Road to Recovery: What to Do if You Are Drowning in Debt

drowning in debt

The Federal Reserve says that the average household has a consumer debt of $15,863. It’s a familiar story across the nation and millions of people are only $1,000 from financial ruin. If you are drowning in debt, it can feel as if there is absolutely no way out.

There are, however, options that you can take advantage of. This article will show you what you need to do if you are drowning in debt.

Take Note of Where You Are

A characteristic of drowning is panic. You are in the middle of an ocean and you have little to no idea of where you are or where you are going. Begin removing that panic by taking note of where you are by creating a budget.

Track your incoming and outgoing money for an entire month. This will show you whether you are profiting or losing money. It will also show you where your money is going and whether you can cut off some luxuries in order to save some money.

The key to good financial habits is that your budget should be constantly being updated and checked. This will ensure that you are not breaking your budget and you are meeting your calculations.

Controlling Your Debts

A common characteristic of people in debt is they have more than one form of debt. It’s rarely the case that someone is drowning exclusively due to educational debt or a mortgage. Controlling your debts requires you to understand how many debts you have, how long it will take to pay them off, and what the interest rates are.

Now you need to prioritize them. Here are some of the things to consider when it comes to prioritizing your debts:

  1. Can you pay off any debts immediately in one big lump sum?
  2. Are any loans reaching the point where the interest rates are about to kick in?
  3. What are your biggest loans? The smaller loans should be paid off first so you can better consolidate and control the bigger amounts for later.

This may not make happy reading, but it’s a necessary process to go through. You may even discover that the figures don’t add up and you have far more debt than you can handle. If this is the case, move to the next step.

Negotiating Changes to Your Debts

Go around each of your creditors and explain your financial situation. Tell them straight that you are finding it nearly impossible to meet the repayments. Most of them simply want their money back, plus a little bit of profit. If you can show that you are in genuine distress, most lenders are willing to negotiate with you.

So how are you going to do this?

First of all, you may be able to negotiate partial loan forgiveness. It’s rare for this to work, but sometimes lenders will forgive a part of the loan. This is most commonly seen with Federal loans, particularly in relation to student debt.

Next, you may be able to negotiate specific terms like the repayment length and the interest rates. This is a more likely outcome.

Finally, you should consider consolidating your loans. It may mean paying roughly the same amount, but it’s much easier to manage when you are making a single payment every month. When someone is drowning in debt it’s usually because they don’t know where the money is going.

Increase Income or Reduce Outgoings – Your Call

You may decide that it’s easier for you to take a second job or to sell some of your belongings. This will allow you to increase your income and pay down some of your debts. Many people focus on building good habits for the future. For example, they may decide to start a business or go back to school. This may not provide immediate relief, but in the long-term it can really make a difference.

Temporarily, you should consider reducing your spending on luxuries. Reduce your outgoing spending and see where you can make cuts. Chances are that you are already spending more than you really need to.

How to Take Control of Your Life?

Drowning in debt signifies a lack of control. You have lost the ability to control your finances. While you can get yourself out of a hole, your real goal should be making sure that you don’t fall into another one going forward. Take control of your life by learning about household budgeting and how finances work.

If you know how debt accumulates and how to avoid it in the first place, you stand a better chance of getting and staying out of debt.