5 things you should know when dealing with debt problems

Debts are one of the easiest ways to turn life into living hell. Chances are, if you are reading this article, you are worrying about how to pay your way out of debt. If you are dealing with multiple debts, the goal is usually to reduce cost, simplify repayment, or regain control of your finances.

Here are 5 tips to navigate you through the process of getting out of debt:

1. Identify and sort out your financial facts

The only way to start paying off debt is to face the reason why you are in debt in the very first place head-on. Stay on top of your financial situation by assessing the actual numbers. Despite how daunting and terrifying this may sound, having an understanding of your debt situation is essential for developing a debt management plan that actually works.

It could be as simple as compiling a spreadsheet, checking your credit report or talking to debt collectors to understand the exact amount you owe.

Also, get clarity on what you own – any savings, insurance plans or investments? Perhaps you could cash in some assets to turn around your debts.

If your debt situation involves multiple existing repayments, it may also be worth reviewing whether a debt consolidation plan could simplify them.

2. Work out a budget

The next step in repaying the loans is to gather up all your financial statements. Bank statements, mortgage or loan agreements, salary slips, credit card bills, utility bills, shopping mall receipts - dig as deep as you can for any money coming in and out.

Then create a list of monthly expenses – the truly necessary, cannot-live-without ones – and compare the list with your average monthly income. Expenses can be categorised into fixed (like a student loan) and variable ones (with an amount that changes from time to time, such as groceries). If your income type is relatively unstable, pick the income amount to your lowest-earning month in the past year as a baseline.

Only with a complete overview of your routine spending and earnings can you find the leak that causes debts or rooms for adjustments. Consider trimming your variable spending first. You may further look into expanding your income sources or shaving a few hundred dollars off your fixed expenses if the debt situation has been significant.

3. Find your loan repaying strategy

Before going into credit help, two strategies are often recommended by financial experts – debt snowballing and debt avalanche.

4. Debt forgiveness does exist

As suggested literally, debt forgiveness happens when a lender agrees to wipe away all or partial amounts that you owe. The terms are subject to the debt collectors and debtor through negotiation. Believe it or not, you are then only required to pay for the amount both parties agreed on. Of all types of debts, government-sponsored loans like student loans are the potential ones that come with debt forgiveness schemes. Since COVID-19, and the sharply curtailing world economies, more public aid programs and emergency debt relief plans are now available.

While it is always worthwhile to check all your options, note that debt forgiveness plans almost always come with major strings attached and huge consequences reflected on your credit score or tax record. You have to be extremely careful about the details to avoid the catch. Keep your eyes open for all the specific parameters that you have to meet to be qualified as well.

5. Look into debt relief options

If you find yourself struggling to keep up with debt payments, consider setting up a debt management plan that allows you to pay off debts at an affordable rate. Most of the time, you could seek help from an individual debt management plan provider or counselling agency to negotiate with your debt collectors. All you have to do is settle a monthly payment to the agency.

Be mindful of the fact that this method is only for repaying unsecured, non-priority debts, including things like credit card debts or personal loans. Fixed loans like those for cars and house mortgages are not covered.

One common option is a debt consolidation plan, where multiple debts are combined into a single monthly repayment through a new loan. Click the following link to understand how debt consolidation works in Hong Kong. This may be useful if you are struggling to manage multiple high-interest debts with different repayment schedules.