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Repaying Debts

No one wants to be swamped under a pile of debt. If you find yourself trapped under a debt burden, don't despair. It's possible to repay your debts and control your finances again. Below, you'll find five important things to know before you start paying down your debt.

  1. Your Finances

    Before creating a viable plan, you'll need to know how much you can afford to put toward your debt each month. Review your past expenses to find out how much you need to live on. Be sure to leave enough for daily necessities like food and gas. Once you create your budget, you'll be able to determine exactly how much you can put toward your debt. If you still need some time to figure out how to best use your "debt payment money," consider setting up a separate savings account so you won't be tempted to use it on other things.

  2. How Your Debt Works

    Next, you have to identify the types of debts you have as well as the consequences of defaulting on them. Most consumer debts typically fit into one of these broad categories:

    • Secured Debt: The lenders for secured debts have an ownership interest in the borrower's property. The most common types of secured debts are mortgages and car loans. When a borrower fails to keep up with payments, the lender can repossess the collateral property.
    • Back Child Support: Every state has a different enforcement policy, but failing to pay child support almost always has serious consequences. Child support rarely gets reduced, although many states will modify monthly payments or create unique payment plans.
    • Back Taxes: Tax collection agencies take tax debt seriously and often charge huge interest rates on unpaid taxes. Debtors can sometimes work out payment plans to pay down their tax debt.
    • Student Loans: Many student loans offer flexible repayment options.
    • Back Utility Payments: Many utility companies will tolerate two or three missed payments, but if too many payments are missed, the company may cut the consumer off.
    • Unsecured Debt: This category includes almost every other kind of debt, such as credit cards, medical bills, or personal loans. Lenders may increase delinquent borrower's interest rates, charge late fees, or simply sue the delinquent borrowers. Unlike secured debts, unsecured debts aren't secured by property, meaning lenders have nothing to repossess should the borrower fail to repay his or her debt.
  3. How to Reduce the Debt You Can

    Next, you may be able to reduce the overall amount you owe by negotiating directly with your creditors. For debts that aren't discharged in bankruptcy, like child support and student loans, your main goal should be to try to delay or minimize monthly payments until your finances improve. Be aware that these kinds of delay tactics may provide temporary relief in the short term, but typically increase the amount of interest you pay in the long term.

    For credit cards and other unsecured debt that may be discharged in bankruptcy, there are two options. First, you may be able to negotiate with the lender to reduce the total amount you owe in exchange for an immediate lump sum payment. Be sure to check with an accountant or attorney to learn about the possible tax consequences of this action. Second, you may be able to "consolidate" your loans. That means you take out another loan, use the cash to pay off all your existing debts, and then pay off the consolidation loan over time. A consolidation loan typically has an overall lower interest rate. In addition, it's easier to keep track of one loan rather than several.

  4. Which Debt to Pay First

    Now that you've determined how much you can use per month to pay down your debt, identified the types of debts you owe, and reduced or delayed debt payments as much as possible, you can finally start paying down your debts. Exactly which debts you pay down first depends on your specific situation. However, in general, you first need to pay the essentials, like your mortgage. You should then make any legally required payments, like child support, followed by the rest of your debt, starting with the loan that has the highest interest rate. Finally, you can tackle any loans you were able to defer.

  5. When to Ask for Help

    Sometimes, despite your best efforts, you'll need to seek professional help. If you've been diligently making your debt payments but see no improvement in your financial situation, or you're in danger of losing your home or being sued, you should talk to a professional.

There are many debt counselors and debt consolidation agencies that claim to help consumers reduce their debt. Unfortunately, some of these counselors are actually scammers. You should instead find a local bankruptcy or consumer rights attorney to help you with your case.

For more information, see FindLaw's sections on Bankruptcy Basics and Bankruptcy Legal Help.

Next Steps

Contact a qualified debt and bankruptcy attorney to find out your options for navigating the best path forward.

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