4 Tips to Escape from Debt Prison

The most popular ways people deal with their debts and how to figure out which will work best for you.

A visit with my mother over the Christmas holiday reminded me of a problem many Americans face on a daily basis. While enjoying some time with our family, the phone never seemed to stop ringing for more than a few hours. It was a debt collector my mother had been avoiding for months.

I asked her why she wasn’t answering. She just said, “Jim, what am I supposed to do?”

She like many others are finding it tough to pay bills. Even though she has a job, the hours have been cut back significantly, forcing her to choose between buying groceries or paying her credit card bill. She chose to eat.

It’s estimated that the average American owes about $9,800, and that’s about where my mom fits in. With the unemployment rate hovering near 10%, many Americans are looking for a way out of the prison known as debt.

A debt settlement company drew in my mother with promises of helping to rid her of debt. The company told her to stop paying her bills and instead pay them to “negotiate a settlement”. See this recent exchange between Stacy and a debt settlement company.

You can’t go online without seeing a bunch of these companies offering to help you become free of your debt with minimal effort. (In fact, I bet there are some ads around this article right now). Finding the right path can be very confusing and frustrating.

In a recent survey by the National Foundation for Credit Counseling, the question was presented, “If you had a debt problem, what would you do?” Here are the answers:

Do you agree with any of the above solutions? Here’s a story we did about the steps you should take, should you find yourself behind in your payments. Watch it and meet me on the other side to read more about the best answer.

Credit Counseling

Yes, each situation is different and a perfect outcome is often hard to come by. However, there are things you can do to help yourself. First, check out credit counseling. They’ll contact your creditors and attempt to negotiate lower interest rates, get penalty fees waived, and will help arrange a monthly payment you can actually afford. Then you send one check to the credit counseling agency for that amount every month and they divide the money amoung your creditors. Be forewarned, it’s not a quick fix. A typical debt management program lasts three to five years.

Many counseling agencies give free advice, however a debt management plan typically requires a small monthly fee to get it set up. Expect anywhere between 5-10% of your debt payment, but normally capped at $25-$50.

Calling the creditor

As with most things, simply picking up the phone and speaking directly with your creditor can do the trick. My mother, for example, dropped her debt settlement company and took matters in her own hands, calling the creditor herself.

She got her fees waived, interest rate lowered, and is now making a payment she can afford… and the phone calls stopped. Imagine that!

Calling a bankruptcy lawyer

When is bankruptcy the right choice? That’s going to depend on lots of factors, but ultimately you only want to file bankruptcy because there’s no other way out. For example, if your monthly payments are higher than your monthly income, you may have no other choice.

But before you even think about bankruptcy, understand it. For individuals (as opposed to corporations) there are two types: Chapter 7, which wipes out all your debts, and Chapter 13, where you’ll be required to pay some of your debts back over time.

We did a story called ‘How Ron Dealt with Debt: Bankruptcy’ that shows how one man, forced into extenuating circumstances, used bankruptcy to help him deal with his debts.

Debt Settlement

Just like bankruptcy and debt counseling, debt settlement does have a place in destroying debt. However, it’s a place you have to be especially careful. Ask lots of questions and be super-wary of upfront fees. We did a story called ‘Dealing with Debt: Debt Settlement’ that goes into more detail.

Ignoring the debt

Of course, many people just pretend their debt doesn’t exist. Unfortunately, however, their creditors don’t. Unpaid debts accrue days, weeks or maybe years of interest and late fees which make that debt bigger. Your creditors (or the collection agencies they sell your debt to) will first they’ll harass you, then they’ll sue you. They’ll get a judgment, which will allow them to start seizing any and all assets allowed by law until your debt is satisfied.

So unless you have nothing and intend to stay that way, ignoring a debt isn’t a great idea.

Stacy Johnson

It's not the usual blah, blah, blah

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  • In all candor, there is but one common way for people to help themselves get out of debt and that is to know and track their income and to know and track their daily expenses. At the end of the month, using free Quicken, having entered all the data on a daily basis, have the software run a P and L or profit and loss for the month and show yourself how and in what manner you spent your money. If there is a loss, it can only be made up using your own personal printing press called a “credit card.” If you have a profit, there should be extra money left over in the bank. Until people see a P and L and show themselves how and in what manner they spent the money, there is no way anyone can make a better decision about how to spend the money. For example, there is a well known coffee house all over the country. If you are a coffee nut and go there 4-5 times a day and buy coffee, it ads up. If you are honest in making the entries and to do this, you have to be honest, at the end of the month, the P and L will show you that you spent $346.00 for coffee. once you see this you can decide…is this in my best interest or…is that money better spent paying off debt? How do you do this? We call it MONEY TRACK and we give it away for free to anyone interested. All we need is an e mail address. If the host of the newsletter wants to help those who really need it, he can contact me and arrange to make it available via the newsletter or by contacting us.
    again, its free.

  • ln

    Why does no one ever discuss how to deal with STUPID EQUIFAX?

    or evne the mafioso orgsanization called “Sallie Mae?

  • debtman

    Equifax is an information gathering entity. This company like its competitors Esperian and TransUnion grew out of the computerization and new sophistication of information gathering that the local “credit bureau” in your city was unable to keep up with. IThe files were not on a screen and inside a server, but were paper reports that were verbally read to a local merchant who would call the local credit bureau to find out about the customer that was in the store waiting for credit approval.It was all based upon a voluntary exchange of information among merchants. Everything changed in the mid to late '60's when it was finally determined that the one and only way to keep track of John and Mary Public was via their social security numbers. So what is an Equifax? It is not a decision maker. All the Equifax or the TransUnion or the Esperian of the world do is gather and store information, again on a continuing voluntary exchange of information based upon rules they themselves create and upon federal regulation. Soon a need was apparent to make the decision making process on who should or should not be granted credit easier and quicker. Thus, along came the scoring system by Fair Isaac or FICO. Why? simple…the super credit bureaus like Equifax do not say if one should or should not be granted credit. they just gather the info. That decision is made by the creditor and the creditor is lazy. So FICO gives the creditor a scoring system. Quick and easy. What then is your gripe with Equifax? All it does it gather and store information.

  • mel92101

    can anyone explain how to get rid of private student loan debt

  • virgilio

    k. that's brilliant!

  • LT3

    I would like to receive MONEY TRACK.

  • JohnLee13

    You are forgetting a few things in your advice above. If you are considering filing bankruptcy you could not file a chapter 7 (if it you already filed one in the past in less than 10 years ago). Also if you are considering filing a chapter 13, be prepared to tie up almost all of your salary to the monthly payments. You will have very little (if any) cashflow left over after your monthly payments for a chapter 13.

    Also beware of student loan debts that have been taken over by private collection agencies. They claim that they are the government's insurers but they add thousands in fees for taking over the debt. As you make payments the balance somehow mysteriously increases and decreases with no explanation. That's why I'm glad Obama has implemented the “no middle man” law for student loans to stop this abuse of American students.

    Finally, I don't know how the author's mother got her interest rates lowered by just calling her creditors, but I have been always paying all of my credit cards ONTIME and some, and I have never been able to have my interest rates lowered by the credit card issuers. (Maybe because I'm hispanic?). Anyway thank goodness for Obama's disclosure law on the credit card bills, now I will eventually close every credit card.

    Americans need to unite in efforts to eliminate the enrichment of the credit card industry.

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