Being the not-so-proud owner of a serious debt problem can make you feel like you'll never be happy or relaxed again. However, it's simply not the case: for every debt problem, there's a solution. It may not be easy, and you'll have to work hard. The good news is that acknowledging the problem is the first step toward a solution that will make your future better.
Empower yourself by making a list of your debts, including everything from tax liens and past due utility bills to credit card and mortgage statements. Make a note of each interest rate, minimum payment and total balance. Rank each debt in order of importance: credit cards, for example, should be near the bottom since they're unsecured loans. Housing and utility payments are at the top. Call each creditor and explain your situation. Tell them you want to satisfy your obligations, but need help doing so. Creditors may lower your rate or minimum payment immediately. Don't wait until they get in touch with you.
Reach out to the National Foundation for Credit Counseling, the nation's gold standard for budget and debt education. It's also a nonprofit. The NFCC partners with local agencies to help you get the assistance you need, including housing counseling if you're behind on your mortgage. Counselors are budget and credit certified and offer free one-hour sessions.
Depending on the severity of your situation, a counselor may suggest a debt management plan. In a DMP, the NFCC reaches out to your creditors to negotiate lower rates and payments. The accounts are closed, but are repaid in full by you in less than five years. Even if you're already late, you may still qualify. Fees vary, but are minimal, depending on your state.
Settling your debts is your next choice. Settlements are legal, but be careful whom you do business with, because debt negotiation businesses are frequently scams. Be sure to check with the Better Business Bureau before you reveal any personal information. Nevertheless, you can anticipate paying about 40 cents on the dollar. You must be late on your payments---three to six months---to be offered a settlement. You'll get a better deal if you pay in one lump sum, although you may be offered the option of a five- or six-month staggered-payment settlement. You must also be prepared to get a lot of phone calls from your lender.
Settlement companies most frequently settle credit card debt, but can be used to negotiate mortgage settlements, as well. Be advised that these services aren't cheap, and consumers should be prepared to pay several thousand dollars in fees. However, your debts will be eliminated.
If possible, you should avoid having accounts go to collection, also known as being "charged off." Be wary of paying a charged-off account, especially if you haven't made a payment in years. Check with your state Attorney General to find out what the debt collection statute of limitation is for your area. You may be able to walk away without paying anything it it's been long enough, but making a payment suddenly may restart the statute's clock.
The last resort is bankruptcy. There are 2 kinds: Chapter 7 and Chapter 13. In a Chapter 7, or "straight" bankruptcy, the court decides what assets are sold to cover your debts. Recent federal legislation has made it more difficult to declare Chapter 7 bankruptcy. Chapter 13 bankruptcy allows you to keep your home and car. You'll be assigned a repayment plan that is agreed on by your lenders. You'll also be required to undergo credit counseling. Bankruptcy does not eliminate certain kinds of debt, like tax liens, student loans, alimony or child support, but it does eliminate most of it (credit cards are typically wiped out). You will need to hire (and pay for) an attorney, but you will have a completely fresh start.
Establishing a budget and sticking to it during your debt repayment period is critical. In general, try to pay your highest-interest loan first (unless you are late on your home payment; in that case, do that first). After the first debt is paid, apply that payment to the next debt on your list, continuing until you're debt free. Don't give up: this may take several years. Chances are, your credit is in poor shape. But you can improve it by always paying your bills on time and in full, if possible. Don't use more than 50 percent of your available credit. Try to have a mix of loan types (a credit card, an auto loan, and a home loan are ideal). Don't close an account because you're not using it; keep it open instead so your credit to debt ratio is lower. Most of all, remember: This too shall pass.
