Money Management

Dealing with a Debt Crisis

Have you recently lost a job?  Are unexpected medical expenses piling up?  Does your house or car need a cash infusion?  There are plenty of ways for an already tight debt load to become a debt crisis.  Debt is a reality for most Americans.  More and more, so are debt crises.  How should consumers deal with debt when they are confronted by a crisis, temporary or permanent, that drastically changes their financial situation?

1. Acknowledge the debt

There is no good reason to avoid legitimate debt obligations.  Regardless of current financial circumstances, debtors should acknowledge any and all debts owed as well as the obligation to repay those debts.

2. Stay calm

Accumulating too much debt is not difficult.  However, getting rid of debt is not a quick and easy process.  Handling debt crises requires patience and clear thinking. 

• Accurately assess the situation
• Review and understand credit obligations
• Organize records
• Maintain the “status quo”

3. Investigate options

Specific circumstances will determine the variety of options that may be available for dealing with a specific crisis.  Spend some time investigating possibilities and learning about specific financial solutions. 

• Budgeting
• “Modified Payment Plan” - This is a change in the current payment terms of a loan agreement.  It is generally initiated by the debtor.
• Debt settlement vs. debt management vs. debt consolidation
• Credit counseling - Professional counseling provided by organizations that help consumers find ways to repay their debt - through careful budgeting and management of money.
• Bankruptcy

4. Take some action

More than likely, the circumstances that cause the “debt crisis” are beyond your control.  There are some things you can do, though, to try to limit the damage of the crisis.

• Contact creditors before debts go to collections. Creditors will be more likely to assist if you let them know of your crisis before getting behind on payments.
• Prioritize your spending appropriately.  Make sure that essentials are covered and that all the money left is put toward surviving the crisis.  Cut everything extraneous from your budget.
• Create additional income.  Work overtime.  Get a 2nd job.  Have a yard sale.  List things on eBay.   
• Act in good faith. 

5. Definite “Debt Dont’s”

• Don’t panic
• Don’t fall for gimmicks
• Don’t pay someone to do something you can do yourself
• Don’t pay anything unless you have an agreement in writing
• Don’t give up control of any of your bank accounts.  Don’t share control of your accounts either.
• Don’t neglect the basics (food, shelter, clothing, healthcare, transporatation)
• Don’t do business with any company that you have questions about

SOURCES:

Federal Trade Commission – www.ftc.gov
Credit Information Center – www.creditinfocenter.com
BankRate – www.bankrate.com