If you have some income that isn't going toward your basic monthly expenses, you may be able to dig yourself out of debt trouble. The path can be slow and arduous but, with hard work and diligence, you can be successful. Here are some options to consider.
Create a Budget and Contact Creditors Yourself
Often, the cheapest and most effective way to deal with out-of-control debt is to take steps to remedy the situation yourself.
Start by listing all of your outstanding debt. Then make a budget that includes all of your income and expenses. (For step-by-step instructions on how to make a budget, see Nolo's article Budgeting: How to Make a Budget.) Explore ways to reduce spending and expenses -- and, if possible, increase your income -- then revise your budget accordingly. Next, using your budget as a guide, come up with a realistic dollar amount that you can devote to paying your debts each month. At this point, it may also be helpful to prioritize your debts. That is, determine which are the most important to pay. (For help in prioritizing your debts, see Nolo's article Which Debts Must You Repay?)
Once you know what you can afford to pay each month, contact your creditors (or your debt collectors if it has come to that). Explain your situation, and try to work out a payment plan. In the process, you may be able to negotiate reduced late fees, lower interest rates, or even a discount on the principal. If necessary, suggest other solutions like a temporary reduction of your payments, skipping a few payments and tacking them on at the end of the loan, or even rewriting the loan.
If you're taking this path, it's extremely important that you work something out with all of your creditors. If you negotiate a payment plan with only some of your creditors, the other creditors can sue you and essentially negate whatever good came from your successful arrangements. And if you do end up filing for bankruptcy, which is not uncommon, the fact that you paid off some of your debt will not benefit you at all.
Consult a Consumer Credit Counseling Agency
If you are unsuccessful in your efforts to work out realistic solutions with your creditors -- or if you feel that you cannot handle this by yourself -- consider getting help from a reputable and accredited nonprofit credit counseling agency.
Credit counseling agencies can provide money management education, budget counseling, debt counseling, housing counseling, and referrals to other agencies that can help. Credit counseling agencies may also be able to contact your creditors and create a debt management plan. (To learn about debt management plans, see the "Debt Management Plans" section below.)
Paying an Agency: Money Well Spent?
Remember, any time you pay an agency to help with your debt problems, you are spending money that could be used to pay off your debts. Figure out whether the amount the credit counseling agency charges for its services makes sense. If you pay more for debt assistance than you save through reduced interest rates and discounted principal, then you're essentially just adding to your debt load.
Before you use a credit counseling agency, do some research. Not all agencies are legitimate -- some charge excessive fees, fail to perform promised services, or sign you up for a debt management plan without explaining other options. (To learn how to find a good credit counseling agency, see Nolo's article Choosing a Credit Counseling Agency.)
Consumer Credit Counseling Service (CCCS) agencies are local nonprofit credit counseling agencies. CCCS agencies are members of the National Foundation for Credit Counseling (NFCC), are usually certified by the Department of Housing and Urban Development (HUD) to provide comprehensive housing counseling services, and are accredited by the Council on Accreditation of Services for Families and Children (COA). To find a CCCS agency near you, or to talk to a counselor on the phone, visit NFCC's website at www.nfcc.org.
Debt Management Plans
In a debt management plan (DMP), a credit counseling agency works with you and your creditors to develop a payment plan for your unsecured debts. You deposit money into a designated account each month (usually for three to five years) and the credit counseling agency or debt servicing company uses those funds to pay your bills under the terms of the plan. Sometimes, the creditor reduces interest rates or waives certain fees as part of the plan. In many DMPs, you pay the company a fee for their services on top of the monthly deposits.
Companies offering debt management plans often bill themselves as credit counselors. Some are legitimate nonprofit credit counseling agencies, many are not. According to the FTC and many state attorneys general, scams involving DMPs are rampant. Consumer complaints against companies offering DMPs are at an all-time high, and consumer protection agencies have brought numerous lawsuits against disreputable companies. Among other things, some companies offering DMPs:
- fail to pay creditors on time or at all
- make promises they don't keep, like getting lower interest rates and reduced fees from creditors
- charge unreasonably high fees to consumers
- hide charges or take them out of deposits that are earmarked for creditors, and
- lie about the company's nonprofit status.
Before considering a DMP, make sure you are dealing with a legitimate nonprofit credit counseling agency, explore all of your other options first, get everything in writing, and follow-up with your creditors to make sure they are getting paid on time. (To learn more about DMPs, including how to pick a credit counseling agency and steps to take to avoid fraud, see Nolo's article Debt Management Plans.)
Debt Negotiation Services
Debt negotiation firms often claim they can get your creditors to discount your debts so that you pay anywhere from 10 to 50 percent less than the actual principal. But, according to the Federal Trade Commission, these companies often charge hefty fees for their services, make promises they cannot keep (for example, guaranteeing that your creditors will discount your debt), and sometimes even take your money and run.
If you want to negotiate with your creditors, you should consult with a legitimate and accredited nonprofit credit counseling agency to learn how to do it on your own. (To learn more about debt negotiation and the scams that abound, see Nolo's article Debt Negotiation Firms.)
Bankruptcy is a federal court process that's designed to help consumers and businesses either eliminate their debts, or repay them under the protection of the bankruptcy court. Bankruptcies can generally be described as "liquidation" (Chapter 7) or "reorganization" (Chapter 13). Under a Chapter 7 bankruptcy, you ask the bankruptcy court to wipe out (discharge) the debts you owe -- but keep in mind that not all debts are dischargeable, and not everyone qualifies to file for Chapter 7. Under a Chapter 13 bankruptcy, you file a plan with the bankruptcy court that details how you will repay your creditors. You must repay some debts in full; other debts may be repaid only partially or not at all, depending on what you can afford.
Bankruptcy can provide many consumers with a fresh start. But before you go this route, check out a good self-help book or consult with a bankruptcy attorney. To get the facts and find out if bankruptcy could work for you, see The New Bankruptcy: Will It Work for You? by Stephen Elias (Nolo).
For a comprehensive guide on dealing with financial problems, including how to prioritize debts, budget your money, negotiate with creditors, avoid foreclosure, and more, get Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and Margaret Reiter (Nolo). For help in choosing a good debt and bankruptcy attorney who can explain your debt relief options, go to Nolo's Lawyer Directory for a list of bankruptcy attorneys in your geographical area.
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