Five-Step Emergency Plan for Dealing With Deep Debt

Intense panic accompanied by stifled screams and helpless flailing is a monthly ritual for peopledrowning in debt.

As a clich, it is, unfortunately,all-too-familiar. The Federal Reserve announced that as of June 2006,Americans are carrying more than $810 billion in revolving debt. Thatdoes not include mortgages and loans for such things as autos, mobilehomes, education, boats, trailers or vacations.

But it's never too late to turn things around. First andforemost, be committed, says Howard Dvorkin, founder of ConsolidatedCredit Counseling Services Inc. and author of Credit Hell: How to DigOut of Debt (Wiley, 2005).

"People have to want to get out of debt. They aren't going toget out of debt just to get out of debt, they have to want it."

Five-Step Emergency Plan

  1. Establish your bearings.
  2. Chart your path.
  3. Put the plan into action -- the dreaded "B" word.
  4. Pay your bills.
  5. Add stability to your credit file.

1. Establish your bearings

Once you're absolutely, unconditionally prepared to dowhatever it takes to pull your credit rating out of a nosedive, you'reready for stage one.

"Take a step back and evaluate the situation," says EmilyDavidson, corporate communications director for "It'svery common for people to skip over this and go straight into crisismode. It's really difficult for people to face the problems that theymight be having."The best way to assess the condition of your financesis by pulling your credit reports. This can be accomplished three ways.

Go to,which is the only authorized source for consumers to access theirannual credit report online for free. Call (877) 322-8228. Complete the form on the back of the AnnualCredit Report Request brochure, and mail it to: Annual CreditReport Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.You are entitled to one free credit report a year from eachcredit bureau -- Equifax, TransUnion and Experian. As long as thereports are ordered from the centralized agency, they can be orderedall at once or at different times of the year.Learn how to read your report. It can be illuminating.According to Dvorkin, "People tend to underestimate rather thanoverestimate -- probably about 20 percent lower than what they actuallyowe. The average debt is $9,000: 20 percent of $9,000 is $1,800 -- sothat is a pretty significant fluctuation for most of us."2. Chart your path How far behind in your payments you are can drastically alteryour plan of action. "If you're just in the beginning of having thisfinancial crisis and beginning to fall behind, it's really best to workon your own to try to recover," Davidson says.On the other hand, your options are goingto be different with one or two 120-day-late payments on your creditreport. "If you let something go all the way to a charge-off -- whereit's placed with a collection agency -- that will be seriously negativefor the full seven years. It is known as 'seriously derogatory,'" saysMaxine Sweet, vice president of public affairs for Experian and authorof the consumer credit advice column "Ask Max."
A severely damaged report does buy yousome wiggle room. "You can negotiate with creditors, or work with adebt-negotiation company or debt-counseling company," Davidson says."The potential downside is that there could be some damage associatedwith those programs -- as far as how the lenders choose to report yourrepayments. But if you're already at that stage, there's not a wholelot that can happen." Obviously, the hope is that you've caughtyourself before that point. Even if you haven't, you will be able torecover with some work and the passage of time."People have a lot of options," Dvorkinsays. "Unfortunately, they don't realize all their options. Bankruptcyisn't the first option; it's the last option. The first is to jugglethe household budget." 3.Put the plan into action -- the dreaded "B" wordCall ita budget, spending plan or resource allocation; it all comes down tothe same thing: "Stop spending," says Sweet. "You can't say 'I'm inover my head' and keep living the same lifestyle. You have got tofigure out what you can cut out of your life."This is the mantra of credit experts."Stop spending; use cash instead of a credit card," Dvorkin says. "Mostpeople's budgets are 15 to 20 percent fat. You don't need a $4 latte atStarbucks every day. People can do without certain things -- do youneed 200 satellite channels? Can you get away with 100?"
The list could go on and on -- carpooling, coupons, cutting out dry cleaning. "You've got to make thetough calls, even on the little things," Sweet says. "And people say,'Oh, those are just little things -- I have big debts.' Well, you'vegot to start somewhere; you have to cut out the big things but you haveto cut out the little things -- they add up." If youlook at your monthly spending and just don't see anything that can becut out, you may need to get professional help. "Go to a reputablecredit-counseling service and get help with budgeting," Sweetrecommends. "They'll do an evaluation to see if they can even help you.If you're so far gone that you don't even have enough income to startpaying off your creditors, they'll tell you that you're beyond theirhelp and may have to file for bankruptcy."Besides decreasing spending, another option would be increasing yourincome. "Consider getting a second job," Sweet advises. 4. Payyour billsSo your budget iswhippet-lean, yet there's still not enough money to stretch across allyour obligations. You do have options."If you're unable to pay small bills, it'sa good idea to contact the business to see if you can work out anagreement," Davidson says. In the case of an extreme emergency, "Ifit's a utility bill, or something that doesn't report to the creditbureaus, it's sometimes OK to skip it -- if it's a one-time situationwhere you're in a financial crisis -- if you have to in order to paybills that are reported to the credit bureaus, you can avoid damage,"she explains.
Payments should be prioritized. After paying yourrent or mortgage, the loan or credit card with the highest interestrate comes first, while paying the minimum on the rest of your debts."By far the most expensive kind of debt you can have is payday-loan debt," Davidson says."Consumers should really do anything they can to pay that off first."Similarly, collection accounts should holdhigh priority. Unpaid collections are worse than paid collections. Youcan negotiate a payoff settlement that reduces your bill, and when youdo, demand that all derogatory remarks be removed from your creditreport or at least reported as paid in full. Be sure to get agreementsin writing before sending off your payment.Be proactive when you're struggling with payments. Call your creditorsand negotiate to keep your accounts current and from being reported asdelinquent or "bad debt." You can ask for reduced monthly payments, oreven change due dates to balance out your monthly bills. "Most lenderswant to help you find a solution," says Davidson.The same strategy can be used forfixed-loan payments. Remember, though, that this is a short-termstrategy. You'll pay more interest to extend the repayment schedule,but it allows you to stay current and save your credit rating. Use theextra money to pay off debts one at a time, gradually increasingpayments to other debts.
You may be surprised at the help that isavailable. "Obviously, with student loans there are forbearanceprograms, there are mortgage programs for people who are havinghardships," Davidson says. The important thing is to work with yourcreditors throughout your struggle. Worst-case scenarioWhen you just can't even comeclose to paying your debts, declaring bankruptcy is an option. The longand costly process will, if successfully completed, discharge most ofyour debts and let you build up your credit again. "Chapter 7 stays onyour credit report for 10 years and Chapter 13 for seven years. It's along, long time of impact," says Sweet. Generally, most people aresurprised at how easy it is to regain their credit in the aftermath,but it can be an uphill battle.5.Add stability to your credit file.If you have really bad credit -- perhaps even filed bankruptcy -- don'tlet your credit status go dormant. "The faster you begin tore-establish good credit, where you pay on time, every time," saysCraig Watts, public affairs manager at Fair Isaac Corp., "the fasteryou'll improve your credit score." "After you've gotten out of the realdanger zone, check your credit reports," Davidson says. "See what'shappened; don't just assume that you destroyed your credit. Once you dothat, you'll have a better idea of how you can continue your recovery.
"For example," she says, "if you've filedfor bankruptcy, you can see exactly what your credit score is and thenevaluate what kind of products you can apply for that will help youre-establish your credit." A securedcredit card is one option for consumers seeking to build asolid credit history. One caveat: Make sure your credit grantor reportsto the credit bureaus, not all do.Last, open a savings account at your bank.This shows creditors that you are working to save and that you havereserves to repay debts.--Dani Arthur contributed to thisstory.Bankrate.comis the Web's leading aggregator of information on financial productsincluding mortgages, credit cards, new and used automobile loans, moneymarket accounts, certificates of deposit, checking and ATM fees, homeequity loans and online banking fees. Visit Bankrate.comto get the tools and information that can help you make the bestfinancial decisions.
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Source: Money & Work

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