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 cash 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 draw back 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 even negotiate with creditors for lower interest rates or better loan terms. 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. More and more, credit counseling is becoming less popular and something of the past. Last but not least, consumer credit counseling companies work for the creditors not the consumer.

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 melt down, and during these times of recession 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 a borrower to pay one lump sum to satisfy the debt rather than monthly payments that incur interest. This lump sum is typically less than the total debt that is owed. 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 only advantage of debt settlement for the creditor is that they will at least receive some money. If the debtor is allowed to declare bankruptcy, the creditor may receive very little or nothing. Declaring bankruptcy is a legal process in which the debtor's assets are turned over to a trustee who then liquidates the assets to pay off the various creditors.

In the United States, the most common type of personal bankruptcy is called Chapter 13, in which the debtor retains some assets -- like a home or car -- and is required to adhere to a court-ordered debt repayment plan in which a percentage of his regular income is used to pay off creditors. After the debt repayment is completed, the debtor receives an official discharge clearing him of any further obligations to his creditors.