4 Tips to Escape from Debt Prison

Photo (cc) by S Baker

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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