Pay Off Your Debt

The first step toward paying off your debt is getting a realistic understanding of your current situation - how much money you take in each month; how much you spend; and how much you can save. This basic information will help you formulate a long-term action plan on your own or decide that you need to seek professional assistance. To get started, read these 10 Smart Steps today.

Paying off your debt means cutting your spending immediately. It may also mean talking with creditors, debt collectors, and credit or debt counsellors. The following information will help you reach your goal.

Find Daily Savings: You Can Do It Save on the Interest you Pay Contacting Your Creditors Dealing with Debt Collectors Understanding Secured and Unsecured Debt Debt Consolidation Loans Home Equity Loans

You might be surprised how quickly small expenses add up to big savings.

Some of your regular, periodic expenses are luxuries - things like house cleaning, manicures, lawn-care services - do them yourself, or do without. Trade in those luxuries for the big luxury of paying off your debt.

That expensive coffee grabbed in the morning rather than having coffee at home or at work, bringing lunch instead of spending $7-$10 a day to grab lunch at a sandwich shop, not ordering expensive drinks at restaurants and going out less - these are things everyone can give up or change that will make a big difference in monthly expenses.

Other things like pay-TV, mobile phone service with all the extras, new CDs or buying online music, and many other items like these are luxuries we may want but don't need. Often you can opt for a less expensive pay-TV or mobile phone service package with no penalty for changing, and this will save you real money every month.

Other items like an expensive car lease or apartment may take longer for you to downsize, but with planning you can. Making these changes can add up to hundreds of dollars a month or more. This will provide you with money you can use to start making a real difference in paying off your debt.

It is equally important not to take on new debt until you get your finances under control.

Just as everyone's debt is different, everyone's idea of what is a "necessity" or a "luxury" is different, too. Only you can decide where and how to make those daily savings, and only you can make it happen. Use the Step-by-Step Guide to Debt Reduction to create your personal plan.

Sticking to a budget and contacting your creditors if you have problems making payments are the first steps on the road to dealing with your debt. Sometimes, though, they are only a beginning, and professional assistance may be necessary. Review the information under this section, and if you feel like you may need professional help, check out Getting Help for tips on seeking professional services

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When less of your money goes to paying interest on your debt and more of it goes toward paying off the actual debt, you will reach your debt reduction goal sooner.

Cutting your interest rate by even a few percentage points will enable you to put more toward paying off your debt each month. While a savings of $10 or $20 dollars a month may not sound like a lot, putting all of those savings toward paying off your debt can be a big help. The larger your debt, the greater the savings from bringing down the interest rates on it.

These suggestions will help you minimise the amount of money that goes to interest and maximise the amount that goes toward paying off your debt.

• Ask each credit card lender for a lower rate - It sounds almost too simple, but it often works. Call each lender's customer service department and let the representative know that you are shopping around for better terms. If you have received a pre-approved offer for a credit card with a lower rate and are thinking of switching, let them know about this offer and see if your current credit card company can meet it. The credit card market is very competitive today, and you may find that this simple tactic can lower your rate by at least a couple of percentage points, and often more.
• Prioritise your debts by interest rate - To minimise the amount of interest you pay, concentrate on paying off the debts that carry the highest interest rates first. Keep all your accounts current by paying at least the monthly minimum due on each one. Focus the additional amount you are able to pay each month on paying off the highest interest rate debts.

If you are having trouble paying your bills, you can contact your creditors and explain the problems you're having. Your creditors may agree to change the terms of your contracts if the changes will enable you to make you payments.  You may be able to extend the term of the contract or postpone the due dates for payments or both, without there being any effect on the interest rate.  Under the Credit Contracts and Consumer Finance Act, you have a right to ask your creditors to agree to such changes if:

• you are unable to make your payments because of illness, injury, unemployment, the end of a relationship or other reasonable cause (for example, a family bereavement) ; and
• you did not expect that you would be prevented from making payments for that reason when you entered into the contract;
• you expect to be able to make your payments once the terms of your contract are changed; and
• you are up to date on your payments so far and are within your credit limit.

Also, if you wait until you miss payments, you may already have been charged late fees and may have had negative marks put on your credit report. Reaching out to your creditors early can save you real money by avoiding late and other penalty fees.

If you do agree to change the terms of your contract, make sure you pay what you said you would each month or the creditor could return to requiring higher payments.

If your creditors will not agree to change your contract, you can apply to the Court to have the terms of the contract changed.

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Many creditors will turn your account over to a debt collector to achieve payment if your account goes unpaid for a certain amount of time. If you are in a tight financial situation and can't pay the full monthly payment, debt collectors, like original creditors, may agree to a modified payment schedule.

It is important to be aware of your rights when dealing with debt collectors. A debt collector may not lie to or mislead you. This means that a debt collector should not demand late payment or collection fees where there is no contractual entitlement and must not exaggerate the legal consequences of non-payment or the likelihood of court action. If a debt collector is repossessing your goods, they must not enter your house unreasonably, and must not enter your house other than between 6 am and 9 pm on Monday to Saturday.

If a debt is over a certain number of years old and outside of the statute of limitations the creditor cannot pursue you in court for the debt. The limitation period will usually be 6 years from when you defaulted on your payment. However, some debts, such as certain tax debts, can be collected regardless of how old they are. More information on your rights and appropriate conduct by debt collectors is available on the following websites:

• Consumers’ Institute
• The Ministry of Consumer Affairs
• Commerce Commission

You may also want to contact your lawyer or your local Citizens Advice Bureau [www.cab.org.nz] or Community Law Centre if you have been approached by a debt collector, particularly if the debt is disputed or you are not sure what your rights are.

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Many creditors will turn your account over to a debt collector to achieve payment if your account goes unpaid for a certain amount of time. If you are in a tight financial situation and can't pay the full monthly payment, debt collectors, like original creditors, may agree to a modified payment schedule.

It is important to be aware of your rights when dealing with debt collectors. A debt collector may not lie to or mislead you. This means that a debt collector should not demand late payment or collection fees where there is no contractual entitlement and must not exaggerate the legal consequences of non-payment or the likelihood of court action. If a debt collector is repossessing your goods, they must not enter your house unreasonably, and must not enter your house other than between 6 am and 9 pm on Monday to Saturday.

If a debt is over a certain number of years old and outside of the statute of limitations the creditor cannot pursue you in court for the debt. The limitation period will usually be 6 years from when you defaulted on your payment. However, some debts, such as certain tax debts, can be collected regardless of how old they are. More information on your rights and appropriate conduct by debt collectors is available on the following websites:

• Consumers’ Institute
• The Ministry of Consumer Affairs
• Commerce Commission

You may also want to contact your lawyer or your local Citizens Advice Bureau [www.cab.org.nz] or Community Law Centre if you have been approached by a debt collector, particularly if the debt is disputed or you are not sure what your rights are.

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Debt can be secured or unsecured.

Secured debts are tied to an asset, such as a vehicle loan or your mortgage. If you fail to make payments on a secured loan, the lender can take steps to repossess the asset, for example taking back the vehicle or selling your home.

• Vehicle Loans - Many vehicle loans include a mortgage over the vehicle, allowing a creditor to repossess your vehicle any time you're in default of your loan. For personal loans the creditor must notify you at least 30 days before repossessing the vehicle and if you repay all arrears and costs relating to the default and do not default again during the notice period the credit provider is not entitled to enforce against you. To recover a vehicle that has been repossessed, you may have to pay the balance due on the loan, as well as towing and storage costs, or the creditor can sell it. If you believe you will default on the loan on your vehicle, you may be better off selling it and paying off the loan, avoiding the costs of repossession and the negative mark it will leave on your credit report. However, any sale of the vehicle must be with the creditor's consent if the creditor has a mortgage over it.
• Home Loans - If you fall behind on your home mortgage, contact your lender immediately to avoid a mortgagee seeking to sell your home. It could take as little as two or three missed mortgage payments for your lender to initiate a mortgagee sale. Most lenders are willing to work with you if they believe you're acting in good faith and the situation is temporary and correctable. Some lenders may agree to extend the repayment period to reduce the monthly payment. Others may reduce or suspend your payments for a short time and, when you resume regular payments, you may have to pay an additional amount toward the past due payments. Ask whether additional fees would be assessed for these options; if so, calculate how much they will add to the total over the long term.

Unsecured debts are not tied to assets. They include credit card debt, signature loans, medical bills, and debts for other types of services.

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Debt consolidation means combining all your debts into a single loan at a lower rate, which can be done in a number of ways.

Credit unions are among the best sources of lower interest debt consolidation loans. If you do not belong to a credit union, other options, including banks, are available. You can explore debt consolidation loans on your own or through a credit counsellor.

Beware of unscrupulous lenders offering fast approvals and easy terms. Remember, if it sounds too good to be true, it probably is.

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Another way to consolidate your debt is by tapping the equity in your home. With a second mortgage or home equity loan, both the interest rate and monthly payment are likely to be considerably lower than they are on your current debts, thereby freeing up more money to pay off your debt.

However, taking out a home equity loan or second mortgage can put your home at risk.

Before you even begin to explore this option seriously, ask yourself these questions - and answer them honestly.

• Have I controlled my spending so that I am now living within my income - spending less than my pay packet each month?
• Have I developed good money management habits and can I be certain that, when my current financial crisis is over, I will continue to save and spend wisely?

Only if you can honestly answer "yes" to these questions should you begin exploring the possibility of tapping your home equity to consolidate your debt. If you cannot answer "yes" to these questions, it is very likely that once you have paid off your current debt, you will revert to the same bad habits that got you into trouble in the first place. Eventually, your mounting debt load will threaten your ability to pay your home mortgage expenses each month that will now be higher than before because of the added second mortgage or home equity payment.

If you do not handle a second mortgage or home equity loan responsibly, you could lose your home.

If you decide to tap your home equity, be sure you are working with a reputable lender, as there are many unscrupulous home equity and second mortgage specialists operating in the marketplace. If you plan to remain in your home for years and already have a low interest rate locked in for 30 years, be wary of a promise of lower payments by converting to an adjustable rate mortgage that may mean lower short-term payments but could mean significantly higher payments in a few years if interest rates go up.

Also be wary of prepayment penalties on loans, and loans that have balloon payments, unless you understand them well and are fully comfortable with following these terms.

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