Where to turn for help with overwhelming debt

Credit Wise
Credit Wise columnist Kevin Weeks
Kevin Weeks is the former president of the Financial Counseling Association of America. Weeks holds a bachelor of science degree in business administration, management information systems from Salem State University.

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Question Dear Credit Wise,
In the past three years, I have lost three jobs due to layoffs. Financially, it's wrecked me. I have been bending over backward to keep my payments current and have not missed a payment on any of my credit cards, car payments, personal loans or student loans. However, due to the short cycle of my layoffs, I unfortunately racked up my credit card balances after consolidating my debt, twice. My payments have reached the tipping point of me not being able to live on the dismal amount that's left over after I pay my bills.

Over 40 percent of my take-home paycheck is going to credit card debt (and that's not even factoring my car, student debt or rent/living expenses). I don't own a home, I don't have a savings, nor do I have an amazing trust fund/inheritance that I'm expecting in my lifetime. I've been researching my options, but I feel like none of them really fit my situation. I'm not late on my payments; I don't have a substantial savings that would allow me the power to attempt to negotiate a lump sum payoff to my creditors. I've considered bankruptcy, but it seems like that's a bad idea. I've looked into debt settlement companies, but that seems to be an even dumber/worse option than bankruptcy.

I'm not quite sure what to consider and who to talk to that would help point me in the right direction without any personal gain from the matter themselves. Any insight, advice or ideas that you may have I would greatly appreciate. Thanks in advance -- Joan


Dear Joan,
I have to say that you have done a great job keeping up with everything during a very tumultuous time. Three layoffs in three years would make it hard for just about anyone. I assure you that there are not many people out there who have a trust fund or inheritance that would solve all of their financial problems in one fell swoop. This means it is up to you to find a way out.

While both debt settlement and bankruptcy are options for handling your debt, I agree that neither is a great idea. Debt settlement can only work if you have a lump sum to offer, which you say you don't have. Debt settlement companies that rely on you for payments are not doing you any favors, because they are using your payments to build up that lump sum and not paying your creditors in the meantime. This is devastating to your credit score. In addition, there are tax consequences with settlements, because you are responsible for the taxes on any forgiven amount. Bankruptcy exists in this country for good reason, but should only be considered as a last resort. That, too, will play havoc with your credit score.

Since you have not been late on your payments, chances are your creditors will not be all that willing to work with you. You can certainly give them a call and see what they have to say, but my guess is that they will point you toward credit counseling. This is also what I would suggest.

Nonprofit credit counseling agencies have trained personnel that will take a look at your entire financial picture and work with you to build a plan based on your unique situation.

The counselor will help you build a budget and set some realistic goals. One of those goals will be to establish an emergency savings account. I know that right now you don't believe you can save any money, but a good counselor will work with you to find places in your budget to save and use those savings to build your fund.

An emergency fund will be crucial to your success, because the other thing that will likely happen is that the agency will want to enroll you in a debt management plan. On a DMP, all of your unsecured debt (credit cards and personal loans) will be consolidated into one monthly payment. The agency will take your payment and disburse it to each of your creditors on a regular monthly basis. However, one thing you need to know is that the creditors will likely close your accounts to future purchases once you enter into a DMP. That means you won't have those cards to fall back on and will need an emergency fund in the event of an unexpected expense.

I know you are concerned about others benefiting from your misfortune. Your initial call to a counselor won't cost you anything, but if you decide to enroll on a DMP you will pay fees to the agency. However, the fees are very reasonable and you should see lower interest rates and maybe even lower monthly payments, which will more than cover your fees. Best of all, you will be out from under your unsecured debt in five years or less.

You can find trustworthy agencies and helpful counselors to work with through either the Financial Counseling Association of America or the National Foundation for Credit Counseling.

Be wise with your credit!    

See related: Fixing damaged credit? First, create a budget, How debt management plans affect your credit, Choosing a debt management program

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Updated: 11-25-2017