If you’ve already read my first article, 5 Steps to Get Out of Financial Purgatory, you know that we’ve reached step #3 on the list. And, although, I am definitely not an expert on getting out of debt, life has taught me that you can’t wish it away or bury your head in the sand. I know, because I’ve tried. Debt, like the notorious bully, will become more aggressive, punk you for your lunch money, and may even morph into something scarier as time goes on.
Debt, as a whole, may contain an array of both secured and unsecured debt, but debt is debt and there are solutions for most debts that have gotten out of hand. How do you know it’s out of hand? Well, can you save money? Are you paying your bills on time? No? Then, it’s time to take a closer look at your finances. Is it worse than that? Are debt collectors breathing down your neck? Were you surprised by a Summons at your door? You’re not alone, and there is still hope.
Credit card debt, specifically, is the third largest debt in the U.S. and can be pretty damned sneaky with introductory rates, annual fees, late fees, and the promise of “rewards”. And, I bet when you applied for that credit card, you probably thought you could pay off the balance every month, or at least pay more than the minimum payments, and it would be paid off in no time. No harm, no foul. Unfortunately, that’s not always the case, as life (or other bills, debts) can and does get in the way.
“All told, the average American today owes about $225,000 in debt, in a country where the median household income is just barely more than $53,000.” – Credit.com
Debt can grow fairly fast.
When introductory rates fall to the wayside, debt can grow bigger due to interest rate hikes, late fees, and annual fees. That can set you back a bit, but if it goes to collection, that can be when you’ll really see the fees add up. If you let it go long enough, it will get so big, you may be inclined to throw your hands up and give in, but I would caution you in doing that.
Debt can steal from you.
When debt starts to spiral out of control, it will start to affect other areas of your life, and even steal things from you, now and in the future. As many of you probably already know, money problems can create friction in your relationship and stunt your family’s ability to do the things you need to do. Being delinquent can also hurt your credit, making it more difficult for you to purchase a home or vehicle.
Debt can morph and change direction.
What I mean by this is that your debt (credit card debt, medical bills, etc) can be bought by debt buyers, be turned over to lawyers, and you can be sued. All of the sudden that debt has become a judgment, which now has to be dealt with differently. Judgments are more complicated to settle, and can cause more damage if you don’t take action (garnishments, liens, etc).
Options for Getting Out of Debt
Pay it Off
The most obvious thing to do is to not acquire anymore debt and pay off your current debt by any means necessary. I’m sure you’ve heard of the debt roll-up, stacking, the ladder or avalanche method, or the ever popular, debt snowball. Most of these repayment methods all follow the same basic principle, and focus on the debt with the highest interest rate (you can also try a balance transfer to lower interest rates). For some, this may be hard to do if their highest interest rate debt is also their highest monthly payment. If you need to start small, then do the “snowball” and make more than the minimum payment on your smallest debt (regardless of interest rates) and roll it up from there.
Additionally, you may have some savings you don’t want to part with, but putting it towards your debt will most likely save you hundreds (if not thousands) of dollars in interest charges. Another options is to borrow money from friends and family to pay off debts in full, then repay the loan to your brother or parents interest free. Or, maybe you have a car, furniture, or jewelry you can sell that will enable you to throw some more money at your debts – the faster you pay it off, the better. Where there’s a will, there’s a way, my friends!
If paying is not an option for you, then keep reading.
The time to consider credit counseling is when you’re just starting to miss payments on your credit card bills, store cards, or medical bills. When this happened to me several years ago, I walked in to a local CCCS office and asked for help. They asked me to fill out some paperwork, then cut up my credit cards right there in the office (ouch). They then explained how they would get lower monthly payments, then consolidate them altogether so I could just make a single payment.
I’m proud to say that 18 months later, things were back on track, but you do have to qualify for credit counseling services. This is not necessarily difficult, but it’s worth noting, and you can learn all the details by reading Michael’s report on lowering monthly credit card payments.
Having been in credit counseling taught me a valuable lesson at a fairly young age (that would, unfortunately, revisit me later in life):
“Mistakes are the growing pains of wisdom.” – William Jordan
Consolidation is for those who want to save on interest, but haven’t fallen behind on their credit card payments. It’s not for everyone, and consolidation isn’t as easy to do as it used to be, but if you’re 1) not behind on your credit card bills – yet 2) want lower interest rates 3) are willing and able (credit qualified) to open up a 0% interest account with a large enough credit line to cover your high interest rate balances, then this might work for you.
Consolidating your credit cards can be a bit tricky, as you may have to bounce from one card to another (to maintain those nifty intro rates), and you can’t become delinquent, as that would affect your credit score, thereby affecting your ability to open the large line of credit that would help you in the first place. If you have a credit card with a lower interest rate and some room to spare, you might be able to do a balance transfer. And, depending on your current rates and credit score, you might also consider a consolidation loan through peer to peer lending such as Lending Club or Prosper.
If you can walk the fine line, then by all means, start walkin’.
This option is for those who have already fallen way behind on their credit card bills. Getting a good settlement requires communication, timing, a lump sum payment, and hardship. You can call your creditor on your own or you can hire someone to do it for you, but you should first consider whether debt settlement is an appropriate solution for your situation and learn the fundamentals of getting a good settlement.
Debt settlement is for specific financial situations and will not work for everyone, and is something you do before considering bankruptcy.
I have settled debts in the past. The discounts I was able to negotiate were because the debts had gone so long without payment. I was lucky to not have been sued for collection. I could have filed for bankruptcy, but the balances on the debts I had to quit paying were relatively small. Had my debt load been bigger I would likely have chosen to wipe the debts out with a chapter 7 bankruptcy filing.
Bankruptcy is used when your credit card and other debts have become overwhelming. It’s considered a last resort, and although bankruptcy has negative connotations, that’s not how it should be viewed. People in my family and some of my friends have been through bankruptcy. I don’t view them as failures, but as people who looked at their situation and made the best financial decision they could for themselves.
If you’re considering bankruptcy, keep in mind that you will be filing for Chapter 7 or Chapter 13 (7 will require a means test to qualify, depending on your state). There will also be a cost involved when you hire a bankruptcy attorney, but your initial consultation should be free and it’s highly recommended to get your questions answered, even if you decide against this route.
More importantly, consider bankruptcy as a second chance. You have the opportunity to get rid of your debt and start over, and this time you can do things differently!
This really isn’t a viable option for anyone. Debt is like cancer…early detection and immediate action to eradicate the problem is vital for your success. In doing nothing, you’re allowing the banks, collectors, lawyers, and courts to decide your fate. And, believe me when I say that they do not have your best interests at heart.
The only time doing nothing might make even a little bit of sense is if you’re having hardships such as medical issues, divorce, brief unemployment, or some other temporary life event that would consume income that would otherwise be used to pay off your debts. If you are judgment proof (little to no income and/or assets that are exempt in your state), doing nothing about collection debts can mean looking over your shoulder…. forever.
Look, dealing with debt is, at best, a real pain in the ass. And, the longer you let it go, the harder it’s going to be to get rid of it. BUT, no matter what method you choose to use, when all is said and done, I promise you’re going to feel like you just crawled out of a 6-foot hole to see your first ray of sunshine.
Stand up for Yourself
Debt can definitely come off like a bully, pushing you around and making your life miserable, but only if you let it. Take control of the situation, be brave, and fight back! Bullies all have one thing in common: they have a deep-rooted fear that you will stand up to them one day.
Do your homework. The above-mentioned methods for getting out of debt can be extremely helpful, but you have to pick the right tool for the job. So, assess your financial situation, find where you fit in, and get to work.