Take Action - How to Eliminate Debt

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Tips to start managing your debt NOW.

If you’ve experienced a financial hardship rendering your unable to send your creditors any money and cannot afford a debt management program, here are some tips that you can start doing today:

Create the right perspective.

Many people fall victim to credit card company’s buy-now pay-later approach. Credit card companies make purchasing easy, putting additives in their product that get you hooked. Americans are as addicted to credit cards as they are to smoking. One kills your physical health, the other, your financial health.

Before you know it a financial hardship occurs completely outside of your control (job loss, medical, downturn in economy, divorce, or sickness), making it impossible to continue making payments. This happens to millions of Americans each year and you’re no less a person to experience this. What you do next makes you truly unique.

The first step to recovery is to have the right outlook for debt. Create a mindset that you will do whatever it takes to get out of debt completely, and truly be debt free. Knowing that you can do it and believing in your own ability to follow proven strategies for eliminating debt will keep your head in the game. If others can do it, you can too. But it will require a commitment on your part. Quitters aren’t finishers: if you want to get out of debt completely, dedicated yourself to finishing.

Cut up the credit cards

You can’t get out of debt if you’re running up the balances. This may require a sacrifice of certain things so be sure to write down clear financial goals with your family and the reasons why you're cutting up the cards.

Create a workable budget for your family.

The current budget you’ve been on is in need of improvement or else you wouldn’t be looking for help. There are many resources online to help you with this step and simple questions you can ask yourself to identify your real needs so that you live within you means. Get the entire family involved, with each person having input. Consider selling off assets or using tax returns or any extra money to become debt free.

Become an smart debtor.

Do research. An informed person is best suited to make the right decision for their finances. There is an abundance of resources online or at your local library http://www.smartmoney.com Google “debt options”, “debt resources”, or go to http://www.ftc.gov that will give you guidance and help you set your direction.

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Realize your options

There are six paths you can take with debt and whether you know it or not you’re on one right now. Provident Financial Services provides a resource center covering these six options. Click here to see them.  Try contacting your creditors and explain your situation and request help or a deferment of payments. This has a low success rate but is worth a shot. Be sure to paint a clear picture of your financial hardship so there is no confusion that you have no money to send them and will most likely be considering bankruptcy. Be sure to expound on the misfortune of your finances so they understand your situation and will be motivated to help you.

Know what will happen if you do nothing.

If your financial hardship has rendered you unable to make any payments whatsoever, your accounts will go delinquent resulting in late payments on your credit report until the debt is paid. Normally, these late marks can be removed once you pay the debt by disputing each one with the credit bureaus (file online disputes at http://www.transunion.com http://www.equifax.com, http://www.experian.com. When the payments go 30 days past due, they will be transferred to an internal collection department within the first party creditor (the credit issuer or who loaned you the money) for collection activity. This will most likely include collection letters and phone calls. Generally, at this point the interest rate is raised sometimes to the legal limit 29%, the payment ratio is altered (meaning up to 98% of your monthly payment can now go towards interest and fees), and finance charges and penalties of all types will be assessed (late fees, over the limit fees, etc.) causing the balances to rise.
Once they fall 180 days past due one of two things will happen: they’ll be leased or sold to an independent collection agency. If they are leased, a “third party” collection agency will attempt to collect the debt. This “third part” collection agency will fall under the Federal Debt Collection Practice Act (FDCPA). This law protects consumers from harassment and can be found at http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm. If you find yourself victim of a harassing collector, simply provide them with a Cease and Desist Letter signed by each account holder (click here to view example letter). If they continue breaking the law, file a formal complaint with the Federal Trade Commission (FTC), Better Business Bureau (BBB), and your state attorney. You may be eligible for financial compensation or a reduction in the debt, if not completely forgiven all together (depending on the degree of harassment and infraction).

If the account is sold to a collection agency, that collection agency then becomes “first party”, meaning they now own the debt. The FDCPA does not apply to the first party creditor. However, if they are harassing you, contact and file a formal complaint with your state Federal Reserve Bank, your state attorney, and the BBB.

Know that financial droughts are seasonal.

If you’ve lost your job, you’ll get another. Humans have a remarkable ability to rebound, so keep a good attitude. Once you get back on your feet and have income again there are things you can do. Collection agencies buy 180 day old accounts for pennies on the dollar, sometimes as low as 5 and 10 cents on the dollar (remember, the original credit issuer hasn’t received any payments in 180 days and sells the account to get something rather than the nothing they’ve been getting). This provides you a significantly improved position: attempt to negotiate a reduction of the balances or work out payment terms with the collection agency at a reduced amount. Remember, if they paid 20% for your debt and you settle with them at 60% they make 200% return on their investment, and you save 40%.

Be sure to get everything in writing. If you work out terms of any kind with them, get it in writing. Never take their “word” for it. Collectors and collection managers will lie to you right over the phone as easily as saying hello. Don’t send them any money until you get it in writing and have that document reviewed by someone experienced in contracts, preferably an attorney.

Know your risks.

There are not many things your creditors can do other than standard collection efforts to recover a debt. There is no debtor’s prison in America. A creditor can proceed legally if they deem necessary and financially beneficial for them to do so. Each state has different laws regarding the reach of creditors in a law suit (including leans and wage garnishments). Normally, unless you have a lot of assets they will not pursue you in court. Check with your home state for garnishment laws.

If you receive a summons in the mail don’t panic. There’s a good reason you can’t pay the debt and that reason needs to be communicated in the response and to the judge in court. First, request the debt be validated (meaning a copy of the signed contract provided to you). If they cannot validate the debt normally they cannot proceed any further. Provide as much documentation as possible to support your claims. You can never have too much supporting evidence for your side of the story. If you are sincere and honest and have kept decent records validating your hardship the judge will normally side with you and not the big credit card company. The easiest way to avoid a lawsuit is to communicate with your creditors.

Know the credit effects.

If your financial hardship has rendered you unable to make any payments whatsoever, your accounts will go delinquent resulting in late payments on your credit report until the debt is paid. Normally, these late marks can be removed once you pay the debt by disputing each one with each credit bureau (file online disputes at http://www.equifax.com, http://www.transunion.com, http://www.experian.com.

Bankruptcy is capitol punishment for your credit report for 7 to 10 years. Consumer Credit Counseling (CCC) has similar structure but is not court approved like a bankruptcy. Likewise, it too has a very negative effect on a credit score. Enrollment, like bankruptcy, will appear on your credit report telling any lender that you were unable to pay to your bills and needed help. Debt Settlement or Debt Negotiation will negatively affect a credit score. Each account enrolled in a Debt Settlement program will be reported to the bureaus as late until it is settled and paid. The faster you can save your money (tax returns, loans from family or friends), the faster you’ll get out of debt with the fewest number of late marks on your credit report. Once each debt is paid it will be reported to the credit bureaus a zero balance. Because the debtor pays the debt themselves, there is never any notation that they have been enrolled in a Debt Settlement program. Late marks can normally be removed online at the credit bureaus website with dispute letters. Ultimately, the Debt to Income (DTI) ratio, a large part of the overall credit score, will be improved due to debt being paid off and zero balances. This will have a positive effect on the credit score.

Know the “Costly Credit Card Tricks”.

According to Travis Plunkett, legislative director for the Consumer Federation of America, credit card companies are tacking on new fees and more expensive fees. Income from fees has become much more important for profitability. http://www.smartmoney.com/nowwhat/index.cfm?story=credittricks
Once you get out of debt, don’t fall for their tricks again.

Getting out of debt requires time, discipline, and a commitment to doing so. Remember, you didn’t get in debt overnight and you’re not going to get out overnight either. If you are behind on your bills or about to fall behind, these are some steps you can take that will work to slow down the financial bleeding. These suggestions are steps you can take even if you have no income and cannot make any payments for your debts and cannot afford a debt management program.

Getting out of debt is an accomplishment in itself. Make a commitment to use credit more wisely in the future.

Howard Strong, author of "What Every Credit Card User Needs to Know

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