How To Reduce Your Debt When You Can’t Repay

negotiating down your debts - reduce debt

Debt is something that can have devastating consequences. It can harm relationships, lead to high stress and result in sleepless nights. However, debt itself is not the problem. Instead, the challenge comes in when you cannot pay off your debts.

The solution to alleviating the stress is seeking ways to bring down your debt. This should make it more manageable with lower repayments.

Here are eight steps that you can follow:

Step 1 – Get clear about your financial situation

You need to have a crystal-clear assessment of your financial situation. To do this, create a chart or a table that contains the following: –

  • Your total amount of debt
  • The type of debt you owe
  • Ranking of the debt from most to least urgent
  • Your current estimation on the duration it will take you to clear the debt
  • Potential exemptions to your debt

Step 2 – Evaluate your behaviour

What got you into debt in the first place? Particularly debt that you cannot manage? List down all the reasons that you are facing your financial situation now. Next, you must learn how to spend below your income to avoid problems.

Once you have established this, figure out how you can increase the amount of money you earn. The fact is, with some more money, you will get on to the fast track of reducing your debt. This may be the time to take on an extra job or join the freelance community and monetize some of your skills in your spare time. This additional income should go directly to reducing your debt. Resist the temptation to increase your expenses and spending.

Step 3 – Focus on the most expensive debt

With this information, it becomes possible to split your debts into two categories. These being high priority debts and low priority debts. High priority may have high-interest rates with penalties should you fail to pay them off. Low priority debts can be postponed, or paid in small quantities until they clear.

For these debts, the best thing that you can do is focus on making the minimum payments on all of them. Then you need to strategize. If you have any amount leftover, put it towards the debt that has the highest interest rate. This will mean that you are paying less overall. However, it also helps you knock off your significant debts more quickly.

Step 4 – Eliminate the small debts

Another approach you can take is to eliminate the small debts faster than the more significant debts. With this strategy, you should maintain the minimum payment for all of your debts. Then, if you have any balance left over, use this to pay off the smallest debt. Once this has been paid off, tackle the next small debt.

The benefit of this approach is the sense of accomplishment when the debts begin to disappear. Furthermore, paying off the debts helps you to increase your credit score.

Step 5 – Put aside something for emergencies

When you are deep in debt, the last thing you may be aiming for is putting money aside. Even so, this is a step that you need to take. Give yourself a small and manageable target to begin with, and then over time, you can increase the target. Your aim should be to build up at least six months of living expenses. This will call you to evaluate what you need and what you want. Then, sacrifice your wants and use that money to save. You will be glad that you did.

Step 6 – Consider debt consolidation loans

Many people face challenges reducing debt because they have many different debts they are paying off. These may include a mortgage, student loans, medical expenses, or asset payments. In addition, all these various debts may attract varied interest rates, making it difficult to prioritize what must be paid off.

Debt consolidation loans mean that you are paying off only one loan. Furthermore, you can negotiate terms that make it easier for you to make a manageable payment. This also allows you to rebuild your credit score if you need future access to finance.

Step 7 – Put a freeze on your credit

Take action to resist the temptation that could lead to an increase in your debt. This may call for putting a freeze on your credit cards until you have fully paid them off. To manage your expenses and continue paying off your debt, you will need to create a budget. This ensures that you know where every dollar you are making and spending goes.

Step 8 – Refinance your Mortgage

Getting a lump sum may be just what you need to eliminate all of your debt. You may need to look at your most significant asset to accomplish this. This becomes an even bigger advantage if you own your own home.

Once you have paid off all your debts, consider the new mortgage your main loan and focus on paying that one-off. The main advantage of this is gaining back a sense of control over your finances. This will only work if you avoid all the previous actions that got you into debt.

There is always a solution when it comes to paying off debt. It begins with having a positive attitude and understanding that debt is not forever. Where possible, negotiate with institutions and come up with payment plans. Cut back on your expenses as much as possible. Set a target to build up some savings. Reducing your debt requires you to make intentional actions and decisions to build up your financial standing.