How to get out of debt
Want to learn how to get out of debt for good? It's not as hard to do as you might think.
First, you need to determine what type or types of debt you have. There are two broad categories of debt, secured debt and unsecured debt.
Secured debt and unsecured debt. The distinction between these two types of debt is vitally important. Secured debt is a debt for which there is specific collateral. For instance, a mortgage is secured debt, since your house serves as collateral for the loan - in other words, if you do not pay your mortgage, the bank my proceed to repossess your house.
Types of secured debt include:
- Car loans
- Home mortgages and home equity lines of credit
- Personal loans from finance companies (with pledged collateral)
- Some store credit (where the item purchased is agreed to be collateral)
- Income taxes
The very first thing you should do when attempting to take control of your debts is to make a list of all secured debt. Check contracts for any personal loans and store credit (especially for furniture and appliances).
Always concentrate on paying off all secured debt before moving on to pay off credit cards and other unsecured debt. The reason for this is simple - if you fall behind on secured debt payments, you can lose the collateral - in many cases without a lawsuit or even a court hearing.
And certainly pay off taxes first and foremost, or at the very least make payment arrangements with the IRS or hire a professional tax firm to negotiate a settlement or payment plan for you.
The IRS (and state tax agencies) has many weapons in its arsenal to get the money you owe them, including tax liens and wage attachments. In addition, willfully failing to pay your taxes can, in some cases, lead to jail time - so always pay the tax man first!
Unsecured debt
Unsecured debt is the second of the two broad types of debt. Unsecured debt is debt for which there is no specific collateral pledged. For instance, with most credit cards, you do not pledge your house or car or even any item you purchase with the card as collateral.
Types of unsecured debt include:
- Credit card debt
- Gas station charge cards
- Department store charge cards
- Cash advances (from credit cards)
- Personal loans (from family and friends)
- Power, gas, cable TV, phone, and other utilities
- Dues owed to health clubs and gyms
- Doctor, dentist, lawyer, and accountant bills
How is this significant for you? The nature of unsecured debt is that, if you fall behind or fail to make payments on the debt, credit card companies and other such creditors cannot directly repossess items when you do not pay.
Instead, these creditors must first file a lawsuit against you before they can collect any money. This is a costly and lengthy process that most creditors do not undertake lightly.
This is NOT to say that you should stop paying or fall behind on your credit card bills or other unsecured debt if you already haven't. Keep making payments if you can at all afford to, as it will make your life quite a bit easier while you are planning how to get out of debt.
Your next step in getting out of debt
Now that you know the difference between your secured and unsecured debt, you need to know just how much income you currently have and how much you currently owe to creditors
First, make a list of all sources of monthly income. Include everything - your take home pay, Social Security payments, disability payments, pension payments, self employment income, and any other sources of income. Add it all up, so that you know your total income (it may be as simple as looking at your paycheck stub).
Next, you need to make a list of all your current debts.
Break the list down into categories of secured and unsecured debt. List each creditor, then list your total owed to that creditor and minimum monthly payment for each. If you rent, include that amount as well.
Next, add up both the columns in both categories, so that you have your total debt owed and your total monthly minimum payments.
If your total minimum payments are a reasonable percentage of your total monthly income, say 60%, you might well be able to simply begin to add more to your monthly payments so that you begin to pay down your debt. You can even find many ways to save money and cut back on your budget so that you have more money available to add to your monthly payments.
But if your total minimum monthly payments are a much higher percentage of your monthly income, say 80% or 90% or even more than your monthly income altogether, you probably are in need of a more innovative approach to debt reduction.
In this case, next you should begin to educate yourself about the best debt reduction and elimination strategies that are available to you.
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