Consumers today regardless of their social status are being stretched like never before. Consider the fact that the average American household owes more than $16,000 just in credit card debt – meaning that this doesn’t include debts such as their mortgages, auto loans and student loan debts. You must have an inkling that you have too much debt or you wouldn’t be reading this article. But if you’re not sure, here are a few signs that you’re in over your head.
• Your creditors have been calling you
• You’ve left this month’s bills piled up in a corner because you’re afraid to open them
• You’ve been turned down for a consolidation loan
• You’ve tried to borrow money from family members
• You’re taking cash advances on your credit cards to pay other bills
• You’re finding it difficult to make just the minimum payments on your debts
• You’re constantly juggling bills trying to keep all of your creditors happy
Step #1: Determining where you stand financially
There’s not much you can do about getting your debts under control until you figure out where you stand financially. This means you need to determine how much you actually spent in the past month relative to what you earned. If it turns out – as it is almost certain to – that you spent more than you earned this means you’re basically trying to finance a lifestyle you can’t afford.
The first thing you should do is order copies of your credit reports from the three credit reporting bureaus – Experian, Equifax and TransUnion. These reports will give you an excellent idea of how you’ve been managing your money, how much you owe, whether you’re over your credit limits, whether any of your debts have been sent to collection and so on. Next, get your FICO score. If you’re not familiar with this score it’s a three-digit number that ranges from 300 to 850. You can get your score on the website www.myfico.com, from any of the three credit reporting bureaus or from websites such as CreditKarma.com. This will give you a picture of how your creditors view you and why you may be having a problem getting new credit.
Step #2: Make a budget
We can guess with almost 100% certainty that you don’t have a budget because if you did you probably wouldn’t be struggling with your debts. The reason you need a budget is because it’s the only way you can allocate your spending in such a way that you will have the money to meet your debt obligations. To make a budget you must track your spending for at least 30 days. This means writing down everything you spent money on right down to the pack of gum you bought yesterday. Next, you’ll need to organize your spending into categories such as food, entertainment, clothing, eating out, insurance and so forth. When you finish this exercise go through it carefully looking for places where you could cut costs. Most people find that the areas where it’s easiest to reduce spending are groceries, clothing and entertainment. So you might take a hard look at these categories first. The objective here is to find ways to cut your spending to the point where you can get your debts caught up to date.
Step #3: Contact your creditors
Just making a budget – and of course sticking to it – could be enough to help you get out of debt. However, if you’re really seriously in debt there are some other things you must be prepared to do. For example, you could contact your creditors and try to cut deals. Trust us, they’re just as anxious as you are to get your debts straightened out. You could ask them to lower your monthly payments on either a temporary or permanent basis. You could ask to make interest-only payments for some period of time or have your interest rates reduced.
Step #4: Get your debts under control
One solution to managing your debts is to get a debt consolidation loan – assuming you could get one. If your credit isn’t totally trashed you might be able to get an unsecured loan where all you would be required to do is sign for it. Conversely, if you have poor credit you would probably be asked to put up some asset as collateral to secure the loan. In most cases that asset will be your house in the form of a home equity loan or home equity line of credit. If you are able to get either one of these types of loans you could then use the money to pay off your creditors. It’s almost certain that you would have a lower monthly payment and you would have only the one payment instead of the multiple payments you’re currently making.
A second option is to get help from a credit-counseling agency. If you have a lot of debt and are struggling with it the assistance and advice you would get from a credit-counseling agency could be a godsend. It could help you set up a household budget, evaluate your current budget (if appropriate), negotiate lower payments with your creditors and teach you better money management skills.
The third or what some people refer to as the nuclear option is to file for bankruptcy. If you owe way too much given your income this could actually be your only option. And this will be especially true if you think that one of your creditors is about to seize an asset you don’t want to lose. Bankruptcy would definitely damage your credit score severely and would stay in your credit reports for 10 years. If you’re in such bad shape financially that you think bankruptcy is your only option, the damage it would do to your credit might not be that big a deal.
It’s likely that you’re being hassled by debt collectors and as you well know that’s no fun at all. If you didn’t know this debt collectors are usually compensated on a commission basis. This gives them a big financial incentive to collect from you – regardless of what’s required. But if you’re being threatened or abused by a debt collector it’s important to know you have rights. You probably don’t know about the Fair Debt Collection Practices act (FDCPA) but it gives you certain rights if a collector is harassing you. As an example of this, you can ask him for written proof that you actually owe the debt that he’s trying to collect. The law obligates him to comply with this request. If you don’t think you owe the debt or if you believe that the amount is not correct, you can dispute it. You must put your dispute in writing and send it to the debt collector’s agency within 30 days of when you were first contacted. You also have the right to send the debt collector a cease and desist letter telling him to not contact you again about that particular debt. Be sure to send the letter certified and return receipt requested. When the collector receives your letter he can communicate with you again only for two reasons – to let you know that he won’t be calling you again or to inform you of some specific action he’s about to take to collect the money such as suing you.
Step #6: Give special attention to your most serious debts
Not all debts are created equal. Some deserve special attention because the consequences of falling way behind on them are very serious. Depending on the type of debt, you could lose an important asset, be evicted or see your income tax refunds taken. In a worst-case scenario you could even end up serving jail time. So what are the serious debts?
• Your mortgage
• Car loans
• Rent or utility bills
• Court-ordered child support obligations
• Federal student loans
• Federal income taxes
If you have debts that fall into one or more of these categories you need to focus your attention on getting them caught up. We’ve already discussed one way to do this, which is a debt consolidation loan. Unfortunately, none of these debts can be “settled.” This means that if you can’t get a debt consolidation loan the bad news is that you will either have to find a way to catch up on your payments or file for bankruptcy.