What to do when debt triples your income

Don't be ashamed to seek help, especially if a long disability is to blame

By Todd Ossenfort

The Credit Guy

The Credit Guy, Todd Ossenfort, is a credit expert and answers readers' questions about credit, counseling and debt issues. Ask a question 'The Credit Guy' archives

Dear Credit Guy,
Help me, please! I am 35 years old and have accumulated $63,000 in credit card debt and $38,000 in student loans. I currently have an income of $31,000. I find that I am living paycheck to paycheck, and at times short on income for expenses. I am at my wit's end and only see bankruptcy in my future (for the credit card debt). I know that I made some unwise financial decisions over the years; however, for three years I was on long-term disability, which resulted in my using credit cards to live. I just want out of this depressing situation. I want to pay off my debt, but there are times when I have to choose between a utility bill and a credit card payment. What do you recommend? -- Rachel

Dear Rachel,
I can understand why you describe your situation as depressing. Carrying credit card debt in amounts greater than twice your salary in addition to student loan debt equivalent to your salary is enough to make anyone depressed.

I recommend that you contact a qualified consumer credit counseling agency to determine if you have the ability to repay your debts or if filing for bankruptcy would be in your best interest. Card issuers are [%Link?type=article&id=2459&text="working with consumers more"%] than they ever have in the past, so it could be that you would qualify for a hardship program with your lenders that would allow you to pay back your debt. You can find a reputable, nonprofit credit counseling agency near you at the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.

If after a thorough review of your finances, it is determined that bankruptcy is the best option, don't feel bad about yourself. As you said, you were on disability for three years and had no other way to pay your obligations. The bankruptcy laws in this country are there for a reason. Without the fresh start that bankruptcy provides to those who need it, many people would be in debt their entire lives. The most important thing to keep in mind with bankruptcy is that you want to make sure you have researched all other possible options before choosing bankruptcy. Your credit counselor will help you do just that.

A certificate of completion from a credit counseling session is required now to file bankruptcy. Therefore, should you decide that the best solution for you is bankruptcy, your credit counselor can assist you with the counseling required to file.

The essential thing to remember with a bankruptcy or a hardship program with your creditors is to learn from the mistakes that landed you in so much debt and not repeat them. Rather than relying on credit in times of emergency for unexpected expenses or a disruption in income, a savings account of three to six months of living expenses is critical. Savings can help you weather a financial storm without adding to your debt load.

Living within your means is the other key ingredient to financial well-being. Once you have the debt paid off, either through a repayment plan or through bankruptcy, be sure to keep your expenses less than your salary. Sounds simple, but you'd be amazed how many people don't follow this sound financial rule.

Take care of your credit!

See related: Card issuers don't make hardship programs easy, After creating a debt management plan, stick to it, When medical problems hit, bankruptcy can make sense

Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.

The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to The Credit Guy.

Published: October 19, 2009

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