High unemployment, a struggling housing market, and rising oil prices have combined to make a perfect economic storm. Caught in the tidal wave are many consumers who have been forced to rely too heavily on credit and now find themselves struggling to stay afloat. Luckily, help is available and dealing with creditors doesn't have to be painful. The keys to success: don't panic, and don't run.
If You're In Trouble
Be proactive. Gather your creditors' information and call them before they call you. Explain your situation and ask if they will adjust your terms. Customer service agents are often authorized to make adjustments over the phone. Say that you want to fulfill your obligations and that you don't want the account to go to collections. If creditors see that you are making a good faith effort to satisfy the terms of the loan, they are more likely to work with you.
The National Foundation for Credit Counseling
If your creditors are not willing to work with you or you do not want to reach out to them directly, contact the National Foundation for Credit Counseling. This nonprofit is the longest running consumer debt relief agency in the United States. The initial consultation is free, and a counselor will review your budget with you and help you determine the best course of action. The NFCC also has a website with a wealth of free information, budget calculators, and financial education programs (see Resources).
Debt Consolidation and Management Options
After your initial consultation with the NFCC, the counselor may suggest a debt management plan. In this scenario, the counselor will contact your creditors on your behalf and arrange new payment terms with a lowered interest rate, payment, or both. The debts are satisfied within five years. In exchange, the accounts are closed.
Alternatively, if your credit card debt is the result of a job loss or unpaid medical bills, a consolidation loan, such as a home equity loan, may be an appropriate solution. However, this solution only works if you have a history of managing your finances responsibly.
Debt Settlement and Bankruptcy
The final choices are debt settlement and bankruptcy. To qualify for debt settlement, you must be at least three months behind on payments, and you must be prepared to satisfy the "settled" amount in cash, usually about 40 percent of the original debt. Your credit report will show that the account was "settled" but not "paid in full" and is very damaging to your credit. The NFCC can advise you with regard to your debt settlement options.
Bankruptcy is an option of last resort, and you must have an attorney. However, recovery is possible, and you may wind up financially healthier than when you started.
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