Getting out of debt

Having trouble paying your bills? Getting multiple notices from creditors?  Are your accounts being turned over to debt collectors? Are you worried about losing your home or your car?  

You're not alone. Many people face financial crises at some time in their lives. Whether the situation is caused by personal or family illness, job loss or simple overspending, it can seem overwhelming, but it can often be overcome. Your financial situation doesn't have to go from bad to worse.  

If you or someone you know is in financial hot water, consider these options: 

Developing a budget 

The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then list your fixed expenses, those that are the same each month, such as:

  • Mortgage payments or rent

  • Car payments 

  • Insurance premiums

Next, list the expenses that vary, such as:

  • Entertainment

  • Recreation 

  • Clothing

Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses and prioritize the rest. The goal is to make sure you can make ends meet on the basics: 

  • Housing

  • Food

  • Healthcare

  • Insurance 

  • Education

Find information about budgeting and money management techniques online, at the library or local bookstore. In addition, there are a number of online tools and apps for developing and maintaining a budget, balancing your checkbook and creating plans to save money and pay down your debt. 

Contacting your creditors 

Contact your creditors immediately if you are having trouble making ends meet. Tell them why it's difficult for you and try to work out a modified payment plan that reduces your payments to a more manageable level. Don't wait until your accounts have been turned over to a debt collector. At that point, the creditors have given up on you.  

Dealing with debt collectors 

The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact you. A debt collector may not call you before 8 a.m., after 9 p.m., or at work if the collector knows that your employer doesn't approve of the calls. Collectors may not harass you, make false statements, or use unfair practices when they try to collect a debt. Debt collectors must honor a written request from you to cease further contact.  

Managing auto and home loans 

Your debts can be unsecured or secured. Secured debts usually are tied to an asset, like your car or house. Lenders can repossess your car or foreclose on your home if you stop making payments. Unsecured debts are not tied to any asset and include most credit card debt, bills for medical care, signature loans and debts for other types of services. 

Most automobile financing agreements allow a creditor to repossess your car whenever you default. No notice is required. If your vehicle is repossessed, you may have to pay the balance due on the loan and towing and storage costs to get it back. If you can't do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car and paying off the debt. You'll avoid the added costs of repossession and a negative entry on your credit report. 

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders will work with you if they believe you're acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past-due total. Other lenders may agree to change the mortgage terms by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes and calculate how much they total in the long term. 

Contact a housing counseling agency if you and your lender cannot work out a plan. Some agencies limit their counseling services to homeowners with Federal Housing Administration (FHA) mortgages, but many offer free help to homeowners having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state, city or county for help finding a legitimate housing counseling agency near you. 

Credit counseling 

If you're not disciplined enough to create a workable budget and stick to it, can't work out a repayment plan with your creditors or can't keep track of mounting bills, consider contacting a credit counseling organization. Many nonprofit credit counseling organizations work with you to solve your financial problems. But be aware that just because an organization says it is "nonprofit," there is no guarantee that its services are free, affordable or even legitimate. In fact, some credit counseling organizations charge high fees, which may be hidden or urge consumers to make "voluntary" contributions that can cause more debt. 

Most credit counselors offer services through local offices, online or by telephone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities and U.S. Cooperative Extension Service branches operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, friends and family may also be good sources of information and referrals. 

Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management and budgeting. Counselors discuss your financial situation and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.  

Source: Federal Trade Commission