Your Money New York - Get Out of Debt Safely

Get Out of Debt Safely

Many families are finding themselves with more debt than they can afford - due to unexpected medical expenses, the loss of a job, or even, in some cases, because credit card companies increased the interest rates and the minimum payments on their debt beyond their ability to pay. The Federal Trade Commission (FTC) offers consumers a page of important resources that covers a broad range of debt-related topics, including:

The FTC also offers advice in its web page Knee Deep in Debt, covering topics such as realistic budgeting, credit counseling, debt consolidation, and bankruptcy.

If you find yourself overwhelmed by debt, it is important to tackle the problem carefully and thoughtfully. This debt didn't accumulate overnight, and there are no magic solutions that will make it disappear overnight. Any offers you see that promise to make your debt go away painlessly are almost certainly scams that could cost you thousands of dollars, ruin your credit score, and leave you with even more debt than when you started. However, there is legitimate help available.

The most important thing to do is to approach your financial situation realistically, to get help from a reliable, trustworthy and accredited source, and take steps to limit your spending within your income to make sure you won't have to face the stress of this situation again. Remember that you are not alone during this difficult time. You should seek out support from your family, friends, or one of the many government and not-for-profit organizations that exist to help the millions of families that are facing similar financial challenges.

Credit Counseling

You may find that your initial efforts are not enough to solve your debt problem - either your debt load is too overwhelming, you don't have the discipline to accomplish becoming debt-free on your own, or your creditors won't work with you. In that case, you may want to seek out the assistance of a credit counselor.

The FTC offers consumers a guide on how to choose a credit counselor, including what questions to ask. At the very least, you should find a credit counselor from a not-for-profit organization, specifically one with official status under section 501(c)(3) of the Internal Revenue Service code, and in good standing with the Better Business Bureau. They should also be certified with the National Foundation for Credit Counseling (NFCC).

A good counselor will help you get a handle on your debt situation and will discuss what options may be appropriate for your particular situation, whether that involves a Debt Management Plan or, in some circumstances, a declaration of bankruptcy.

Steps to Get Out of Debt

None of these steps are easy - they require taking a hard look at your overall financial situation and then making some tough choices about how to deal with the challenges you face.

Step 1: Get a complete picture of your debt situation

Identify all your debts - including your mortgage, car payments, medical bills, personal loans and credit cards. Make a list showing each debt, including who the creditor is (whether it is a bank, a retail store, or a friend); how much is owed; what the minimum payment is each month; what the interest rate on the debt is; and any penalties, fees, or additional costs associated with the debt.

List your debts in order of priority - for example, because your mortgage payment is tied to your home, you want to make sure you stay current on making that payment to avoid losing your home. Because credit card debt is "unsecured," meaning there is no dedicated property or asset that is tied to the debt, this debt should come after your mortgage debt on your priority list.

Make sure you know exactly how many creditors you owe money to and regularly keep track of the balance and interest rate on each account.

Step 2: Contact your lenders

Call every lender on your list and explain that you are having difficulty meeting your payments, and try to work out a modified payment plan that reduces your payments to a more manageable level. Start with your highest interest rate debt and try to negotiate lower rates. If the agent you are speaking with can't help you, politely ask to speak to a supervisor, who may have more authority to adjust your rate.

If you have fallen behind on your payments and debt collectors are contacting you, be aware that you have rights under the federal Fair Debt Collection Practices Act, which prohibits debt collectors from using abusive, unfair, or deceptive practices to collect from you. The New York State Office of the Attorney General also provides information on consumers' rights under the Act.

Step 3: Create a budget

Look at how much money you take in and compare it to your expenses. You should do this both on a monthly basis and on an annual basis, so you don't leave out major expenses such as insurance or taxes. Try to figure out where your money goes, and determine what expenses are fixed and what expenses are flexible.

The Federal Reserve Bank of Dallas offers a budgeting resource called Building Wealth, which gives you a step-by-step guide to taking control of your finances. It teaches you how to set financial goals and meet them, including how to create a household budget.

Step 4: Reduce your expenses

While a budget helps you better understand your expenses, it may not always be obvious how you can reduce them. Look at your flexible or discretionary expenses first and see where you can cut back. This can include everything from eliminating take-out food purchases, to switching to store brands. Try to make every dime count.

The Federal Citizen Information Center, part of the U.S. General Services Administration, has created a guide entitled 66 Ways to Save Money. The guide provides advice on how to save money on housing, utilities, transportation and in many other areas of your life.

Step 5: Decide which debts to pay off first

Generally, it makes more sense to pay off your highest interest rate debt first, because that’s the debt that costs you the most money each month. However, debt reduction isn’t easy, and some people may have more success by paying off an account with a lower balance first. The psychological victory of paying off a loan (even if it is at a lower interest rate) may be just the thing to help you stick to your plan.

Step 6: Take steps to repair your credit

The FTC offers guidance on how to get a free copy of your credit report and provides contact information for each of the three nationwide consumer reporting companies (Equifax, Experian, TransUnion). Your credit report will show you what accounts are currently open in your name. If you find incorrect information in your credit report, contact the three credit reporting companies immediately.

The FTC offers advice for consumers on how to repair their own credit and avoid falling victim to the many credit repair scams that claim to be able to repair credit, but end up costing consumers significant amounts of money with no benefit.

Step 7: Eliminate temptation

It may not be in your best interest to close a credit card account once you pay it off (it decreases your available credit and could lower your credit score), but it is a good idea to put your cards somewhere where you won’t be tempted to use them. Some credit counselors even recommend placing your credit cards in a bowl of water and keeping them in the freezer, giving you plenty of time to think about whether or not to use them as they thaw.

Other resources

Other debt-related information available from the FTC includes:

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Tips & Topics - Debt

Get Out of Debt Safely