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When a financial disaster strikes, whether it be a medical emergency or overwhelming credit card bill, it’s important to research your options and take action immediately. Formulating a step-by-step plan can help you explore different repayment avenues and gain a handle on your finances.

Know What You’re Dealing With

Before you take any action, analyze the entirety of your financial situation and determine what you’re trying to overcome. The particular crisis you find yourself in will influence how you strategize your payments.

1. Difficulty meeting monthly obligations. If you are struggling to pay your utility bills or other small expenses, contact your service providers directly to seek out different payment options.
2. You have fallen into significant debt. In cases where your credit card, loan or mortgage balances have become unmanageable, it’s imperative to contact your lender immediately and try to negotiate your rates or reduce your principal. Most lenders will be willing to work with you if you notify them of your financial problems before defaulting on a payment. Consider cutting down on other services and finding ways to stretch your income before you miss a payment, which could significantly damage your credit score.
3. Your debt has been sent to a collections agency. If your unpaid debt has been sold to a collections company, keep in contact with your original lender and the company to work on a negotiation plan. In addition, educate yourself on your rights when dealing with a collections agency. For example, if you request that debt collectors only notify you in writing, rather than by calling you, they must comply by law.
4. You have been hit with an illness. Medical-related debt can climb into the thousands. If you find yourself overburdened by your bills, work closely with your healthcare billing office and insurance company to explore repayment plans and debt reduction options.

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Determine Your Repayment Options

Once you gain a firm understanding of which types of debt are weighing you down, explore your repayment options.

1. Credit cards for short-term debt. Using credit cards to pay your utility bills or other small expenses may help you get out of a jam and allow you to repay the debt slowly over time.
2. Dip into savings for serious financial shortfalls. If you are at risk of losing your home or other property, using your savings to pay down the debt may be an effective way to safeguard your possessions and credit standing.
3. Home equity loans are an option if you need to obtain a sizable amount of financing, and have little savings in the bank or low credit limits. Keep in mind however, that home equity loans are tied to your house, meaning that if you default, you may risk losing your property.
4. You may borrow between $1,000 and $15,000 with a personal loan, which can carry a rate ranging between 5 and 20 percent. On average, you may have roughly 1 to 4 years to pay back the amount.
5. As a last resort, you also have the option of taking out a payday loan for short-term needs. However, these loans come with extremely high rates of interest and must be paid back in full within a two-week to month-long period. Make sure you have the income to pay off the loan in full to avoid exorbitant interest charges and fees.

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Image: Denise Mattox, via Flickr.com

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