How to Get a Fresh Start Without Filing Bankruptcy
- 1). Identify unnecessary expenses and develop a budget to free up extra cash. List your fixed expenses that remain the same each month. Writing down your expenses, even those that seem insignificant, is a great way to help you track your spending habits. Prioritize all variable expenses according to need, and cancel any unnecessary services or activities. Compare your fixed and necessary variable expenses to your monthly income. After all expenses are paid, dedicate the funds that remain to payments on outstanding debts.
- 2). Order a copy of your credit report from the three major credit bureaus (Equifax, TransUnion, Experian). List, according to the amount owed, each account that has gone to collections, is charged-off or is current with past delinquency. If the account is current with past delinquency, contact the creditor to determine the minimum amount you owe to take the account out of the red.
- 3). Identify charged-off or collection accounts with the smallest balance and contact the creditor to reach a "pay for delete" agreement. According to the Credit Repair website, a pay for delete entails paying a lump sum or a percentage of the balance owed on a debt in exchange for a deletion on your credit report. If a company makes a report to the credit bureau, it also reserves the right to amend a report. The Fair Credit Report Act does not prevent creditors from removing negative entries. Some creditors simply state that they can't remove negative entries to prevent the practice from becoming commonplace. You must contact each creditor individually to reach a pay for delete agreement. If the creditor refuses on your first try, keep trying until you secure a viable agreement.
- 4). Pay the smallest collection or charged-off debt in full using the extra cash you set aside each month. This is known as the "debt snowball," created by financial guru Dave Ramsey. The debt snowball allows individuals to pay off debts without difficulty and provides quick results to keep individuals motivated. For example, if you have five negative accounts with $500, $680, $900, $1050 and $3200 balances, it's more advantageous to pay the smallest negative account in full than to spread your payments on all the delinquent accounts simultaneously. Once you pay off the smallest balance, concentrate on paying what has then become the new smallest balance. Continue this process until you pay off all negative accounts.
- 5). Apply for new credit accounts to rebuild your credit score and pay all of your bills on time. Once an account goes negative, the damage is already done. Paying off delinquent accounts removes the damage from your credit report, but opening new credit accounts and establishing a record of on-time payments is the only way to build your credit score.
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