As an increasing number of people are finding themselves in over their heads in debt, many are turning to various debt management programs for assistance. Before you sign on to one of these programs, you might try to make your own debt reduction plan – and save yourself having to pay a company fees for their services, or avoid the trouble of potentially dealing with a dishonest company.



Step One: How Bad Is The Situation?

Before you can honestly make a go at paying off debt, you need to have accurate knowledge of how much debt you have. Get out your checkbook register, bank statements, credit card statements and anything else you use to track your finances and see if you can pull together a complete list of debt. Include the name of the creditor or person you owe, how much you owe them, what the minimum payment is, and how much the interest is.

Make a second list of other financial obligations each month – your rent or mortgage, utilities, etc. This way you can see how much money you're paying out versus how much you're receiving. If your income isn't greater than the minimum payments and living expenses on your list, you know you're in a really bad situation. If the income is the same or greater than what you owe – the situation is troublesome but probably not as bad as you thought.

Either way – making your own debt reduction plan is a good place to start digging yourself out of this hole. If after you try this with 100% commitment you find you still can't make any headway in reducing debt, you might want to consider other options (debt management companies or a debt consolidation loan, for example).

Step Two: Call your Creditors

This step can be challenging and it's the reason many people feel working with a debt management company is helpful because they will actually try to negotiate on your behalf. What you may not realize is they don't have much more pull in getting lower interest rates are different repayment terms than you do on your own.

There is nothing stopping you from calling each of your credit card companies and explaining your situation. Right now, they are likely to be getting a lot of calls from people trying to do the same thing, so it may be more difficult than ever but you won't know if you don't try! Ask for a lower interest rate for a period of six or twelve months, to help you pay down your debt faster; or ask for any other payment arrangement that helps more of your money go to the principal balance to enable you to get out of debt. You may be pleasantly surprised at the offer you receive – if the customer service representative tells you there is nothing they can do, don't just say thank you and hang up! They are reading from a “what to say when the customer asks...” type of script, so be sure to ask to be transferred to the supervisor and be persistent (yet polite).

Step Three: Work Out a Repayment Plan

You have to be committed. You have to be serious about wanting to get rid of the debt, or you may as well stop right here because you aren't going to get anywhere if you start a debt reduction plan and quit a week later. You can't approach it like a diet that you start before Thanksgiving and quit because you want to eat two helpings of Thanksgiving dinner.. start back up afterwards and quit for Christmas and New Year. It probably took you a few years to get into serious debt, and unless you win the lottery or are handed a ton of cash, it's going to take discipline and time to get out of it.

Look at your lists and see where your money is going right now. First of all, eliminate all unnecessary expenses (coffee on the way to work, picking up extra groceries on a whim when shopping for meals, eating in restaurants or take-out, buying books when you can go to the library, etc). Change your list to reflect new interest rates or minimum payments you maybe succeeded in arranging from doing Step Two.

After subtracting your required living expenses from your income (your rent, your utilities, your gasoline, car insurance, etc), take the amount you have left and decide how to allocate it to your debts to pay them off. You can use a “debt snowball” to do this. The key is to pay the minimum payment on all debts except for one; which you send as much money as possible month after month until it is paid off. Once the account is paid off, you send the money you had been sending to it on to the next account on your list (added to the minimum payment you were already sending). As you pay off accounts your payments get bigger to each of the accounts on your debt list, which accelerates repayment.

When you use a debt management company, often you are required to stop making payments on some or all of your accounts in order to get them three months (or more) past due just to get the company to work with you. In some cases, you may already be this far behind and the option for using a debt management company may be a good one. If you aren't quite that behind on your debt, you can work out better repayment terms and become disciplined with your finances without having to damage your credit score further or make payments to a debt management company.