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New Loan is Not the Answer to Debt Problems

Erica Sandberg

March 19, 2013

QDear Erica,

I am overburdened with debt, from credit cards, to car loans, to taxes. My income is such that I can't afford it all at this time and am falling behind. I would like to get a new loan to consolidate all of my debts. Who do I get one from, and how can I make myself more attractive in their eyes? I already tried my credit union where I got my car loan, but they said no. I don't know where to go from here. — Wendy

AHi Wendy,

I can tell you where not to go: to another financial institution to borrow even more money. You're already in the hole, Wendy. Any entity that is willing to lend you a penny more will only do so at a higher rate of interest that you have at this point, and with even worse terms.Ask Erica

Instead, this is what I want you to do:

  1. Cover your essentials. There are certain things that everyone must have to survive, and they include shelter, food and transportation. Before sending your creditors anything, draw up a budget to make sure those necessities are covered first. Then subtract the total of those expenses from your income and see how much you have left for debt.
  2. List your debts by consequence. Not all unpaid obligations have the same repercussions. Some are far worse than others. Write down each debt type and then know what can happen to you if you don't pay on time or at all. For example, delinquent credit card debt will hurt your credit, but the company will have to sue you and win the case before it is able to take your things or garnish your wages. That can take half a year or more. And if you have nothing to take (now and in the future), you're safe. However, if you don't pay your car note, you risk losing your vehicle to repossession within just a month or two. Tax debt is problematic as well because the IRS doesn't have to sue you to garnish your wages.
  3. Deal with your debts accordingly. Once you're clear on worst-case scenarios, you can begin to organize your creditors by importance. Must have a car? Make sure you put most of your surplus funds go toward that payment. And if that means you can't pay your credit card bills right now, contact your bank and ask if you can get a temporary reprieve from payments. The IRS also has a hardship program as well as an installment plan. Call to find out what you can do to stave off the worst.

If you need help designing a spending plan and arranging your obligations into proper order, visit a credit counseling organization — preferably one affiliated with the National Foundation for Credit Counseling (nfcc.org) or the Association of Independent Consumer Credit Counseling Agencies (aiccca.org). They'll offer insight for free.

As you're budgeting and communicating with creditors, take stock of what you own. Maybe you have some things you can sell and apply the proceeds toward your debts. Perhaps a better-paying job is an option — anything to bring more cash to the table.

Another option might be bankruptcy. If you're eligible, a Chapter 7 bankruptcy would allow you to discharge the unsecured debts (for example, credit card debt), leaving more of your money left over for the ones you're stuck with. You may have to surrender some property, though. A Chapter 13 bankruptcy could also work. If you choose that option, you'd be required to bundle everything into one payment. It's not a loan, but a court-supervised repayment plan. As long as you earn enough to handle the payment (plus trustee fees) you'd be able to keep all of your possessions while getting your finances back on track.

A good credit counselor should be able to help you determine the best course of action you should take.

Good luck!

Got a question for Erica? Send her an email.