Help… I’m in debt
Waking up every day to a new bill on the doormat? Worried about the future?
Debt can take over your life if you’re not careful, making it difficult to think about much else. You may not know what to do first — especially if the phone’s ringing and you’re getting letters from the companies you owe money to. No debt problem is unsolvable. Take a breath and work through these four steps before you do anything else:
- Assess your debt. Take a step back and figure out how much you owe, adding up the balances on your cards and any loans. Determine an amount that you’ll be able to set aside to pay down these balances. Doing this will broaden your perspective on your situation.
- Choose your priority debts. When you have many small debts, it’s tough to know where to start. A “quick win” is paying off your smallest debts first, boosting your mood and getting the ball rolling. Then prioritize debts with high interest rates to prevent your balances from growing too fast.
- Make a plan. With a better handle on what you owe and can pay, work out a clear path to get out of debt for good. The size of your debt will affect how you pay it back, so plan your debt management strategy wisely.
- Seek expert advice. Consider working with a credit counseling organization. Reputable nonprofits can recommend ways to work out a budget and often offer free materials and workshops to help you manage your finances for the long term.
Choose your debt level
While any debt is tough, lower amounts are easier to manage. That said, you’ll want to prevent your debt from growing. Hardly anyone starts out owing hundreds of thousands of dollars. Most unmanageable debts build over time, made up of little emergencies or unexpected bills. Given the amount of your debt, talk with your family or friends about borrowing the money.
Carefully decide on the parameters of your loan: how much you’ll borrow, how long you’ll need to repay that amount, and whether you’ll include interest. You may be surprised at how willing your loved ones will be to support you in eliminating your debt.
The Internet has opened up new ways to make a little extra cash (We’re not just talking eBay). Upwork, Taskrabbit and Fiverr are sites that match your skills or services to people needing help. Projects vary from writing and proofreading to even picking up a family’s groceries. And while it’s not an easy decision, you may have books, toys, gym equipment or other items you no longer need that you could sell online.
If you’re confident that you can pay off the amount in two to three months, think about taking out a payday loan, small loan or cash advance loan. These are typically short-term unsecured loans that allow you to access the money you need quickly and easily. You must have payroll and employment records to apply, and interest rates are determined by the state in which you live — some as high as 40%!
Simple ways to further save money could be right under your nose. Review your monthly expenses —electricity, cable, cellphone, and Internet bills — and then call each of your providers to ask about offers you be eligible for. Merely mentioning that you’re interested in switching to a competitor can result in savings. While there’s only so much you can do about groceries, consider joining a wholesale club like Costco or Sam’s Club. You’ll pay a $45 to $55 membership fee upfront, but if you have a large family or even the extra room, you could save on food, household supplies and seasonal items.Back to top
This amount of debt takes a little longer to clear, but it’s still worth making a game plan. If you don’t keep track of how much you owe, high interest rates could push your debt even higher. When the money you owe is split between many companies, it’s easy to become overwhelmed. Consider merging your medium-sized debts into one manageable chunk with lower monthly payments. This means you owe money to just one lender — and no more figuring out who to pay first.
Balance transfer credit cards give you the opportunity to pay your debts off quickly, provided you do so in the introductory period. Many cards offer between 6 and 21 months of no interest as an incentive to clear your debt, but beware: You could be hit with very high fees later on. Paying no interest will save you a lot of money, but be certain that you can pay off the balance within the time limit.
A sudden jump in interest rates can wreak havoc on your debt repayment plans, especially if you use your house as collateral. If you miss a payment, you could lose your home. Learn about balance transfer cards.
For this level of debt, you could still qualify for a balance transfer credit card. If you don’t qualify or the offer is not appealing to you, consider a debt consolidation loan. Like a balance transfer credit card, a debt consolidation loan means merging all your debts into a more manageable monthly lump sum, payable to one lender only.
Unlike balance transfer credit cards, a consolidation loan is a long-term option. It won’t come with 0% APR intro periods, but the interest will be lower than a balance transfer credit card — and far lower than paying several interest rates to different lenders. There are two types of debt consolidation loans: unsecured and secured. Unsecured means the lender has no right to claim your financial assets if you miss a payment. However, the loan may not be big enough to cover your debts: The loan amount depends on the amount of risk the lender is willing to take. You can get a bigger loan if it’s secured.
However, a bigger loan means a bigger risk to the lender, and you’ll need to “secure” the loan by putting down collateral. With a secured loan, you agree that the lender can take your collateral — typically your house or car — if you fail to repay the loan. This is a situation you do not want to be in, so consider your options carefully. Read the details of your loan terms: You may not get a lower interest rate than you were paying before, and there may be penalties for early repayment. Compare consolidation loans to find one that’s best for you.
Another option is a debt management company. Though it’s similar to debt consolidation, there’s a crucial difference: with debt management, you authorize a third party to pay your debts on your behalf. These companies — often for a fee — offer to work out lower payments and interest with your creditors and “manage” your debt by distributing a monthly payment from you among those you owe money to.
There are drawbacks to using a debt management company, including high fees and possible dings to your credit score. Confirm that any company you’re considering is reputable by reading reviews, especially those with the Better Business Bureau.Back to top
A larger debt is more difficult to pay off, but there’s good news: With pro-level organizational skills and motivation, you have options. First consider negotiating your debt with your creditors. By calling to explain your difficulties, they may be able to help by lowering your monthly repayments. They want to keep you as a customer, after all. Consider seeking the advice of a credit counseling organization. A reputable debt counselor can help you plan a budget and create habits to manage your finances beyond your debt.
If you own a home with a mortgage, explore taking out a home equity line of credit (HELOC). Also called a second mortgage, a HELOC uses your home equity as collateral. Because real estate prices generally rise with time, your house will appreciate in value while you pay of your mortgage’s principal. The difference between what your house was worth when you bought it and what it’s worth now — your equity — is an amount that you can borrow against. Lenders may be willing to allow you to borrow anywhere from 60% to 80% of your equity.
If you bought your house for $160,000 and it’s now worth $250,000, you have $90,000 in equity. You might be able to secure a loan from roughly $54,000 to $72,000 — money to apply toward your debt. Of course, if you’re unable to repay the HELOC, your home will be at risk. This type of loan also comes with appraisal, administration and legal fees, among other costs, so compare your options before applying.Back to top
Why are debt collectors calling me?
Debt collectors act on behalf of companies to recover late payments. You may not recognize them at first, because they don’t operate under the name of the company you owe money to. If you’ve missed payments or a creditor’s records make it appear as if you have, a debt collector may contact you.
How to deal with credit card debt collectors
The Fair Debt Collection Practices Act, enforced by the Federal Trade Commission (FTC), prohibits debt collectors from using abusive, unfair or deceptive practices in attempting to collect from you. You may be in debt, but you still have rights.
My debt collector is worrying me. What can I do
Fraudulent debt collectors may use scare tactics to get money from you. Always confirm the company’s phone number and address and who they are trying to contact. Scammers often make cold calls, and so they might not even know your name. Under federal law, legitimate debt collectors are required to tell you the truth if you ask.
I’m a student with outstanding student loans, and I haven’t been able to find a good job. Should I file for bankruptcy?
No, because student loans do not have a statute of limitations. Without a time limit, you have years to pay them off. Partial or full forgiveness of student loans is possible, but you’ll need to convince the courts that not only do you not earn enough now, but there’s no possibility of you earning enough in the future.
Will my loved ones’ debt affect me?
Debt can cause rifts in family life, but you won’t be affected financially unless you lend those loved ones money. However, if your spouse is in debt, your liability for his or her debt comes down to the state you married in. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are “community property” states — meaning most debts incurred during your marriage are owed by the “community” (the couple), even if only one of you signed the paperwork. The key word is “during” — the student loan you took out before you married, for example, is not considered a joint debt. All other states are “common law property” states, where debts belong only to the person who incurred them. In these states, any income you earn isn’t automatically jointly owned by your spouse. Many states have different rules within these laws, so consult a lawyer if you’re worried about liability for a loved one’s debt.