Editorial Policy

Deep in card debt? 5 ways to regain financial control

Jennifer Nelson

July 14, 2016

Credit cards can be a good thing — until you rack up too many charges and find yourself sinking in a quicksand of debt.

Charging more than you can comfortably pay off every month can get you in trouble fast. Card balances can grow incrementally over time, or all at once in a crisis.

“The top three causes of serious debt hardship are unexpected medical expenses, job loss and divorce,” says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.

Credit experts and debt counselors say many people don’t realize they’re over their heads in debt until it’s at a crisis point. Signs you may be overextended:

1. You’re behind on monthly payments.
2. You’re getting calls from creditors.
3. You’re juggling card balances, robbing Peter to pay Paul.
4. You’re using credit to pay for necessities such as housing and food.

With debt, “how much is too much will vary from person to person and depend on their income, living expenses and other forms of debt,” says Jeremy Heck a consumer protection and debt law attorney in Columbus, Ohio. Heck also is an adjunct professor at Capital University Law School.

Not-so-deep debt
If you’re facing a mounting pile of bills, these three self-help tactics may help you to pay off your debt and get your finances back in order: Freeze spending on all cards, use cash and purchase only necessities, and choose either the avalanche or snowball method of debt repayment.

Stuck-in-the-muck debt
If you can’t make at least the minimum payments, you need help. Going more than 60 days without making a credit card payment will trigger a penalty rate that applies to the entire balance, says Gallegos. Late fees balloon the balance. Plus, you’re damaging your credit score.

“The top three causes of serious debt hardship are unexpected medical expenses, job loss and divorce.”
— Kevin Gallegos,
Freedom Financial Network

Here are five ways to pull yourself out of deep debt and regain financial control:

1. DIY debt payoff plan
If you have only a couple of cards, contact your creditors and ask about their in-house hardship debt management program. Many offer help to cardholders dealing with a financial problem such as a layoff. You’ll have to prove you’re having trouble paying and apply for the program. If you’re approved, your creditors  can offer to reduce your interest rate and monthly payment for a set period of time, such as 12 months, or until the balance is paid.

If you have several cards — the average consumer credit counseling client has seven credit cards — you’ll have to ask each creditor individually about an in-house plan. If you qualify, keep up your end of the deal and make timely payments on all those cards.

2. A structured debt management plan
Many people who “have snowballed debt, using their cards as an extension of their income often after a financial hardship” turn to the Consumer Credit Counseling Services to craft a debt management plan, says Thomas Nitzsche of ClearPoint Credit Counseling Solutions.

A counselor takes a financial snapshot of your income, expenses and all your obligations and then approaches your creditors with a repayment plan. The credit counselor helps tailor a debt management plan with a reduced interest rate to erase your debts over a period of years.

“On average, the reduction in interest is usually about half, and the reduction in total monthly payments is about 20 percent,” says Nitzsche.

For some people, that interest rate break is enough to get them back on track paying down debt. With a DMP, the credit card accounts are closed and collection calls are stopped. Instead of several payments to creditors, one payment is made to the agency, which pays the creditors.

DMP administration fee varies by state, with a maximum monthly cost of $50. The typical debt management plan lasts 45 months, and pays back $25,000 worth of debt spread over seven creditors, Nitzsche says.

3. Debt consolidation loan
If you have many accounts with high interest rates, consolidating all of them with a debt consolidation loan may help. “This simply means combining debts to have one interest rate and one payment to focus your efforts,” says Gallegos.

“How much [debt] is too much will vary from person to person and depend on their income, living expenses and other forms of debt.”
— Jeremy Heck,
a consumer protection
and debt law attorney

This loan can take a variety of forms. Some people may opt to transfer balances to a new credit card with a low interest rate. Some balance transfer cards offer a 0 percent interest rate for a year or more, which can provide enough runway to pay off a large transferred balance before the regular interest rate kicks in. These cards carry balance transfer fees usually ranging from 3 to 5 percent of the amount transferred to the new card.

Other loan options? Borrow from a friend, family member, bank or a reputable online lender (SoFi, LendingTree, Lending Club, for example), or explore taking out a home equity loan  to pay off credit card debt.

Note, though, that some consolidation loan services have high fees, and loans secured by personal property, such as your house or vehicle mean that if you default, you may lose your wheels or home. A personal loan from a family member or friend has costs, too. You may not be charged interest, but if you default on the loan, you jeopardize your relationship.

Also note: A balance transfer card or debt consolidation loan may not be an option if your credit scores are in the basement. Nitzsche says the average DMP client has a credit score around 580 and wouldn’t qualify for a consolidation loan or a new 0 interest credit card.

4. DIY debt negotiation/settlement
If you’re so deep in debt you’re tempted to call one of those companies that promise to settle your debt for pennies on the dollar, a do-it-yourself debt settlement likely may be a better option.

With a DIY debt settlement, you’re not paying someone else to settle your affairs, and you’re in control of the whole process. Many people, though, are reluctant to take on their own debt settlement because they’d rather not deal with banks, other creditors and collection agencies, experts say.

And debt settlement requires persistence, a lot of hard work and regular contact with debt collectors for months or years.

To get started, financial advisers and debt counselors suggest that you get expert advice, plan your timeline, find additional income to pay, call your debtors and be sure to get any agreements with creditors or collection agencies in writing.

Once you settle, you can expect to receive a 1099-C at the end of the year from the IRS for the amount of debt forgiven.

5. Bankruptcy
If your credit card debt has grown too large and you can’t afford a debt management plan or debt settlement, you may want to consider filing for bankruptcy.

In a Chapter 13 bankruptcy, an individual reorganizes or restructures debts and you pay those debts off over time. In a Chapter 7 bankruptcy, your credit card debt is discharged and your unprotected assets, such as personal property and household goods, are liquidated. A Chapter 13 bankruptcy will remain on your credit reports for seven years after you file; a Chapter 7 bankruptcy will remain there for 10 years.

No matter which method you choose to dig out of debt, it’s important to recognize when you’re in financial trouble. If you’re in debt quicksand, get help and act fast. Once accounts go to collection agencies and your credit scores have tanked, you have fewer options to claw your way out of the debt.

SEE ALSO: GUIDE: The last debt management plan you’ll ever need

Tags: , , , , , ,