5 steps to tackling debt while unemployed

Opening Credits columnist Eric Sandberg
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.

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Question for the CreditCards.com expert

Dear Opening Credits,
I have a really bad problem: I am 23, I owe $2,000 and don't have a job because of the economy. I haven't worked in almost a year, and my unemployment rights are over. I live with my grandparents to survive, but I have been getting calls from people who want to hurt me and get their money back, and the calls are bothering them, too. I went to credit counseling, and she said they couldn't help me because I have no money. What kind of help is that? What should I do now? I am desperate. -- Christine

Answer for the CreditCards.com expert

Dear Christine,
As a former credit counselor, I distinctly remember clients coming in with similar stories to yours. The first thing I would say is, "We are going to take a look at your overall financial picture together, and then I'll make some suggestions based on your goals and economic ability." After that, I'd review everything, from income and cash flow to assets and debt and construct an action plan. Does that sound familiar? It should -- part of the accreditation process is for all such agencies to have a similar approach.

Of course, some counselors are more thorough than others, but I'm sure you were provided with at least a detailed budget, clarification of your situation and a few recommendations on what to do with your debt for the short and long term. So you did get help -- it just wasn't what you were hoping for. While you may have come in for a debt management plan, your counselor did not present it as an option because you have no current source of income. That makes sense because they can't promise a creditor that you have the means to pay when you don't.

Now I don't know what your counselor proposed, but here is what I think would be an excellent approach to turning your negative situation into a positive one:

  1. Focus your attention on getting a job. There is very little you can do without an income stream. You've simply got to start earning some money. Today's economy can make it tough to get a well-paying job in some sectors and parts of the country, but that doesn't mean you should lay down and give up. There is work to be had! Set up a lemonade stand, deliver newspapers, walk dogs, flip burgers -- you are young and (I hope) healthy. Don't wait around for the perfect position; do anything legal that pays.
  2. Contact your creditors. Because of the frequent demanding calls, I assume your accounts are now in collections. The collectors bought the debt and now want to recoup. As long as they don't harass you, they have every right to call. They can't, however, talk to anyone else about your arrearage so if it happens again, let them know you are aware of your rights under the Fair Debt Collection Practices Act.
  3. Pay the accounts down. After you've secured cash flow and saved a bit of money, write the creditor a letter. Say you intend to pay your debt in full, but do not have the total balance at this time. Ask that they accept payments in four equal installments of $500, starting immediately and include a check. Why that sum? Because if you were to work a minimum wage job full time (the federal minimum is $7.25 per hour) you'd bring in about $900 per month. That would be enough to send $500 and still have a few hundred dollars left over to pay your grandparents room and board and cover your most basic expenses.
  4. Monitor and build credit. Once the debt is paid in full, make sure it's notated as such on all three of your consumer credit reports. Though the fact that it was in collections will remain on the report for up to seven years from the date of last payment, the older it gets, the less important it will become. After a year or so, you may want to get a secured credit card with a small credit line to start again. The sooner you prove that you can borrow and repay money responsibly, the better your credit report and scores will look.
  5. Prepare for the future. There is no reason to hang around low-level, uninteresting positions forever. While you're toiling away in an "OK-for-now job," think about what you really want to do and then take the steps to make it a reality. At your age, you can work hard and go to school simultaneously.

Think you can do all this, Christine? Sure you can! With no debt, great credit, hard work and a positive attitude, it won't be long before you're packing your bags and moving into your own place. Just make sure you thank your grandparents profusely. Taking you in when you needed assistance was a good deed you need to repay in many ways and for a long time.

See related: 8 steps to picking a credit counselor, 11 tips for dealing with debt collectors, collection agencies, Everything you need to know about consumer credit reports

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Updated: 01-19-2018