Debt solutions have played an important role in helping many American families improve their economic security since the 2008 economic crisis. Credit had been easy to get for decades, but as result of the global economic collapse and subsequent recession, many families failed to adjust their spending habits, and found their debt to income ratios spiraling upwards. It’s taken a while, but it appears that many American families have begun to take their debt problems seriously. By combining more disciplined spending habits and some time tested debt solutions, many families have improved their financial conditions substantially. Other families still have a long way to go.
Debt Solutions American Families Have Used
The US population is one of the most diverse on the planet. It is no surprise that the debt solutions adapted by American families are equally diverse. While there are still many families who have not adopted a workable plan to reduce their debt burden, many families have adopted one or more of the following debt solutions:
- Arranging a bank debt consolidation loan on their own or with the help of a debt counselor.
- Securing professional assistance in establishing a Debt Management Plan (DMP).
- Securing professional assistance in establishing a Debt Settlement Plan under which a third-party negotiates with each creditor seeking partial debt forgiveness, lower interest rates, or other concessions in exchange for a guaranteed monthly payment.
- “Tearing up” all but one credit card for use in dire emergencies, and tightening the family budget to free up as much cash for monthly debt reduction as possible.
The first three of these approaches seek to reduce at least the number of monthly payments the family must make, and often the total sum required for debt repayment each month. The first three debt solutions, and hopefully the fourth as well, seek to eliminate the family’s most costly (high interest) debts as quickly as possible.
Planning For the Future
While a short-term focus on debt solutions is understandable for families that have endured the frightening experience of watching family debt begin to spiral out of control, it is important not to overlook the importance of long-term retirement planning that will allow parents to live in comfort for two or three decades after they reach retirement age without imposing burdens on children or other family members. Awareness of the sobering reality may add an extra incentive for eliminating current debt as quickly as possible. Many financial planners advise including at least a small monthly budget allocation for long-term savings as early as possible, even if that means starting before debt repayment costs have been lowered to an acceptable level.
What debt solution strategies are right for your family?
Deciding which approach to debt reduction is best for your family depends on many factors, including personal preferences, and the presence or absence of financial management skills within the family. In all cases, however, a well conceived and realistic family budget is an important starting point. If you are uncertain how to establish a family budget, by all means seek assistance from an accredited nonprofit debt counseling service.
With a budget in hand, consider the following scenarios as illustrations of approaches that might be useful for your family:
- If your total debt repayment costs are between 10% and 15% of your gross income, you are in pretty good shape, and may be in position to further improve your condition by simply lowering your credit card usage, and focusing payments to reduce the highest interest debt’s first.
- If your debt repayment costs are closer to 20% of your gross income, and includes a large number of separate monthly payments, you may be well advised to consider seeking a debt consolidation loan. Your family will gain the convenience of reducing the number of monthly payments, and a consolidation loan may protect your credit score by lowering the risk of inadvertently missing a payment.
- When debt repayment costs approach 35% of your gross income, or if there is a compelling reason to eliminate all debt by a specific date, seeking professional assistance in establishing a Debt Management Plan may make sense for your family. Establishing and executing your plan will put you in frequent contact with an experienced debt repayment expert. The combination of the expert’s knowledge and the spending discipline the expert will require from your family, can significantly speed up your progress to a responsible debt level.
- If you have delayed taking action until debt repayment costs have reached the 40% to 50% of gross income level, you may require the services of a debt settlement company. Because debt settlement companies generally seek to negotiate debt settlements with individual creditors at less than the total balance owed, the use of a debt settlement company will have a lasting impact on your credit score. If, however, the debt settlement company succeeds in restructuring your debts so that they can be successfully managed going forward, they may have provided the foundation from which you can begin the process of rebuilding your credit report and credit score.
It was the failure to adapt our old spending habits to the changing economic conditions starting in 2008 that got many American families into debt trouble in the first place. We must all remember that no approach to lowering debt and saving money will work without conscientious attention to realistic spending habits.