5 Lifelines for People Drowning in Debt

My personal finances after divorcing my first husband were in shambles. It took me years to get out of debt, during which I learned how to navigate the treacherous waters of financial peril. The following 5 lifelines are there for anyone who is experiencing a monitory setback in his life, be it from illness, unemployment, bereavement, or any other hardship.

#1. Write A Financial Hardship Letter

If you can't meet your monthly payments, there's something you can do. Send your creditors what's known as a Financial Hardship Letter (use this letter template). Indicate any reason that may mitigate your financial hardship, such as health issues, divorce, loss of employment, or a death in the family. Ask the creditor to work with you to restructure your payments, or indicate that you will be unable to make payments for a limited period of time, say 6 months. Be prepared to speak with your creditor when they respond to your hardship letter.

#2. Stop Debt Collectors in Their Tracks

If you've already missed loan payments and debt collectors are harassing you, here's what you should know. "The Fair Debt Collection Practices Act" prohibits debt collectors from contacting you before 8 a.m. or after 9 p.m., as well as at work. Furthermore, you can write a letter to the debt collector and indicate clearly that "You don't want to be contacted by them again". Send the letter by certified mail and make sure you pay for a return receipt, which will be sent to you as confirmation that the letter was received by the collection agency. From this point on, the debt collector can contact you once only either to say that the debt will not be pursued further, or to advice you that your creditor will pursue legal action. Small debts are typically not worth pursuing in court and are more likely to be forgiven, however the forgiven amount may be considered as taxable income.

#3. Known the Truth About Debt Consolidation (aka Debt Settlement Companies)

Most debt consolidation companies promise to reduce your debt by up to 70%. They look at the amount of your collective debt and propose a two to five year payment plan, which they will use to completely pay off your debts. Such a payment is far smaller than your collective minimum payments and may seem attractive. However, your debt can only be negotiated down after you default on it for a few months, which will ruin your credit. In addition, your monthly payment plan will include a service fee. Be sure to find out the total fee, not the monthly fee (which may seem relatively small). Finally, keep in mind that any forgiven debt will be considered taxable income, and you will be taxed on it in accordance with your tax bracket. Needless to say, be sure to find a reputable debt consolidation company and check the Better Business Bureau for complaints.

#4. Contact a Credit Counseling Organization

A reputable credit counseling organization will look at your financial situation and offer you the best guidance, including help you develop a budget and long term plan for getting out of debt. In some cases, the counselor may determine that the you qualify for a Debt Management Plan (DMP). In this case, your debt will be negotiated down by the counselor. You will be required to make a monthly payment to the organization and it will make the payments to your creditor(s) on your behalf. Understand, once more, that forgiven debt will count as taxable income.

#5. Consider Filing for Bankruptcy

Despite the famous saying: "Bankruptcy is a fate worse than death", in truth, debt consolidation and bankruptcy both harm your credit equally. With bankruptcy, however, the debt solution is customized to your unique circumstances. Keep in mind that the Bankruptcy Abuse Prevention and Consumer Protection Act requires that you receive counseling from a government-approved credit counsel organization, whose counselor will assess whether bankruptcy is the best option for you. You will be required to provide a full disclosure of your debts and assets. During the bankruptcy hearing a Judge will determine your level of hardship and decide whether the debt should be forgiven or negotiated down. In such a case you will make monthly payments to the court, which will disburse the funds to your creditor(s). As with other cases of forgiven loans, such funds will be subject to income tax.

References

1. FTC.gov: "Debt Collections: FAQ's"

2. FTC.gov: "Before You File Personal Bankruptcy"

3. FTC.gov: "Knee Deep in Debt"

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