Debt can be a daunting and overwhelming burden to carry. If you’re feeling trapped by your financial obligations, don’t worry, there are steps you can take to regain control of your finances and get out of debt. In this article, we’ll explore various strategies and options that can help you on your journey to becoming debt-free.
What You Can Do On Your Own
Where do I start?
A budget is your roadmap to financial planning and tracking your expenses. It’s a useful tool for individuals who are working hard to make ends meet or for those with extra income who want to adjust their saving goals. By creating a budget, you’ll be able to understand where your money goes and identify areas where you can make changes to have more money left over each month.
To create a budget, follow these steps:
- Gather your bills, including utilities, insurance, and other monthly expenses.
- Collect receipts for your typical expenses like groceries, entertainment, transportation, clothing, and everyday items.
- Add up all of your income, including paychecks and any other sources of income. Subtract your expenses from this total.
Once you’ve completed these steps, you’ll be able to identify areas where you can make adjustments to have more money left over each month. There are many resources available online, at your local library, and in bookstores that can provide valuable information on budgeting and money management. You can also use budgeting worksheets to help you create and fine-tune your budget.
If you find yourself falling behind on your bills, it’s important not to wait until a debt collector gets involved. Contact your creditors as soon as possible to explain your situation and work out a new payment plan with lower payments that you can manage.
What if my debt has already gone to a debt collector?
If your debt has already been turned over to a debt collector, it’s crucial to address the situation promptly. Even if you don’t believe you owe the debt or are unable to repay it immediately, it’s advisable to have at least one conversation with the collector. This will allow you to gather more information about the debt and confirm its validity. However, exercise caution when sharing personal or financial information with collectors you are not familiar with.
Debt collectors are required to provide “validation information” about the debt. They must either do this during their first phone call with you or send it to you in writing within five days of initial contact. This information should include the amount of money you owe, the name of the creditor, how to obtain the name of the original creditor, and what steps to take if you believe the debt is not yours.
Moreover, you have the right to request that a collector stop contacting you. You can do this by sending a letter via mail asking for the contact to cease. Remember, collectors have specific guidelines governing their behavior. They cannot harass you or use threats, obscene or profane language, or misrepresent themselves as attorneys or government officials.
What if my debt is old?
Debt doesn’t typically go away on its own, but creditors have a limited amount of time to sue you for the collection of a debt. This timeframe is referred to as the “statute of limitations.” The statute of limitations usually starts when you miss a payment on a debt. Once this period has passed, the unpaid debt is considered “time-barred,” and creditors can no longer sue or threaten legal action against you. It’s important to note that debt collectors are prohibited by law from suing you for a time-barred debt. If you are sued for a debt that is time-barred, inform the judge that the statute of limitations has expired.
The length of the statute of limitations varies depending on the type of debt and the laws in your state or the state specified in your credit contract or agreement. Keep in mind that in some states, making a payment or acknowledging the debt in writing can reset the clock and create a new statute of limitations period.
What should I do if I’m having trouble paying my mortgage?
If you’re struggling to make your mortgage payments, it’s crucial to contact your lender as soon as possible. Taking immediate action is key as it can prevent your lender from foreclosing on your home. Most lenders are willing to work with borrowers who are acting in good faith and are facing temporary financial difficulties.
Your lender may offer the following options:
- Lowering or suspending your payments for a short period.
- Extending your repayment period to reduce your monthly payments.
Before agreeing to a new payment plan, it’s essential to understand any additional fees or consequences associated with it. If you’re unable to reach an agreement with your lender, consider contacting a nonprofit housing counseling organization. You can reach a free, HUD-certified counselor at 800-569-4287. Additionally, your local Department of Housing and Urban Development office or housing authority can provide assistance. Remember, you don’t need to pay a private company for these services.
Beware of companies that promise to make changes to your mortgage loan or offer other means of saving your home but fail to deliver. These are often scams. Never pay an upfront fee to a company that promises mortgage assistance relief. Familiarize yourself with the signs of a mortgage assistance relief scam and learn how to avoid them.
What if I’m having trouble paying my car loan?
If you find yourself unable to keep up with your car loan payments, it’s important to be aware that most car financing agreements allow the lender to repossess your vehicle if you are in default. Usually, they don’t have to give you any notice before doing so. To reclaim your repossessed vehicle, you may have to pay off the remaining balance on the loan, as well as any towing and storage costs. Selling the car yourself and using the proceeds to pay off the debt might be a more viable option. By doing this, you can avoid the costs associated with repossession and prevent a negative entry on your credit report.
What can I do if I can’t pay my student loan?
For individuals with federal student loans, the U.S. Department of Education offers various programs that can provide assistance. It’s important to note that applying for these programs is free. You can find more information about your options at the U.S. Department of Education’s StudentAid.gov website or by contacting your federal student loan servicer. If you have private student loans, your options may be more limited, but it’s still worth exploring. Contact your loan servicer directly to discuss your situation.
It’s crucial to remember that you don’t have to pay for help with your student loans. Companies that claim they can lower your monthly payment or get your loans forgiven can often leave you worse off. They may charge high fees and provide little or no assistance in return.
What can I do if I’m way behind on paying my credit card debt?
If you’re struggling to keep up with your credit card payments, communication is key. Reach out to your credit card company to discuss your situation, even if you’ve been turned down for a lower interest rate or other forms of assistance in the past. Instead of paying a company to negotiate with your creditor on your behalf, remember that you can do it yourself for free. Find the phone number of your credit card company on your card or statement and be persistent and polite when reaching out. Keeping detailed records of your debts will enable you to explain your situation more effectively. The goal is to work out a modified payment plan that reduces your payments to a manageable level.
It’s important to be aware that if you fail to pay the amount due on your debts for several months, your creditor will likely write off your debt as a loss. This may impact your credit score, and you will still be responsible for repaying the debt. In some cases, the creditor may sell your debt to a debt collector who will attempt to collect payment. However, creditors may be open to negotiating even after they have written off your debt.
Credit Counseling
What do credit counseling agencies do to help?
Credit counseling organizations provide advice on money management and debt repayment. These reputable organizations can help you develop a budget, offer educational materials and workshops, and create a plan to repay your debt. Credit counselors are certified professionals who specialize in credit issues, debt management, and budgeting.
A good credit counselor will take the time to understand your entire financial situation before devising a personalized plan to solve your financial problems. The initial counseling session usually lasts about an hour, after which follow-up sessions may be offered. Be wary of credit counselors who promise to solve all your problems or request a substantial payment before taking any action.
How can I find a credit counselor I can trust?
Most reputable credit counseling organizations are nonprofit entities that charge low fees. They offer services through local offices, online platforms, or over the phone. Whenever possible, choose a credit counselor you can meet with in person. Nonprofit credit counseling programs are often available through credit unions, universities, military personal financial managers, and U.S. Cooperative Extension Service branches. Your financial institution or local consumer protection agency can also provide referrals to trustworthy credit counseling organizations.
Before committing to a credit counseling agency, it’s important to conduct thorough research. Reputable credit counseling organizations will offer you free information about their services before asking for any details regarding your situation. Verify the legitimacy of organizations you are considering by checking with your state attorney general and local consumer protection agency for any complaints against them. Additionally, inquire whether credit counseling companies are required to be licensed in your state and confirm if the companies you are considering hold the necessary licenses.
When selecting a credit counseling organization, keep the following criteria in mind:
- Avoid organizations that charge fees for services they haven’t provided.
- Look for credit counselors who are accredited or certified by reputable external organizations.
- Choose an organization that offers comprehensive services, including budget counseling, debt management classes, and free educational materials.
- Request a specific written quote for any fees or contributions.
- Seek an organization that is willing to assist you, even if you are unable to afford the fees.
Ensure that all promises and details are provided in writing. Before signing any contracts, read through them carefully.
What’s a debt management plan?
A debt management plan (DMP) is a strategy recommended by credit counselors for individuals struggling with unsecured debts, such as credit card debts, student loans, or medical bills. Debt management plans are not applicable to debts secured by collateral, such as mortgages or car loans.
A reputable credit counselor will review your financial situation in detail before recommending a debt management plan. If a debt management plan is deemed suitable for your circumstances, it’s essential to contact all your creditors to ensure they offer the modifications and options described by the credit counselor.
Typically, a debt management plan operates as follows:
- The credit counselor collaborates with you and your creditors to develop a payment schedule.
- You deposit money into a designated account managed by the credit counseling organization.
- The credit counselor distributes the deposited funds to your creditors according to the payment plan.
Keep in mind that a debt management plan may not be suitable for everyone. Its success depends on making regular, timely payments and can take 48 months or longer to complete. During this period, you may need to refrain from applying for new credit until the plan is finalized. Legitimate credit counselors will only recommend a debt management plan after a thorough review of your finances.
Debt Settlement
What is debt settlement?
Debt settlement programs are typically offered by for-profit companies to individuals burdened with significant credit card debt. These companies negotiate with your creditors to reduce the amount you owe and allow you to make a lump sum payment that is lower than your original debt. To participate in a debt settlement program, you must set aside a specific amount of money each month until you have accumulated enough savings to make a settlement offer. Debt settlement programs usually encourage you to stop making monthly payments to your creditors.
Debt settlement programs come with risks. If a debt settlement company fails to convince your creditors to accept a settlement, you may end up owing more money due to late fees and interest charges. Even if a settlement is reached, you will need to make payments long enough to honor the agreement. Additionally, be cautious of dishonest debt settlement companies that make false promises, charge high fees, and provide minimal assistance. During the debt settlement process, debt collectors may continue to contact you, and your credit report and score may be negatively impacted. The entire process can take several years to complete.
If you do decide to engage with a debt settlement company, you may be required to open a special bank account managed by an independent third party. The funds in this account are yours, including any interest they accrue. The account manager may charge a reasonable fee for managing the account and will transfer money from it to pay your debts and the debt settlement company when settlements are reached.
What does a debt settlement company have to tell me upfront?
Before enrolling in a debt settlement program, the company must provide you with certain information. This includes details about the fees, terms, and conditions of their services. They must also disclose how long it will take to achieve results, the potential negative consequences of ceasing payments to your creditors if it is part of the program, and the amount you must save in a designated account before the company can make settlement offers to your creditors on your behalf.
Debt settlement companies are not allowed to collect fees from you before settling your debts. The fees they charge are typically based on a proportion of the amount of debt resolved or a percentage of the amount saved. After successfully settling a debt with one of your creditors, the company can only charge you a portion of their full fee.
The debt settlement company must also inform you that the funds in the account are yours and that you are entitled to the interest earned. The account administrator must not be affiliated with the debt settlement provider and should not receive referral fees. You have the right to withdraw your money from the account at any time without penalty.
What are the risks of debt settlement?
Debt settlement programs come with several risks:
- Negative impact on your credit report and credit score: Debt settlement programs often require you to stop making payments directly to your creditors, resulting in late fees, penalties, and potential damage to your credit score.
- Debt collection attempts: While participating in a debt settlement program, you may still receive collection calls from debt collectors and could even face lawsuits. Should a lawsuit be filed against you, the creditor might garnish your wages or place a lien on your property.
- Inability to settle all debts: Creditors are not obligated to negotiate settlements for the total amount you owe. Debt settlement companies typically prioritize negotiating smaller debts while interest and fees accumulate on larger debts.
- Inability to complete the program: Many individuals struggle to make payments for the entire duration of a debt settlement program. Dropping out of the program can result in the loss of fees paid to the settlement company for previously settled debts. Additionally, you will still owe any debts that have not been settled, and late payments during the program may negatively impact your credit report.
It’s important to be aware that debt relief savings may be considered taxable income. Consult a tax professional to understand how this might affect your specific situation.
What are some signs of a debt settlement scam?
To avoid falling victim to debt settlement scams, watch out for these warning signs:
- Companies that request upfront payment before settling any of your debts.
- Companies that guarantee they can settle all your debts or offer fast loan forgiveness.
- Companies that enroll you in their program without thoroughly reviewing your financial situation.
- Companies that claim to be associated with a “new government program” but fail to provide specific details.
- Companies that advise you to stop communicating with your creditors without explaining the potential consequences.
- Companies that promise to stop all debt collection calls and lawsuits.
To learn more about the reputation of companies you are considering, search online for their name along with terms like “complaint” or “review.” Additionally, check with your state attorney general and local consumer protection agency to determine if any complaints have been filed against them.
Can I work out a solution to eliminate my debt on my own?
In some cases, you may be able to negotiate with your creditors directly without the assistance of a debt settlement company. If your debts are overdue, your creditors might be open to negotiating with you and accepting a reduced amount. However, it’s important to keep in mind that when agreeing to such arrangements, late payments and settlements could have a negative impact on your credit report and credit score. It’s always advisable to request that any agreement be sent to you in writing.
Debt Consolidation Loans
What’s a debt consolidation loan?
Debt consolidation involves combining all your debts into a single loan with one monthly payment. You can achieve this by taking out a second mortgage or a home equity line of credit. Alternatively, you can opt for a personal debt consolidation loan from a bank or finance company.
It’s important to note that some consolidation loans require you to use your home as collateral. Failing to make the necessary payments or making late payments can put your home at risk. Additionally, consolidation loans often come with costs. In addition to interest charges, you may be required to pay “points,” where one point equals one percent of the loan amount. Before pursuing a debt consolidation loan, it’s essential to evaluate the associated costs and determine if it is a financially viable option for you.
Bankruptcy
What does filing for personal bankruptcy do?
Filing for personal bankruptcy provides individuals with a discharge, a court order that relieves them from the obligation to repay specified debts. Bankruptcy is generally considered a last resort due to its long-lasting negative impact on your credit. Bankruptcy information, such as the date of filing and the subsequent discharge date, remains on your credit report for ten years. This can make it challenging to obtain credit, purchase a home, secure life insurance, or find employment. Despite these drawbacks, bankruptcy can offer a fresh start to individuals facing severe financial difficulties.
What are the main types of personal bankruptcy?
There are two main types of personal bankruptcy: Chapter 13 and Chapter 7. Both must be filed in federal bankruptcy court, and filing fees apply.
Chapter 13 bankruptcy allows individuals with a stable income to retain property like mortgaged houses or cars that they may otherwise lose during the bankruptcy process. In this type of bankruptcy, the court approves a repayment plan that allows you to pay off your debts over a three to five-year period. After successfully completing the payments outlined in the plan, your debt is discharged, and you are no longer responsible for any remaining balance.
Chapter 7 bankruptcy, also known as straight bankruptcy, involves the liquidation of non-exempt assets to repay your creditors. Some property may be sold by a court-appointed trustee or handed over to your creditors. Exempt assets, such as cars, tools required for work, and basic household furnishings, are typically not included in the bankruptcy estate and can be retained by the debtor.
What debt won’t be erased by filing for personal bankruptcy?
Filing for personal bankruptcy typically does not erase the following types of debts:
- Child support and alimony
- Fines
- Taxes
- Most student loan obligations (unless you can prove undue hardship)
- Debts secured by collateral when the creditor has a lien on the property
What do I need to do before and after filing for bankruptcy?
Before filing for bankruptcy, you must complete credit counseling from a government-approved organization within six months of filing. The U.S. Trustee Program maintains a list of approved agencies on their website.
After filing for bankruptcy, you must take a debtor education course from a government-approved organization. This course covers topics such as budgeting, money management, and responsible credit use. Similar to credit counseling, a certificate of completion must be filed with the bankruptcy court.
Credit Repair
After I pay off my debt, is there anything I can do about my credit?
No credit repair company can legally remove accurate negative information from your credit report. Only time can make accurate information disappear from your report. Credit bureaus can report most accurate negative information for seven years and bankruptcy information for ten years. Unpaid judgments can be reported for seven years or until the statute of limitations expires, whichever is longer. However, there are steps you can take to repair your credit over time.
What To Do If You Paid a Scammer
If you fall victim to a scam and have made a payment, it’s essential to take action promptly. Depending on the method of payment, there may be specific steps you can take to recover your money. Visit the News Explorer Today website for detailed information on how to get your money back.
Report Debt Relief Scams
If you encounter a debt relief scam or suspect fraudulent activity, it’s crucial to report it. You can report scams to the Federal Trade Commission (FTC), your state attorney general’s office, or your local consumer affairs office. By reporting these scams, you can prevent others from falling prey to fraudulent practices.