How to get out of debt during a recession.
Former U.S. Federal Reserve Chairman Alan Greenspan said in February that the current global recession will “surely be the longest and deepest” since the 1930s (Source: http://recession.org/news/worst-recession-since-1930s)
Can we get out of debt during a recession, especially this one?
I’d like to suggest that it is possible. We will need a plan and have the discipline to work that plan amidst the difficulties we’ll face.
First, we need to admit that our debt is a result of us spending more than we earn. It used to be that people got into debt because of over-spending on non-necessities. These days, much of our debt, especially credit card debt arises because of rising prices of our basic needs. Many Americans have had to resort to using their credit cards because their earnings just cannot keep up with the high cost of living.
The Federal Reserve’s report confirms this as it shows a 1.2% increase in revolving debts in January 2009 compared to December last year.
Here are steps we can take to pay off our debt:
1. Stop buying stuff we don’t need. Stick to spending on basic necessities.
2. Use cash as much as possible. Cut up our credit cards. Keep one for emergencies though. It is more difficult for us to fork over hard cash than it is to hand our credit card to the cashier. This will make it difficult for us to spend unnecessarily.
3. List down all our debts. It may come as a shock to realize how deep we are in debt but we need to do it. Ignoring a debt will not make it go away. Review the list and organize the debts in order of priority.
First on the list are priority debts, which include mortgages and taxes, both of which can land us in serious trouble if action is taken against us for non-payment. Ensure that these debts are kept current.
Next, come debts such as credit card debt, which grows because of interest charges. Last, but not least, are personal loans given by family and friends.
4. Pay off all overdue debts and make them current. This will save us money on late payment fees and avoid us being taken to court.
Then make payment based on the order we determined earlier:
a. Priority debts mortgage, taxes, car loan, etc
b. Credit card and other interest bearing debts. Besides making the minimum payment, focus on settling the one with the highest interest rate by paying more than required. Do this every month until that debt is paid off. Then repeat the process with the debt with the next highest interest charge, and so on, until all debts are fully paid.
c. Friendly loans can usually be deferred, provided the lenders are aware of your efforts to pay off your debts.
5. Approach your banks. Negotiate to have any late payment fees waived. Also request that the interest rate be lowered for future payments.
Discuss with them your plan to be debt free. Be persuasive. Most banks will try their best to help ease their customers’ burden in such difficult times. Accept any offer that reduces the amount you’ll have to repay.
6. Earn more money. Now that we’ve planned ways to pay off our debts, we’ve got to figure out ways to increase our income. It’s only by earning more money that we can both afford to meet our living costs without getting further in debt, and work towards paying off our existing debt.
Getting a part-time job is one option. You can also consider a business you can do in your free time. If you are comfortable with the Internet, you’ll find many opportunities online that you can get involved in, with little or no cost.
Do you have stuff at home that you don’t need? You could have a garage sale or even sell them on online auction sites such as Ebay or Amazon.com.
Be creative. If you are serious about getting out of debt, then every extra penny counts towards paying off your debts faster.
It is possible to be debt free even in a recession. We will just have to work our plan and persist until we succeed.