How to Get Out of Debt

The simplest way to get out of debt - and for many the most difficult - is to budget your spending and save enough money to pay off your debts.

A budget is a financial plan that allocates a specific amount of money to be spent on certain commodities like food, clothing, mortgage or rental payments, entertainment and savings. Here's how to use a budget to lower your overall debt:

• Carefully record your monthly spending - down to every utility bill, pack of gum and newspaper. These are called your fixed expenses (phone and electric bills) and your variable expenses (double lattes and movie tickets).
• Figure out exa­ctly­ how much money you take home in income every month and subtract the cost of your fixed and variable expenses. What's left over is how much you can spend on lowering your debt.
• You can increase your monthly budget surplus (the amount left over) by eliminating items from your variable expenses that are unnecessary or unnecessarily expensive.
• Make a list of all of your monthly debts along with the interest rates for each type of debt.
• Pay off the debt with the highest interest rate first, while continuing to make at least the minimum monthly payment on your other debts.

Debt consolidation is another way to reduce your debt load. Debt consolidation means taking out a lower-interest loan to pay for higher-interest debts. It's called consolidation because you take several high-interest debts and consolidate them under one lower-interest payment. It's not an ideal way of reducing debt, because you're technically incurring more debt to pay off the debt you already have. Also, often people who have incurred a lot of debt, may not qualify for any or the amount of loan required to consolidate.

Typical forms of debt consolidation are a home equity loan or a second mortgage. Second mortgages are like home equity loans in that they use the home as collateral and carry relatively low interest rates (although certainly higher than the original mortgage). An example of debt consolidation would be to take out a home equity loan to pay off credit card debt. One drawback to note is that now you have turned unsecured debt into secured debt, secured by your home.

Credit counselors can help a chronic debtor come up with a manageable budget, develop a "debt management plan" and negotiate with creditors for lower interest rates. However, not all credit counseling services are legitimate. Some of them charge hidden fees, called "voluntary contributions," that can quickly get expensive. Others are able to win lower interest rates only after purposefully defaulting on all of your loans and ruining your credit score. Often, your monthly payment will be only slightly lower than what you would normally pay as minimum payments on credit cards. As a result, these programs have a greater than 70% failure rate. And finally, most consumer credit counselors are alleged non-profit organizations that claim to be independent. But, in fact, these non-profits are funded and supported by the very people you owe money to: the credit card companies. More and more, credit counseling is becoming a less popular solution for reducing debt.

If you find yourself up to your neck in debt with no possible way out, you still have a final option before having to file bankruptcy: Debt Settlement. Debt settlement has become a very popular alternative since the mortgage meltdown, and during these extremely difficult times it may be the best solution to get rid of unsecured debt quickly, save the most money and avoid bankruptcy. Debt Settlement is an arrangement between a debtor and their creditor to settle debt accounts typically with single lump-sum payments, but may include restructured monthly payments. This payoff agreement satisfies the debt instead of having monthly payments that incur interest. It's important that debtors know their rights when negotiating with creditors. In the United States, these rights are established by the Fair Debt Collection Practices Act. BlueChip Debt Relief is a trusted company which can assist you with this alternative.

The advantage of agreeing to debt settlement for the creditor is that they will at least receive some money from the debtor. If the debtor chooses to declare bankruptcy, the creditor may receive very little or nothing at all. Declaring Chapter 7 bankruptcy is a public legal process that will discharge all of the debt, provided the debtor does not make more than the medium income for his or her state (typically referred to as the means test).

The most common type of personal bankruptcy is Chapter 13 since most consumers find it difficult to qualify for Chapter 7. Chapter 13 bankruptcy offers debtors the opportunity to save their homes from foreclosure. The debt repayment plan is court-ordered and the debtor will have to repay a percentage of their debt, without any flexibility.