How to Fix Unmanageable Debt

It is not a pretty sight to see debt collectors knocking on your door, calling you day and night, taking your car away, or even seizing your home.

What makes it even messier is that some people in debt, ignore collection letters, change their contact numbers, leave no forwarding address, and try to ditch. Don’t think running away will solve your debt problems. Collection agencies are not stupid. They have dealt with all kinds of tricks so they can anticipate your next move. It’s best to deal with your debt. By the way, ignoring letters, moving out, or changing your phone number are some of the worst things you can do as it sends a clear message that you are attempting to run away from your debts. This will destroy your credit standing.

These types of mess usually happen when people don’t expect the unexpected. Therefore, mentally expect to lose your job one day and expect to have a medical emergency, expect the worse and prepare for it. Here is what you can do to get out of debt!

When in Debt; Be Open, Honest, and Realistic

So you already in that situation where you know can’t pay off your debts. Your debts are unmanageable and time is running out. The smart thing you can do is to call the collection agency and explain your situation before they call you. It is always better to contact them rather than them having them contact you. Contacting them shows that you are trying to fix your financial problems. Therefore, if you know you won’t be able to pay on time due to problems (i.e. losing your job, medical emergency), call them up, explain your situation, and work out a payment plan. The creditor will almost always, happily try to work out a plan  with you.

They will ask for your income and will want to know your “necessary” expenses (food, utilities, rent, child care, etc.) and they will calculate how much money you have left so you can realistically pay off your debt. They might even reduce your payments or bring down the minimum you need to pay. It all depends on your situation. Remember there are always options. If you are smart about it, you will try to recover your loss income source or make additional income so your credit rating can still remain solid.

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If you try to run away from your debts, you will destroy your credit possibly for life. Banks will hesitate (with a passion) to not lend money to you ever again.

Worst Cast Scenario

The worst case scenario is when creditors won’t work out a deal with you. It’s most likely you have very little money left after paying off necessary and immediate expenses. In other words, your income is too low. If creditors won’t work out a plan, it would be wise to file a Chapter 13. Chapter 13 sounds like bankruptcy but Chapter 13 is actually more of a court administered plan that is designed to help you pay off your debts overtime (3-5 years) while allowing you to keep your property. For more info about Chapter 12 see this.

The advantages of Chapter 13 is that it allows the debtor to save his or her home/property from foreclosure (with conditions). Again, read the details in the link I provided above or hire a good lawyer. The disadvantages of Chapter 13 is that it takes time to prepare the paperwork, it costs money to file, and you will most likely need a lawyer to help you out because it is fairly complex for the average individual.

Know your Debts… Get a Ledger!

Know thyself and know thy enemy. ~ Sun Tzu

Another smart tactic to get out of debt is to LIST all your debts. Listing them is the first step in managing debt. If you shop a lot, you might consider reading this. Write down all your debts and make a detailed list of all of them (e.g. total balance, due date, interest rate, and etc. ). I recommend using a spreadsheet if possible but a typical notebook ledger is more than good enough.

The list should include the amount of debt, what it’s for, and the monthly interest. Once you have this down, attack the debt that has the highest interest and work your way down.  In most cases, it’s the credit card debts that have the highest interest so try to pay them off. You main goal is to stop the bleeding of cash coming from the biggest cash hole you have. Interest rates are holes. The higher the interest rate, the bigger the hole. Make sure you know them and plug’em up!

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Prevention is Key

The best thing is to avoid getting in debt trouble in the first place. Do no live above your means. It’s that simple. If possible, keep an emergency fund of at least $5K so you have a some room to spare.

True Story: I personally know a couple who have actually took out new loans so they can consolidate their debts. I like to add that getting a new loan to pay off debt would work well if it was for temporary problems (e.g. out of the blue medical bills and other types of emergencies) but the problem was that this couple were living far beyond their means. Things became much worse as they were forced to borrow at higher interest rates (we’re talking 35% interest!!!). Note that when things get messy or borderline unmanageable, lenders start to waver.

So to lower their lending risks, the lenders jack up the interest rates in which the borrower is financially responsible for. They weren’t able to manage even with a Chapter 13 and in the end, the couple lost their nice big home and their 2 newly bought Mercedes… add a divorce a couple of months later! Speaking of divorce, I think their nice big wedding was paid off with credit too. The harsh reality is no one really cares how nice your wedding was. You can live and prosper without a wedding. It’s the debt that you owe that can literally drown your life.

Anyways, the moral of the story: Do not live beyond your means with credit. Prevent having any type of unmanageable debt. It’s that simple.

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