Paying down debt on fixed income: Tough, but possible

A realistic budget is 1st step when debt is high and funds are low

By Erica Sandberg

Opening Credits

Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com. Ask a question. 'Opening Credits' stories

Dear Opening Credits,
How do I live on a fixed income of $879 (disability) and pay off my credit card debt of about $10,000? Credit card No. 1 is open and has a $7,000 balance, while the second one is closed but has a balance of $2,500. Most of the credit card debt comes from finance charges. Rent is $232, cable package is $100, locked in until February 2011. Electricity is roughly $100 a month. For groceries, I get away with going to my parents, but going to them for credit card help is not an option. I'm currently giving roughly $500 a month to credit card No. 1 to give them something. Then, the rest goes to rent, leaving no money toward other expenses. What am I doing wrong? -- Rita

Dear Rita,
I have two versions of an answer to your question. One is based on your situation being permanent, and the other is if your circumstances are temporary. You'll soon see why they differ.

Permanent: If your disability prevents you from ever returning to the workforce and you don't foresee a time when you'll be bringing in more than $879, then repaying your debt within a reasonable amount of time is unlikely. No matter where you live, that is a small sum and will be barely enough to cover essential living expenses and save even a speck for the occasional emergency.

Here's a quick budget:

As you can see, I created a grocery category. Though your parents have generously opened their pantry, you should plan for paying for at least some food. I also removed the cable package, since you should cancel that once your contract is up in February. Savings are important, too, because you may not always enjoy such reasonable rent, and you don't want to be caught with empty pockets when unexpected costs arise. (And they will, more often than not.) This plan doesn't leave anything for your debt, does it? That's because you must prioritize, and basic living expenses come first.

Still, I'm an unabashed advocate of personal responsibility, so I certainly wouldn't be opposed to you sending the creditors a small portion of what you allot for savings. Making good faith payments can provide the relief that comes with doing your very best. Write to those you owe, explain your situation in detail and include a synopsis of your finances. Then, work it out together.

Communicating with your creditors is critical. If it's true that you have no assets now and chances of you ever having them in the future are slim, make that known, as this information can offset legal action. Even if you were sued, however, disability benefits cannot be garnished, and if you don't own any property that they can take, losing a lawsuit would have little impact. Then again, if you're in line for a big inheritance, you win the lottery or you return to work after all, a judgment creditor may be able to jump in. For this reason, bankruptcy is another option, as it will allow you to just get it all over with.

Temporary: Of course, the preferred scenario is that you're back in the saddle within six months to a year. If this is likely, contact your creditors and see if you can arrange a hardship plan. Tell them what you're going through and that you expect to be back at work and making regular payments again by a specific date. You may either send no or low payments in the meantime, with hopes of staving off a lawsuit. Just make sure to promise only what you can afford, and stick to it.

Whether your disability is long- or short-term, I also encourage you to pay down what you owe by liquidating unnecessary property that you bought with the cards. Ten thousand dollars is substantial, and you may have something to show for it. This may sound harsh, but you did borrow the money, get the stuff and promise to repay.

Finally, look into social service programs for which you are eligible. There is no shame in getting help to survive and get back on your feet. I wish you good luck and good health, Rita.

See related: State-by-state listing of bankruptcy filings, Hardship programs: An option for desperate debtors, Your first budget in three easy steps

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: October 13, 2010

	Three most recent Opening Credits stories: 2 ways to start building a credit history – You want your first credit card, but no bank will give you one without an established credit history. How do you go about proving you're a good credit risk? ... When it's OK to get a second credit card – You've been faithful to paying on time with your first credit card, but the limit is low. How do you know when it's a good time to get a second credit card? ... Know where you stand before you apply for new credit – To know what kind of credit card you can qualify for, you first need to know your credit score and pull your credit reports ...

	CreditCards.com's newsletter Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!