How to Reduce Bad Debt

Bad debt and poor credit affect many Americans. Thousands of consumers are faced with overwhelming debt. Bad debts, like charge-offs, judgments and collection accounts, can be reduced, but the process is often quite challenging. Cleaning up your bad debt will help you obtain lower-rate financing, better apartments and even secure more favorable employment.

Instructions

1

Obtain a copy of your credit report. You can get a free copy at Annual Credit Report. (Resource 1) However, you must pay for a copy of your FICO score. This three-digit number between 300 and 850 is your overall credit character. Scores above 720 are excellent, and scores below 600 are poor.

2

Review your credit report for bad debts, which may include: any account that is more than 30 days overdue, accounts in collections, any public records (judgments, bankruptcies, charge-offs) and liens (medical liens and tax liens).

3

Prioritize the bad debt. For example, say you have three accounts that are 30 days overdue, two charged-off accounts and three judgments. The judgments are the most damaging (since a court order can only approve a judgment), followed by the charge-offs and, finally, the overdue accounts.

4

Calculate your debt-to-income ratio (DIR). Divide all monthly credit-reportable expenses (including all bad debts) by your gross monthly income. If you have a DIR higher than 50 percent, creditors will likely be more willing to adjust a repayment schedule.

5

Contact the creditors who own your most serious accounts. Indicate your willingness to honor the account. Offer to fax income documents so a fair and realistic payment schedule can be arranged. Get all repayment offers in writing (either via email, fax or post).

6

Review repayment offers with a trusted advisor, such as a personal accountant or attorney. Some lenders may try to slip in extra fees and charges when negotiating repayment agreements. Make sure the agreement will help you repay and escape the bad debt, not push you further into trouble.

7

Repeat steps six and seven for all bad debts. Arrange equitable repayment schedules with all of your bad debt accounts.

8

Redesign your monthly spending budget. Look at your bank statements for previous months. You must eliminate all non-essential spending in order honor your repayment agreements.

9

Consider liquidating any savings or investment accounts, if applicable, to quickly reduce bad debts.