month. You don’t often realize it at the time you’re spending that money, because the amount is so small. However, those small amounts add up to big expenses over time.
This type of debt-reduction measure relies on you being disciplined enough to create a budget on your own and stick to it. If you know that you’re going to have an issue with this – and you might, given your current debt predicament – then, you may want to go on to the next option, debt counseling.
Finally, it’s worth noting that some people will attempt to get a consolidation loan in order to reduce the amount of money they need to pay out every month and to reduce their interest rates. If you do go this route, then do make sure to pay off all of your debts with the largest interest rates, even if you cannot pay off everything with the loan.
This loan will reduce the amount you pay out each month. It’ll also reduce the number of checks you have to write, which helps you regain a feeling of control over your money.
2. Debt Counseling for Debt Reduction
Debt counseling may not be at all what you expect. Some people believe that a debt counselor is there to make you get lean and mean with your debt. That may be true of some debt counseling companies, but not all are created in the same vein (as many Hornet Partners clients can attest.)
Really, the best debt counselors hold up a mirror up to your finances and help you see how you can legitimately escape the debt burden you’re facing. We recognize that everyone has a different debt threshold and that what feels like too much debt for one person doesn’t even phase another person.
Once your debt counselor talks with you about your income and your expenses, he/ she will work with you to help you come up with a plan to reduce your debt. Although, this may sound a lot like the information in the previous section – and in some ways, it is – it also different in some key ways.
For one thing, once you go to debt counseling, you gain an accountability partner. Many people who try to get rid of their debt on their own find that they just can’t do it.
Additionally, many debt counseling companies are able to negotiate with your creditors: The debt counseling company may be able to get some of your interest rates reduced. Same goes for the late fees: These may be reduced or disappear altogether.
You, the consumer, makes one payment a month to the credit counseling organization you’re working with and then that organization acts as a liaison between you and your creditors. Not only does this put a buffer between you and your creditors, it simplifies your finances and allows you to get a bit of breathing room again.
Many times, this is enough to help many debtors escape the feelings of overwhelm that inevitably come with having a large amount of debt.
3. When All Else Fails, Try Bankruptcy
Bankruptcy counts as the most extreme types of debt restructuring. There are a couple of different kinds of bankruptcy, and the differences can be confusing. Basically, most consumers will qualify for two main types of bankruptcy help, either Chapter 13 or Chapter 7.
There are two other types of bankruptcy, Chapter 11 and Chapter 12, which deal with business bankruptcy and bankruptcies for farmers and fishermen, respectively. However, this post will deal only with the two most common types of bankruptcy, Chapter 7 and Chapter 13.
Under Chapter 13, you will work with the courts to create a plan to restructure your debt. You will subsequently repay your debts over the course of the next three to five years. The court handles and monitors your payments.
This type of bankruptcy will remain on your credit report for seven years. It does not completely eradicate your debt burden, but it does reduce it dramatically. For many people, this lifts enough of the debt burden to help them alleviate the stress and overwhelm that can come from having a large debt burden.
Chapter 7 bankruptcy is more dramatic. You basically hand over your assets to the court, and the court sells off your stuff to pay off your creditors. There are some items that you may not have to sell. For example, you may be able to keep your car, because you need it to get to work.
That said, many of the assets that you do have will get sold. Your assets will sometimes sell for pennies on the dollar, and your creditors will usually only get a fraction of the amount of money they’re owed. However, many people face such a large financial burden that bankruptcy may be the only way out of their dire financial situations.
This type of bankruptcy will stay on your credit for 10 years. If you feel that this really is your only option to turn your finances right side up, so to speak, then do think about it carefully.
Your ability to buy a home or a car or any other major purchase could be put off years and in some cases, even indefinitely. As such, it is wise to look at all of the financial remedies that you have at your disposal before deciding to go this route. You should also know that some types of debts, student loans, for example, cannot be discharged through bankruptcy.
A Special Section About Student Debt
According to Student Loan Hero, students graduating in 2018 left school with an average of $29,800 in student debt. Right now, student debt stands at $1.56 trillion in the U.S. Needless to say, student debt causes a very, very large debt burden for many.
There are ways to discharge student debt that aren’t bankruptcy. Usually, the students who are able to do this can do so because they qualify for one of the many programs that have been set up to alleviate this debt issue. These programs include income-driven repayment plans, Public Service Loan Forgiveness (for people who work in non-profits, schools, etc.), loan cancellation programs, teacher loan forgiveness programs, and repayment assistance programs to name but a few.
When dealing with this kind of debt, it’s best to go directly to the Federal Student Aid (FSA) website and find out the options that you have for dealing with student debt. Typically, you’re assigned a student loan servicer while you’re still in school. That servicer is the entity who manages your student loans for the government. This company will bill you each month for your student loans.
If, during the course of dealing with your servicer, you should become unhappy, then you’ll want to explore your options to change servicers. The easiest way to do this is to consolidate your student loans, which you must do through the Department of Education/ FSA and one of the other student loan service providers. You must also wait until you’re out of school to do the consolidation.
When you file for student loan consolidation, you can then choose your new servicer. Before you decide who should take care of your loans, it’s best to research all of the servicers on the list first. You’ll get a feel for which companies best serve their clients. The exact route to go is beyond the scope of this post, but the information here does give you a starting point for your research.
You should also know that you may have to deal with your student loan servicer yourself. You may not be able to tackle this burden with the help of a debt counselor (for example). That said, it may be in your best interest to get your student loans taken care of before you visit a debt counselor. Many loan repayment programs are based on your income. Your debt counselor will want to know every type of financial constraint that you have so that he/ she can best serve your needs.
Final Words on Lessening Your Debt Burden
Hornet Partners gets a lot of inquiries from people who want to escape their burden of debt. While a complete escape may not be possible, it is possible for most people to find some relief to their debt issues. Many people are able to tackle their debt without the help of a credit counselor, but some are not.
That said, it is a process worth going through. Getting out of debt may take time, but eventually, if you do explore one of the options on this list, you’ll have control of your finances and your life before you know it.
