Below is an excerpt from our Debt Free Forever Guide. Be sure to download the free guide to help dump debt for good.
You may reach a point in time where you have just accumulated too much debt relative to your income or your assets. When you can’t even afford to make the minimum due, you will end up struggling every month to make a payment where 90% (or more) of the payment will go to interest. At this rate, it will be 30 years (or more) before you are debt free. And, along the way, you will spend your working years giving interest to the bank, rather than paying down your debt and saving for retirement.
If this description sounds familiar, you may want to take action. And there are a few options:
- You can try to negotiate settlements or forbearance directly with your creditors
- You can visit a non-profit consumer credit counselor to get help negotiating settlements (or putting together a plan)
- You can consider bankruptcy, depending upon the level of debt.
Your Credit Score Will Drop
In all of these cases, your credit score will be hit. There is no avoiding that fact: you have borrowed (or owe) money that you cannot afford to pay back.
Your credit score measures how successfully you paid back your debt. So, by definition, your score will suffer. However, the sooner you take action, the sooner you will get your debt situation under control and the sooner your score will start to improve.
You may also be sued, and this could result in wage garnishment. If you are able to repay your debt, but choose not to, the law will catch up with you. Your wages would be garnished, and you probably would not be able to file for bankruptcy. So, it is important to proceed with these options only if you really are drowning in debt, and you don’t see any way of paying back this debt.
Before making this decision, it makes a lot of sense to sit down with a non-profit consumer credit counselor to review your options. You can find a counselor near you.
Be Aware This May Not Apply To Your Debt
All of the recommendations in this section apply to unsecured (credit card, personal loan) debt. None of this applies to student loans, unpaid taxes, and unpaid child support and alimony. All of that debt is treated differently under the law. (Put simply: you just can’t walk away from that debt).
It also does not apply to any secured debt (mortgages, auto loans, etc.) because failure to repay can result in foreclosure or repossession. In other words, the creditor can take your home or your car if you stop paying.
When you are drowning in debt, it is just as important to be aware of the things you shouldn’t do. Make sure you avoid:
- Credit repair companies, who make bold promises and charge hefty fees. If you hear things like “we can remove bankruptcies, judgments, liens and bad loans from your credit file forever!” – beware. No one can remove a legitimate claim from a credit report, unless they resort to fraud, which is punishable in a court of law. In my career, I have punished such cases. And, if there is incorrect information, you can apply (online, in a matter of minutes, for free) to have that incorrect information removed. You do not need to pay a company to do this for you, and they will not get the promised results.
- For-profit debt settlement companies. There are a ton of companies out there who are willing to take your money and negotiate on your behalf. The scenario typically works like this: you stop making payments to your credit card companies. Instead, you put the money into an account. As you become increasingly delinquent on your payments, the settlement company will try to negotiate with the companies to get a settlement. Once a settlement is achieved, they will make a lump sum payment, taking a fee for themselves. Stopping your payments, and starting to negotiate may be a good option. But paying 20% - 40% to a debt settlement company is just a waste of money. Banks and credit card companies will have certain settlements that they are willing to grant. The more money you pay to the debt settlement company, the longer it will take (and the more money it will take) for you to meet the settlement requirements of the bank. You can always do it yourself, or with a non-profit company.
You are delinquent on your debt, but it is still with your bank (and likely less than 180 days past due)
Once you stop making on-time payments, you are considered “delinquent.” And, once you are delinquent, banks and credit card companies will make a guess. Their guess: what is the likelihood that you will pay them back. The higher the likelihood, the less likely they will be to agree to a settlement.
The longer you go without paying, the higher the probability that you will not pay back the bank. You’ll receive a greater settlement if there is a higher probability you will not pay back the bank.
Although the policy of every lender varies, it is highly unlikely (given our experience) that you will see a wonderful offer during the first 30 – 60 days of delinquency. The good deals come much later. And, the best deals come after 180 days (6 months), when the bank has written off the debt and likely sold it to another collection agency.
So, your approach should be simple: know how much you can afford. Offer that amount to the bank or credit card company as a settlement. If they refuse to accept the offer, just continue to wait. Eventually, one of the collectors will likely accept your offer – it will just take a while.
While you are waiting, make sure you know your rights. The CFPB has a good section that helps you understand your rights.
If you are unable to reach an agreement with the bank or credit card company during the 6 months while the debt is collected internally, you will likely have much better luck when the debt is with a collections agency.
Download our Debt Free Forever Guide! It’s FREE and will help get you back on track.