How Do I Start Addressing My Debt Problem?

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How Do I Start Addressing My Debt Problem?

If you find that you have dug yourself into a hole, the first thing to do is stop digging. Limit any further losses. Beyond this, you have several options at your disposal.

Your options for reducing debt

• Set up a budget that limits your spending. If you try hard enough, you can probably find money to save, which you can put toward your debts. If debt is a recurring problem for you, a budget will become a necessity at some point.
• Take on a second job.
• Sell some possessions—jewelry, collectibles, a second car, things in your attic. Some people even resort to selling their homes and renting for a while as they regain their footing.
• Withdraw or borrow money from a retirement account. Carefully consider the effect of such a move on your retirement, however. If you do go this route, in most cases you will have to pay taxes and there may be a penalty on the amount you take out.
• Borrow from friends and family. The advantages are that you can negotiate the repayment terms and the interest rate (if any). The disadvantages are the effects it may have on your relationships.
• Borrow from a life insurance policy, if that is allowed.
• Take out a home equity loan and use the proceeds to pay higher-interest debt, or take out a reverse mortgage.

Here are some options that really don’t reduce debt at all in the long run. They are very expensive and not recommended by financial advisors:

• Payday loans. Here is how these loans work: you write a check for a certain amount (say, $500) and receive cash for a lesser amount (say, $450; the remaining $50 serves as payment for the loan’s service to you). The lender holds your check until your payday, at which point you must pay it the original amount ($500). If you can’t pay that amount, the lender tacks on another fee. The effective interest rate thus becomes exorbitant.
• Tax refund anticipation loans (RALs). These are much rarer than they used to be. How they work: A third-party company (possibly a payday lender) loans you the value of your tax refund, minus a fee. Interest is typically charged. The company then takes claim to your refund when it arrives.
• Tax refund anticipation checks (RACs). These are offered by tax preparation companies, and they provide a way for you to pay the tax preparation fee out of the refund. They are temporary accounts that wait for your IRS tax refund.

You can fall into debt for reasons beyond your immediate control. You may have lost your job or had big medical problems, for instance. And your creditors may be sympathetic to you. Also, your creditors don’t want to go through the hassle and expense of collections or repossession. They would rather keep you as a customer. If you contact your creditors and explain your situation, they may let you miss a few payments, revise your loans, or remove or reduce certain finance charges.

If you expect to be in debt for a while

But what if you expect that your problems will last a long time? In that case, foreclosure, repossession, or bankruptcy may be inevitable. But they should be a last resort. Consider a non-profit debt counseling program instead. The US Department of Justice maintains a list of approved credit counseling agencies. These counseling agencies can help you negotiate with your creditors.