If you’re feeling overwhelmed by debt and searching for a way out, you’re not alone. Many people face the challenge of debt management, and understanding your options is the first step towards financial recovery. This guide provides essential information and actionable strategies to help you navigate your debt and find legitimate resources for support.
What You Can Do On Your Own
Where do I start to tackle debt?
Creating a budget is fundamental when you’re aiming to get out of debt. Think of it as a financial roadmap that outlines your income and expenses, giving you a clear picture of your money flow. Whether you’re struggling to make ends meet or looking to optimize your savings, budgeting is an invaluable tool. It allows you to pinpoint your spending habits and identify areas for potential adjustments.
To create an effective budget:
- Gather your financial documents: Collect your bills (utilities, insurance, etc.) and recent pay stubs to understand your income and fixed expenses.
- Track your spending: Keep receipts for typical expenses such as groceries, entertainment, transportation, clothing, and daily essentials to analyze your variable spending.
- Calculate your income and expenses: Add up all sources of income and subtract your total expenses. This will reveal your current financial situation.
After setting up your budget, analyze it to identify areas where you can adjust your spending and free up more funds each month. The primary goal is to halt further debt accumulation and, if feasible, begin to pay down existing debt. Numerous resources are available to help you with budgeting and money management, including online platforms, local public libraries, and bookstores. Consider using a budget worksheet to structure and refine your financial plan.
If you’re falling behind on payments, proactively contact your creditors before your debt is passed to a debt collector. Reach out to the companies you owe money to as soon as possible. Explain your situation and attempt to negotiate a revised payment plan with more manageable, lower payments.
What if my debt is already with a debt collector?
Engaging with a debt collector, at least initially, can be beneficial, even if you dispute the debt or are unable to repay it immediately. This interaction allows you to gather details about the debt and verify its legitimacy. However, exercise caution when sharing personal or financial information with debt collectors, particularly if you are unfamiliar with them. Not every call claiming to be from a debt collector is genuine; some are scams designed to extract money from you.
Debt collectors are legally required to provide “validation information” about the debt. This information must be provided during their first phone call or in writing within five days of initial contact.
This validation information must include:
- The total amount of the debt owed.
- The name of the current creditor.
- Information on how to obtain the name of the original creditor.
- Instructions on what to do if you believe the debt is not yours.
You have the right to request a debt collector to cease communication with you at any point. This can be done by sending a written request via mail to stop further contact.
Debt collectors are prohibited from harassing you. Examples of harassment include:
- Threats of physical harm.
- Use of obscene or profane language.
- Repeated phone calls intended to annoy or harass.
Debt collectors must not misrepresent information. For instance, they cannot:
- Claim you owe a different amount than the actual debt.
- Impersonate attorneys or government officials.
- Threaten arrest or legal action if untrue.
Debt collectors are also restricted from unfair practices. For example, they:
- Cannot collect unauthorized interest, fees, or charges unless stipulated in the original contract or permitted by law.
- Cannot deposit a post-dated check prematurely.
- Cannot publicly disclose your debt, such as through postcards or envelope markings.
What happens if my debt is old?
While debt typically doesn’t disappear on its own, debt collectors have a limited timeframe to legally sue you to recover a debt. This period, known as the “statute of limitations,” usually begins from the date of your first missed payment. Once this statute expires, the debt is considered “time-barred.” Legally, collectors can no longer sue or threaten to sue you for time-barred debt due to the extended time passed. It is illegal for a debt collector to sue you for a time-barred debt. If you are sued for such a debt, inform the judge that the statute of limitations has expired.
The duration of the statute of limitations varies depending on the type of debt and the laws of your state, or the state specified in your credit agreement.
It’s important to note that in some states, making a payment or even acknowledging the debt in writing can reset the statute of limitations. The clock restarts, and a new limitations period begins.
What should I do if I’m struggling with mortgage payments?
If you’re facing difficulties paying your mortgage, contact your lender immediately. Do not delay, as lenders may initiate foreclosure proceedings. Most lenders are willing to work with borrowers who demonstrate good faith and are experiencing temporary financial hardship.
Your lender might offer options such as:
- Temporarily reducing or suspending payments.
- Extending the repayment period to lower monthly payments.
Before agreeing to any new payment arrangement, inquire about potential fees or other consequences. If you cannot reach a workable solution with your lender, seek assistance from a non-profit housing counseling organization. You can access free, HUD-certified counselors by calling 800-569-4287. Additionally, contact your local Department of Housing and Urban Development office or your state, city, or county housing authority. These services are available for free; avoid paying private companies for assistance.
Be cautious of companies promising mortgage loan modifications or home-saving solutions, as some are scams. Never pay upfront fees for mortgage relief assistance. Learn to recognize the signs of mortgage assistance relief scams to protect yourself.
What if I’m struggling to pay my car loan?
Most car financing agreements allow lenders to repossess your vehicle as soon as you default on payments. They are not legally obligated to provide notice. To recover your repossessed car, you typically need to pay the outstanding loan balance, plus towing and storage fees. If you are unable to do so, the lender may sell the car.
If you anticipate difficulty keeping up with car loan payments, selling the car yourself and using the proceeds to pay off the debt might be a better option. This can help you avoid repossession costs and negative impacts on your credit report.
What can I do if I can’t pay my student loan?
If you have federal student loans, the U.S. Department of Education offers various programs to assist borrowers. Applying for these programs is free. Explore your options at the Department of Education’s StudentAid.gov website or contact your federal student loan servicer. These resources also provide information on how to get out of default.
For private student loans, options are generally more limited, especially regarding loan forgiveness or cancellation. Contact your loan servicer directly to discuss potential solutions. If you are unsure who your servicer is, check a recent billing statement.
Be wary of companies offering help with student loans that charge fees. You can access the same programs and assistance on your own for free. Student loan debt relief companies may promise lower monthly payments or loan forgiveness, but often provide no additional benefit and can sometimes worsen your financial situation.
What can I do if I’m way behind on paying my credit card debt?
Communicate with your credit card company, even if previous requests for lower interest rates or debt assistance have been denied. Instead of paying a third party to negotiate on your behalf, remember you can negotiate directly with your creditor for free. Find their contact number on your card or statement. Be persistent, polite, and keep detailed records of your debts to effectively explain your situation. Aim to negotiate a modified payment plan that reduces your payments to a manageable level.
If you fail to make payments for several months, your creditor will likely write off the debt as a loss, which will negatively impact your credit score. However, you will still owe the debt. The creditor may sell your debt to a debt collector who will then attempt to recover the amount owed. Despite writing off the debt, creditors may still be open to negotiation.
Credit Counseling
What services do credit counseling agencies offer?
A reputable credit counseling organization can offer valuable support by providing advice on managing your finances and debts, helping you create a budget, offering educational resources and workshops, and assisting in developing a debt repayment plan. Counselors are certified and trained in credit management, money management, and budgeting.
Effective credit counselors will conduct a thorough review of your overall financial situation before recommending a personalized plan to address your financial challenges. Initial counseling sessions typically last about an hour, with follow-up sessions available. Trustworthy counselors will not make unrealistic promises or demand high upfront fees.
How can I find a trustworthy credit counselor?
Most reputable credit counseling organizations are non-profit, charge minimal fees, and offer services through local offices, online, or via phone. If possible, consider a counselor you can meet with in person. Non-profit credit counseling programs are often affiliated with:
- Credit unions
- Universities
- Military personal financial managers
- U.S. Cooperative Extension Service branches
Your bank or local consumer protection agency may also provide referrals to reputable credit counselors.
How do I verify a credit counseling organization’s legitimacy?
Being a non-profit organization does not guarantee free or affordable services, or legitimacy. Some credit counseling organizations impose high fees, which may not be disclosed upfront.
- A legitimate organization should provide free information about their services before discussing your financial situation.
- Check with your state attorney general and local consumer protection agency to see if any complaints have been filed against organizations you are considering. While the absence of complaints is not a guarantee of legitimacy, it is a good starting point. Also, inquire with your state attorney general about licensing requirements for credit counseling services and verify if the organizations you are considering are licensed.
- The U.S. Trustee Program maintains a list of approved credit counseling organizations for pre-bankruptcy counseling, but does not endorse any specific organization.
After initial vetting, interview potential candidates. Choose an organization that:
- Does not charge fees for services not yet rendered.
- Employs counselors accredited or certified by an external organization.
- Offers a comprehensive range of services, including budget counseling, debt management education, and free educational materials.
- Provides a clear, written quote for all fees, whether one-time or monthly.
- Offers assistance regardless of your ability to pay fees or contributions.
Ensure all details and promises are documented in writing, and carefully review any contracts before signing.
What is a debt management plan?
A qualified credit counselor will assess your financial situation and offer tailored advice to manage your finances. Following this assessment, they might suggest enrolling in a debt management plan (DMP) to help repay unsecured debts like credit card balances, student loans, or medical bills. DMPs are not designed for secured debts such as mortgages or car loans.
Be wary if a counselor promotes a DMP as your only option or recommends it without a detailed review of your finances.
If you and your counselor decide a DMP is suitable, confirm with your creditors that they offer the modifications and options described by the counselor.
Typically, a DMP operates as follows:
- The counselor develops a payment schedule in collaboration with you and your creditors. Creditors may agree to reduce interest rates or waive certain fees.
- You make monthly deposits to the credit counseling organization.
- The counselor distributes these funds to your unsecured creditors according to the agreed-upon payment plan.
Is a debt management plan a beneficial strategy?
The suitability of a DMP depends on your individual circumstances. DMPs are not universally effective. Success requires consistent, timely payments and can take 48 months or longer to complete. You may also need to agree to refrain from applying for or using new credit until the plan is completed. A reputable counselor will not recommend a DMP without a thorough financial review.
Debt Settlement
What does debt settlement entail?
Debt settlement programs differ significantly from debt management plans. Typically offered by for-profit companies, debt settlement is aimed at individuals with substantial credit card debt. These companies negotiate with your creditors to accept a “settlement,” a lump sum payment that is less than the total amount owed. The agreement is that this settlement amount will resolve your debt. While negotiations are underway, you are usually advised to deposit a fixed monthly amount into a designated account until sufficient funds are accumulated to cover the settlements. These programs often recommend stopping monthly payments to your creditors.
Debt settlement programs carry considerable risks. If the company fails to negotiate settlements with your creditors, you could end up owing more due to accumulated late fees and interest. Even if settlements are reached, you must be able to sustain payments over time to fulfill the settlement agreements. Furthermore, be cautious of dishonest debt settlement companies that make unrealistic promises, charge high fees, and provide minimal or no actual assistance. Settlement of all debts is not guaranteed. While enrolled in a debt settlement program, you may continue to receive calls from debt collectors, and your credit score is likely to suffer. The debt settlement process can take several years to complete.
If you engage with a debt settlement company, you may be required to deposit funds into a special bank account managed by an independent third party. These funds remain yours, including any interest earned.
The account manager:
- May charge a reasonable fee for managing the account.
- Is responsible for transferring funds from your account to pay creditors and the debt settlement company as settlements are finalized.
What disclosures are debt settlement companies required to make upfront?
If you decide to proceed with debt settlement, even after understanding the risks, there are important disclosures required. Before you sign up for their services, the company must inform you of:
- All fees, conditions, and terms of service.
- The estimated timeframe for achieving results: how many months or years it will take to make settlement offers to each creditor.
- Potential negative consequences of ceasing payments to creditors, if this is part of the program.
- The amount you must accumulate in a dedicated account before settlement offers will be made to your creditors.
Debt settlement companies are prohibited from collecting their fees before successfully settling your debts. Fee structures typically involve either a percentage of the debt resolved or a percentage of the amount saved. Fees can only be charged incrementally as each debt is successfully settled with a creditor.
The debt settlement company must also disclose that:
- The funds deposited are yours, and you are entitled to any interest earned.
- The account administrator is independent of the debt settlement provider and does not receive referral fees.
- You have the right to withdraw your funds at any time without penalty.
What are the potential risks of debt settlement?
- Negative impact on credit score and report: Debt settlement programs often advise or require you to stop making direct payments to your creditors. This can lead to increased late fees and penalties, worsening your debt situation and damaging your credit.
- Continued debt collection activities: While in a debt settlement program, you may still receive collection calls and potentially face lawsuits from creditors seeking repayment. If a creditor wins a lawsuit, they may be able to garnish your wages or place a lien on your property.
- No guarantee of settling all debts: Creditors are not obligated to agree to debt settlement negotiations. Debt settlement companies often prioritize smaller debts, leaving larger debts to accrue more interest and fees.
- Program incompletion: Many individuals struggle to maintain payments long enough to settle all or even some of their debts and may drop out of the program. In such cases, fees paid to the debt settlement company for settled debts are lost, unsettled debts remain, and your credit report likely reflects late payments, further harming your credit. Before enrolling, carefully assess your budget to ensure you can consistently set aside the required monthly amount for the entire duration.
- Potential tax implications: Savings achieved through debt relief services may be considered taxable income. Consult a tax professional to understand the potential tax consequences for your specific situation.
What are red flags of a debt settlement scam?
Be vigilant and avoid fraudulent debt settlement or debt relief organizations, regardless of whether they offer credit counseling, debt settlement, or other services.
Never pay any organization that demands fees before settling any of your debts or enrolling you in a debt management plan.
- No legitimate organization will guarantee complete debt settlement or rapid loan forgiveness.
- No legitimate organization will enroll you without first thoroughly reviewing your financial situation.
- No legitimate organization will promise results from a “new government program.”
- No legitimate organization will advise you to cease communication with your creditors without explaining the serious consequences.
- No legitimate organization will claim they can stop all debt collection calls and lawsuits.
To further investigate any company you are considering, search online for the company name along with terms like “complaint” or “review.” Read customer testimonials and feedback. Also, check with your state attorney general and local consumer protection agency about any company you’re considering.
Can I negotiate debt settlement on my own?
Yes, instead of paying a company to negotiate with creditors on your behalf, you can attempt to settle your debts yourself. If your debts are overdue, creditors may be willing to negotiate and potentially accept a reduced payment. In some cases, you can reach an agreement to eliminate the debt and prevent further collection actions. If you reach a settlement agreement, request written confirmation from the creditor. Similar to using a debt settlement company, settling for less than the full amount owed or making late payments can negatively affect your credit report and score.
Debt Consolidation Loans
What is a debt consolidation loan?
A debt consolidation loan combines multiple debts into a single loan with one monthly payment. This can be achieved through a second mortgage, a home equity line of credit, or a personal debt consolidation loan from a bank or finance company.
Are debt consolidation loans a wise choice?
Some debt consolidation loans require you to use your home as collateral. If you fail to make payments or make late payments, you risk losing your home. Most consolidation loans involve additional costs. Besides interest, you may have to pay “points,” with each point equaling one percent of the loan amount. Debt consolidation can be an expensive way to manage debt, so carefully calculate the total costs to determine if it is financially beneficial for you.
Bankruptcy
What are the effects of filing for personal bankruptcy?
Personal bankruptcy provides a legal discharge, which is a court order relieving you from the obligation to repay certain debts.
Bankruptcy is generally considered a last resort due to its significant long-term negative impact on your credit history. Bankruptcy filings, including the filing date and discharge date, remain on your credit report for 10 years. This can significantly hinder your ability to obtain credit, purchase a home, secure life insurance, or find employment. Despite these drawbacks, bankruptcy can offer a fresh financial start for individuals in severe financial distress.
What are the primary types of personal bankruptcy?
The two main types of personal bankruptcy are Chapter 13 and Chapter 7, both filed in federal bankruptcy court. Filing fees are typically several hundred dollars, and attorney fees are additional. For detailed information, consult the United States Courts website.
Both Chapter 13 and Chapter 7 bankruptcy can discharge unsecured debts such as credit card and medical debt and halt foreclosures, repossessions, wage garnishments, utility shut-offs, and debt collection activities. They also provide exemptions, allowing you to retain certain assets, although the extent of exemptions varies by state.
What are the key differences between Chapter 13 and Chapter 7 bankruptcy?
Chapter 13 bankruptcy is generally designed for individuals with a steady income who wish to keep assets, such as a mortgaged home or a car, that might otherwise be lost in bankruptcy. In Chapter 13, the court approves a repayment plan that allows you to repay a portion of your debts over three to five years, rather than surrendering property. Upon completion of all plan payments, the remaining debt is discharged.
Chapter 7, often referred to as straight bankruptcy, typically involves liquidating non-exempt assets. Exempt assets may include vehicles, work tools, and essential household furnishings. Some of your property may be sold by a court-appointed trustee, and the proceeds distributed to creditors.
What debts are not dischargeable through personal bankruptcy?
Personal bankruptcy generally does not discharge obligations such as child support, alimony, fines, taxes, and most student loan debts, unless you can demonstrate undue hardship. Additionally, bankruptcy typically does not allow you to retain property if a creditor has a lien or financial interest in it, unless you have an acceptable plan under Chapter 13 to address these debts.
What steps are required before filing for bankruptcy?
You are required to complete credit counseling from a government-approved organization within six months prior to filing for any type of bankruptcy relief. A state-by-state list of approved agencies is available on the U.S. Trustee Program website, which oversees bankruptcy cases and trustees within the Department of Justice. You must file a certificate with the bankruptcy court confirming completion of this counseling.
Furthermore, before filing for Chapter 7 bankruptcy, you must pass a “means test” to verify that your income does not exceed a certain threshold, which varies by state. More information is available from the U.S. Trustee Program.
What steps are required after filing for bankruptcy?
After filing, you must complete a debtor education course from a government-approved organization on topics such as budgeting, money management, and responsible credit use. A list of approved debtor education providers is available. You must file a certificate with the bankruptcy court verifying completion of this course.
Credit Repair
What credit repair actions can I take after paying off debt?
No credit repair company can legally remove accurate negative information from your credit report. Be wary of any company claiming otherwise.
Only time can remove accurate negative information from your credit report. Credit bureaus can report most accurate negative information for seven years, and bankruptcy information for ten years. Information about unpaid judgments can be reported for seven years or until the statute of limitations expires, whichever is longer. The seven-year reporting period begins from the date of the original event. However, you can take steps to repair your credit over time.
What To Do If You Paid a Scammer
Scammers often prefer payment methods that are difficult to reverse. Regardless of how you paid, acting quickly is crucial to maximize your chances of recovering your funds. Learn more about how to potentially get your money back if you have been scammed.
Report Debt Relief Scams
Where should I report a debt relief scam?
If you encounter issues with a debt settlement or other debt relief company, or suspect a scam, fraud, or unethical business practices, report it to the relevant authorities.
