Consumer debt statistics reported in a July 2008 "New York Times" article are staggering. Federal Reserve Board data indicates that there's been a 22 percent increase in consumer debt since 2000, with Americans holding $2.56 trillion in consumer debt. Credit card debt in the average household is about $8,500. If you don't know how to handle too much debt, you're certainly not alone. However, as noted by the Federal Trade Commission, there's no quick fix when you have too much debt. Companies that purport to wipe out your debt with "one easy payment" or who claim you can legally erase your debt can only make your predicament worse.
Step 1
Find out where the money goes. The FTC advises that you develop a monthly budget. Write down your monthly income. Then list your fixed expenses, such as your rent or mortgage, car payments, utility bills, medical expenses, and grocery costs. Write down how much money you spend on entertainment and creature comforts, such as clothing, cable television service and movie tickets. Find out where you can cut back. The FTC notes that a healthy budget is one that allows you to comfortably afford the necessities of life: the roof over your head, your meals, health care, insurance and education.
Step 2
Take a hard look at your secured loans, such as those for a car or home. Your car may be repossessed or your home may go into foreclosure if you default. If you're struggling to make your car payment, the FTC notes that it's probably best to sell the car rather than have it repossessed and risk a negative mark on your credit history. If you're having difficulty making mortgage payments, contact your lender. You may be able to work out a plan so that you can make smaller payments, or the lender may suspend payments temporarily. Your lender may also revise the terms of your note to extend the time during which the loan must be repaid to reduce the amount of payments. If your lender won't work with you, the FTC advises you to contact a housing counseling agency. The Department of Housing and Urban Development or the housing authority in your area can recommend a housing counseling agency that's reputable.
Step 3
Consider contacting a reputable credit counseling organization if you can't adhere to your budget or if you have too much debt to pay back and not enough income with which to pay it. These nonprofits provide a wide array of services (see Resources) and offer solutions based on your financial situation. One strategy to reduce debt may be a debt management plan (DMP), which requires you to pay the credit counseling service a set amount each month. In turn, they pay your creditors. However, the National Foundation for Credit Counseling stresses that the DMP may not be appropriate for every situation. The FTC notes that many credit counseling organizations don't provide legitimate services and exist only to take your money. To find out how to locate a reputable credit counseling agency, see Resources.
Step 4
Beware of risky, undesirable solutions--credit consolidation, debt settlement and your very last resort, bankruptcy. Credit consolidation often requires that you use your home as collateral when you take out a loan against the equity that you've built in your home. Debt settlement companies charge high fees to negotiate unsecured debt (usually credit card debt) to be paid off at a lower rate, anywhere between 10 and 50 percent of the total balance owed, notes the FTC. But the NFCC notes that you can negotiate with these creditors yourself by contacting them directly. Bankruptcy is a legal option when you have too much debt and no feasible way to repay it. However, bankruptcy is a matter of public record; it also stays on your credit reports for 10 years, making it difficult, if not impossible, to get a loan.
Step 5
Change your way of thinking about debt and know how much debt is too much--as well as if debt rules your life (see Resources). According to the "New York Times," Americans incur too much debt because they've considerably increased their debt burden while their incomes remain the same. Credit card companies and other lenders launch ads with a persuasive pitch to coax you to live beyond your means, be it buying a home, car, vacation, or even a college education. The NFCC notes that as a general rule, you should never spend more than 20 percent of your monthly net income on credit card bills and loans, including your car payments.
Tips and Warnings
- Look for a legitimate credit counseling agency by selecting a member agency of the NFCC.
Member Comments