When you’re in a bad situation, sometimes it helps to figure out how you got there. Not only could this help you come up with a solution to get rid of the problem, it could also help you avoid getting there again. This is true of debt. As you face debt settlement, reflecting on what got you in debt might allow you see how you got into debt in the first place and help you develop habits that keep you from getting into debt again.

Spending more money than you make

Almost always people get in debt because they spend more money than they bring in. Credit cards and loans often lull you into a false sense of your spending ability, making you think you have more money than you actually do. When you spend all your money, then charge up credit card balances, you don’t have any money to pay your credit card bill when it comes due or you only have enough money to make the minimum payment. Do this month after month and soon you have a huge credit card balance, a larger minimum payment, and not enough money to sustain it all.

Failing to adjust your spending to accommodate an income loss

If you lose your job or experience a paycut, you should also lose some of the things you spend money on. Even if you have unemployment, severance pay, or an emergency fund to fall back on, you should still cut back your expenses because you don’t know how long the income loss will go on. You could be without a job for several months or more. You should make the money you do have last as long as possible.

Uncovered medical expenses

Not everyone who goes into debt does so because they made bad money choices. A 2007 Harvard study revealed that the majority of bankruptcy cases are caused by (more…)

If you’re facing a lot of debt, you may consider debt consolidation instead of debt settlement for dealing with your debt. Debt consolidation doesn’t work for everyone, so make sure you evaluate the solution before you settle on it.

What is Debt Consolidation?

Consolidating your debts typically means you take out a big loan and use it to pay off your debts. It’s not like consumer credit counseling where the counseling agency typically takes over your payments. Instead, you would have a brand new loan and you would be responsible for paying your loan each month.

Debt Consolidation Loan

To consolidate your debts, you need to be able to take out a loan that’s large enough to cover all your outstanding debts. For example, if you have $50,000 in credit card debt, you need to qualify for at least a $50,000 debt consolidation loan.

What makes debt consolidation hard for many consumers is that it’s often difficult to get approved for a large, unsecured loan without having an excellent credit score and enough income to qualify for the loan. If you’ve missed some credit card payments, there’s a chance you don’t qualify for a debt consolidation loan because your credit score has suffered.

It may also be hard to qualify for a debt consolidation loan if you don’t make enough money every month to meet the lending standards. Even if your income is high enough, the lender may count your current debt load against you, even though you’re planning to (more…)

Debt settlement is just one of several options for dealing with debts, and may not be best suited for everyone. There are a few alternatives to debt settlement, so before you go through with debt settlement, and deal with the possible negative side effects, it’s important to make sure it’s actually what you need for your debt.

Can you afford to make your minimum monthly payments right now?

If you’re comfortably making the minimum monthly payment on your credit cards each month, then debt settlement may not be the solution you need. By paying the minimum on your credit cards, you’re probably not hurting your credit score. When you stop making these minimum payments, which is almost always a condition for debt settlement, your credit score will likely suffer.

If you’re making the minimum payments and you can afford to make a little more, then you might consider a debt snowball where you send a higher payment to one of your credit cards each month (while making the minimum on all your others) until that card is paid off. Then, you’ll do the same thing for another credit card. Repeat until all your cards are paid off.

When you’re making your minimum payments, but feel the pinch in your budget, you may consider consumer credit counseling. Credit counseling agencies talk with your creditors to negotiate a lower (more…)

Debt settlement is made more difficult by the fact that you typically have to have a lump sum of money on hand when it’s time to settle your debts. When you make monthly payments to a debt settlement firm or you put monthly deposits into your own debt settlement account, it may take months to accumulate enough money to settle your debts. All the while, your debts get more delinquent, more fees are added, and the debt gets larger.

With Settlements, Time is Money

The longer it takes to come up with the money for a settlement, the more money you’ll probably need to save up for a settlement. For example, if your credit card balance is $8,000 at the date you last make a payment to the creditor, six months later, it could easily have grown to $8,500 or $9,000 with interest and late fees. That means you’ll end up probably settling that debt for at least $250 to $500 more than what you would have if you had enough money to settle sooner. It may not sound like much money but if you multiply it by 8-10 for that many additional debts, then it’s an extra possible $5,000 that you’ll have to come up with for debt settlement.

Settle Sooner With Home Equity

If you have home equity available, you might consider (more…)