Facts About Debt Reduction

Debts that are forgiven or consolidated are still taxable at their original full amount, as are debt settlements of more than $600. For this reason alone, it's important that you approach debt reduction as a serious commitment, and do so in manageable steps.

Expert Insight

Debt snowballing is a concept introduced by financial guru Dave Ramsey. It focuses on paying the smallest debts first while making only the minimum payments on everything else.

Considerations

Setting up a budget is essential to paying off debt, as you need to know what your monthly income after taxes and your fixed expenses are before you can figure out how much you can direct towards paying off debt.

Prevention

Before you can attempt to pay off debt, you should make a list of everything you owe, note the interest rates, annual fees and penalties incurred on each debt.

Solution

Rather than paying off debts randomly, it makes sense to first contact creditors and lenders to see if you can get a reduction or negotiate a lower interest rate.

Steps

Once a debt reduction plan is in place, it's important to follow through each month, even if the amount paid is lower than originally planned, as this will prevent rates from increasing again due to payment default.