Sunday 16 June 2024

Debt Cycle And Solutions

The recent economic recession threw vast sections of the American public into a vicious cycle of debt. Unable to provide for the mortgage payments because of the rapid fall in value of their home equity, much of the American public had to resort to falling into more debt to get out of the current debt.

This exchanging of debt, replacing one with another, provides at best a very temporary relief, but eventually only ends up exacerbating an already bad situation – resulting in even more debt, with higher interest rates on them, leaving such sections of the public in a deeper hole of their own making, getting out of which becomes seems almost improbable, if not impossible.

While there are no magic bullets or short cuts to save people from the mess that they have landed themselves into by getting into this cycle of debt, there are indeed some great solutions to relieve them of their severely indebted situation. We offer a few debt relief solutions that may be of great help to those staring into the barrel of severe debt.

However, before we get into the details, it needs to be said that these solutions, although making a lot of sense, are still not a walk in the park, and the public will have no choice but to make a lot of sacrifices, and work extremely hard to climb out of the debt hole that they have gotten themselves into. But making use of our debt relief solutions will help immensely.

Debt Cycle And Solutions

1.  Watch every penny.

This solution works best for those who have a milder form of debt – say credit card debt worth $ 20,000, and have managed to somehow keep up with the payments. Such people will do well to save on by denying themselves that daily Cafe Latte at Starbucks or on a Louis Vuitton last seen at the mall. Small savings, done with regularity, snowball into something much larger with time, and help tremendously in cutting back on the old debt.

Indeed, with the most simple sacrifices, such as not eating out every Sunday, or getting rid of the club membership, it is possible to visualize savings of as much as $ 10,000 a year.

2.  Peer-to-peer lending.

Peer-to-peer lending on the internet is a wonderful way for the public to “crowdsource” away their heavy debt problems. Typically, peer-to-peer lending websites connect a “borrower” – an average person, who could have a bad credit rating, to an “investor”, several people on the website who together, in bits and pieces each, provide this person with a loan.

Since there is no overhead, the borrower has to shell out much lesser interest, typically from 5% to 7%, than he would have, had he taken the loan from a major bank. Peer-to-peer lending is a highly effective way for the debt ridden public to replace their old loans with new lower interest loans borrowed from the hundreds and even thousands of investors from these websites. However, the deals in a typical peer-to-peer lending take a while to come to fruition.

3.  Negotiate with the creditor.

The debt-ridden public might try settling their debts quickly by negotiating with the creditor for much better terms. A professional from Nick Scali company said that it is possible for the creditor to offer an “up-front” chance to the borrower to get out of the debt, if the borrower commits to fulfil an obligation to settle at least 50% of the debt in a relatively short period of time – say pay back 50-60% of the debt in 5-6 months.

This is better than a worst case scenario for the creditor, as they end up getting nothing if the borrower decides to file a Chapter 7 bankruptcy. By offering a certain discount, they end up getting a certain amount back on their investment – so, it’s not a total loss for them. The borrower in his turn, suffers with his credit score, but has every chance of staging a recovery with it in 12-18 months.

Kent Farell, a registered financial planner, shares the best insights on financial management and investment. He also loves to give wise tips about spending, saving and overcoming debts.