Debt consolidation and other debt reduction strategies

If you're in debt up to your eyeballs, and you want to do the responsible thing and pay it off instead of sliding into bankruptcy (which is increasingly difficult to do), you have several options:

The first option is the simplest: Cut out some of your unnecessary spending, such as cable TV or eating out, and put the money towards paying down your debt. If you don't know where to start, use an effective debt repayment plan such as Mary Hunt's Rapid Debt Repayment Plan or Dave Ramsey's Debt Snowball. Although either plan will work, the Rapid Debt Repayment Plan is more effective, and will have debts paid off faster than with the Debt Snowball. However, the RDRP requires more sacrifices, including "No new debt" and "Pay the same minimum balance each month, regardless of whether it declines as you pay off your debt". I think an intelligent combination of the two approaches would work - i.e. follow the rules set by Mary Hunt's Rapid Debt Repayment Plan, but kick it up a notch with an additional amount (the "snowball") applied to the debt with the shortest duration until payoff. Anyway, please read about these two plans and give them serious consideration before considering any of the other options.

The second option is a little trickier: Negotiate with your creditors. If you can't make all your payments, talk to your creditors and tell them what steps you're taking to try and pay down your debts. If you make it clear that repayment of debt is your number one priority, they may make concessions regarding interest rates, late fees, and more. All you have to do is ask.

The third option is even more complex, and can be more fraught with pitfalls: Consolidate your debts with a debt-consolidation loan. I offer this as an option only because it exists, not because it's a good option. Consider it only if you truly cannot even afford the minimum payments of your debts, even after cutting all of your unnecessary expenses and trying to negotiate with your creditors. If you're at that point, check out several different debt consolidation services - seriously, investigate them thoroughly, because your financial future is at stake if they're flakes or scam artists. Make sure you understand all of the costs involved with getting the loan, including fees and "points". Also, make sure you know exactly how many payments you're supposed to make, what your interest rate is, and what your total payments will be, then compare this to your current situation. If doing so won't hurt you, then go ahead with the debt-consolidation loan.

An option that I don't consider viable is personal bankruptcy. Seriously, I won't even discuss it, so if you want to take the easy way out, you're on your own.

Finally, once you're out of debt, please do yourself a favor and make a habit of visiting and learning from the many personal finance blogs available. I proudly plug my own blog as a resource that is becoming increasingly useful, especially as I make more personal finance tools available, such as Excel spreadsheets for finance. If you haven't already, bookmark this blog or subscribe to the RSS feed by using a link at the bottom right of this page. You'll be glad you did.