In over your head with debt? Here’s how to fix it

Money, Business

It’s easy to get into debt. You lost your job and can’t pay your bills. You charged too much to take the family to Disneyworld. Your home business forgot to cross a few “t’s” or dot a few “i’s.” Or you resorted to using credit cards to cover large medical, college, or divorce expenses.

Many overwhelmed borrowers turn to debt relief services, which promise to help you deal with your massive pile of bills. And while some borrowers have been helped, others have found themselves even further in the hole, begging the question: Do debt relief programs do more harm than good?

“In general, borrowers should be really careful with debt relief programs,” cautions Andy Josuweit, CEO of Student Loan Hero, which offers innovative solutions for managing student debt. “If they choose the wrong one, they could end up in a lot of trouble.”

Credit Counseling

Most credit counseling organizations are nonprofits that provide services online, via the phone, or in person through local offices. They offer advice for managing debts and help you develop a personalized plan to address your money problems. When going it alone seems impossible, this can be a good place to start.

Some credit counselors are free, others charge high fees, and still others are not legitimate at all. According to the Federal Trade Commission, “a reputable credit counseling agency should send you free information about the services it provides without requiring you to provide any details about your situation. If a firm doesn’t do that, consider it a red flag and go elsewhere for help.”

The U.S. Trustee Program, a federal entity that oversees the administration of bankruptcy cases, maintains a list of approved credit counseling agencies. “Borrowers should look for reputable companies by checking with their state attorney general and local consumer protection agency,” adds Josuweit.

Debt Management Plans

In some cases, credit counselors recommend debt management plans. Each month, you deposit money into an account managed by the credit counseling organization. The deposits are used to pay your unsecured debts, which include credit cards, student loans, and medical bills, per payment schedules developed between you and your creditors. Sometimes, creditors will even agree to lower interest rates or waive fees.

Ultimately, it’s up to you to know understand all of the terms and determine whether or not your creditors are in agreement.

Debt Settlement Programs

Debt settlement programs involve negotiating with your creditors to allow you to settle your debt for a lump sum that is less than the full amount owed. You make monthly payments to the debt settlement company, which in turn negotiates with creditors to lower your balances.

Unfortunately, many consumers find it difficult to make these monthly payments long enough to get debts paid off. And your creditors may not agree to the settlement terms, which means you’re paying into a plan that will not cover your obligations.

Debt settlement agencies are typically for-profit. And while these companies are barred from charging you before they settle your debts or enter a debt management plan, according to Josuweit, some may still attempt to collect their fees from you before paying down your debt.

Too good to be true?

Maxed-out credit cards hurt your credit score, but mismanaged debt relief programs cause damage, too. If you’re sending payments to a debt settlement program instead of directly to your creditors, your existing debts may continue to accrue late fees and other penalties. And you can be sued for repayment, which could result in having your wages garnished or a lien put on your home.

The area of debt management and elimination, unfortunately, is a breeding ground for scams. “Companies may promise to make your debt go away when in reality they simply can’t guarantee this,” explains Josuweit.

Take student loan debt, for example. “There really isn’t a whole lot that debt relief companies can do that a borrower can’t do himself,” he says. “We’ve seen companies simply charge borrowers to enroll in federal repayment programs, like income-driven repayment options, that borrowers could otherwise enroll in themselves for free.”

You actually can do it on your own

Jackie Beck is an expert on debt, having once pulled herself out of a hole to the tune of over $147,000. “I knew to steer clear of programs that promised to magically make debts go away without consequences, that offered a one-size-fits-all plan, that charged high fees, or that had many complaints filed against them.”

Ultimately, Beck opted to use Consumer Credit Counseling Services (CCCS), paying them a monthly fee to talk to the credit card companies to develop a plan. CCCS helped Beck eliminate $17,000 in credit card debt. “When it came to paying of the remaining $130,000,” says Beck, “we focused on only spending money we already had, building a small emergency fund, and then tackling one debt at a time.”

Beck is now a debt freedom teacher, helping tens of thousands of borrowers get themselves out of debt with something she calls the debt snowball method. In a nutshell, you pay off your debts from lowest to highest balance, regardless of interest rate. This lets you knock off one of your creditors quickly, giving you a psychological boost.

Another, more conventional approach, is to pay of the balances that charge the highest interest rate first. This method, often referred to as the avalanche approach, is particularly useful when you have several debts that are about equal in size but have widely varying interest rates.

Whether you opt for the snowball method or the avalanche approach, the important thing is to adopt a strategy and stick with it. You dug this hole, and with perseverance, you can dig your way out of it.