By Andrew Housser
The troubled economy is continuing to cause financial problems for many people. Add to that the fact that many people simply do not have experience managing their money, or the skills to do so, and the challenges are compounded. Worst of all, falling deeply in debt can leave people feeling helpless and desperate.
If you have debt you cannot repay, seek help by trying one or more of the options below.
1) Credit card debts:
If you cannot make minimum payments on your credit cards, you risk serious damage to your credit score, not to mention great stress. If you find yourself in this situation, for a first step, try calling your creditors to explain the situation and see if they will arrange a payment plan. If that fails, several options exist. The right one will depend on your individual situation.
A) Debt consolidation combines multiple debts into one larger loan with one monthly payment. Consumers pay back 100 percent of the debt, plus interest.
B) Debt management companies, also known as consumer credit counseling agencies, can lower credit card interest rates (not principal) with credit card banks. Often, consumers enter a debt management plan (DMP) that lasts up to five years. The agencies collect a monthly fee from consumers, as well as revenue from the credit card companies.
C) Debt settlement providers, also known as credit advocates, work on consumers' behalf to negotiate principal reductions on existing debts. Successful negotiations can obtain savings of as much as 50 percent of the total enrolled debt (before fees). The firms negotiate directly with creditors while the consumer accumulates funds for the settlement, or resolution, through a monthly program payment. Clients who stay with the program can fully resolve their debts in about two to four years.
D) Bankruptcy is generally considered a last resort, given its strong emotional and financial consequences. Those considering this option should discuss their situation with a bankruptcy attorney. Since the 2005 bankruptcy reform laws went into effect, bankruptcy is more difficult to obtain, and more expensive.
2) Student loans:
If you cannot pay student loan debt, contact the lender immediately. Many student loan programs can arrange payments based on your income, or suspend loan payments for a time if you are unable to pay. Additionally, check into programs offered by your employer or professional field. A few professions provide opportunities that help repay student loans, whether through monthly assistance, one-time payoffs or matching funds. Also, be aware that most recent graduates can deduct up to $2,500 per year in student loan interest payments. You may be able to seek the help of a debt settlement company if the student loans are not government-guaranteed, but be aware that student loans are generally not dischargeable in bankruptcy.
3) Payday loans:
If you can, avoid check-cashing stores or payday loans. These options are extremely expensive, and can easily spiral out of control. Some states have regulations that provide consumer protections and place limitations on payday lending. To check regulations in your state, visit www.paydayloaninfo.org, the Consumer Federation of America's resource on payday lending. Some people are tempted to close their bank accounts to avoid repayment. But be aware that that action could constitute a violation of the loan contract, and could result in additional bank fees. Instead, try to negotiate an extended repayment term. Occasionally, lenders will agree. Alternatively, you might be able to save up a lump sum and negotiate a settlement with the payday lender.
4) Unmanageable mortgage payments:
If you have an older mortgage and cannot pay due to job loss or job reduction, you might be able to get help through the Making Home Affordable program. This program offers support for refinancing, lowering mortgage payments, or exiting a home without foreclosure. Visit the Making Home Affordable website for details: www.makinghomeaffordable.gov. You also could contact your mortgage lender directly, or the Hope Now Alliance (www.hopenow.com), to ask about a permanent loan modification. These changes might include lowering the payment and extending the loan's term, or incorporating delinquencies into future payments.
5) Home foreclosure:
Mortgage lenders might initiate foreclosure after 3 to 6 months of missed payments. If the homeowner is trying to work with the bank, that timeline might be delayed. One option if a foreclosure has not begun might be to sell the home to repay the lender. If the home's sale price is less than the mortgage amount, known as a "short sale," the sale might require special permission from the lender to sell the home at a loss. Alternatively, a deed in lieu of foreclosure essentially allows the borrower to return the title or deed of the property -- giving the home back -- to the mortgage holder to avoid foreclosure. The borrower forfeits rights to the property. This action damages credit, but it is less harmful than a foreclosure on a credit record.
6) Auto debt:
Many auto loan contracts specify that if a borrower stops paying the loan, the lender can repossess, or take back, the vehicle. Lenders typically start the repossession process when owners are behind on payments by about 90 days. After a vehicle is repossessed, the car will be sold at auction, typically within 41 days. If you are late on car or truck payments, do not keep any personal items in your vehicle in case it is repossessed. Once you are months late on payments, the repossessor can take the vehicle at any time, without your permission. Creditors cannot keep personal property that you left in the car, but they can make it difficult to get back.
7) Rent-to-own assets:
Property bought as "rent to own," including furniture, televisions and appliances, also can be repossessed if you do not make payments. Check your contract for consequences if you cannot pay. If possible, contact the company you owe to see if you can return the items. This is likely to be less damaging to your credit than having the items repossessed.
8) Medical bills:
Most medical offices will work with you to set up a payment plan if you are struggling to pay a bill. Call the billing manager and explain your situation. If your issue is that you do not have insurance, some providers will offer a "self-pay" discount.
Struggling with debt is not fun. Sometimes the hardest thing to do is take the first step to confront the situation. But once you start addressing the problem, you will find that there is likely a solution out there that can put you on track to getting out of debt and finding financial freedom
Falling deeply in debt can leave people feeling helpless and desperate. Here is some advice. (©iStockphoto/Thinkstock)
Andrew Housser is a co-founder and CEO of Bills.com, a free one-stop online portal where consumers can educate themselves about personal finance issues and compare financial products and services. He also is co-CEO of Freedom Financial Network, LLC and its wholly owned subsidiary, Freedom Debt Relief, a national consumer debt resolution firm that has served nearly 100,000 clients and manages more than $1 billion in consumer debt. Housser holds a Master of Business Administration degree from Stanford University and Bachelor of Arts degree from Dartmouth College.
