I am an alcoholic and in Alcoholics Anonymous. As of September 13, I have been clean and sober. While I was in the throes of my addiction, I ran up a significant about of debts on my credit cards and to someone close to me. I need to clean up the mess my life had become. That includes my debts, of course. Can you help me devise a plan? To my knowledge, I owe three collection agencies totaling almost $20,000 (my sponsor helped me get my credit reports). My sister lent me $2,000. She told me she does not expect it back, but I have every intention to pay her back anyway and re-earning her trust. What can I do? – Marvin
Thank you so much for reaching out and wanting to make financial amends. Such a desire is not only important to people in substance abuse programs, but for anyone who has borrowed money.
You've already taken the first step in contending with your creditors, and that's coming to terms with who they are and how much you owe each. Fantastic. Now here are the next steps.
1. Develop a budget. How much do you have coming in and going out? Find out. Write down all of your essential and non-essential expenses, then subtract the total from your net monthly income. Then review your budget again. Is there anything you can shave off so you maximize what's left over?
Don't put too much pressure on yourself. You want to be conservative and reasonable, and overdoing it can set you up for failure. Whatever is left over after necessary bills are paid, though, is what you'll use to send those you owe on a fixed monthly basis.
2. List the creditors in order of priority. What is more important, your personal relationship or the collection agencies? I say the former. The latter is already a mess, so having them wait a little while longer won't be so bad, unless of course your creditors have initiated court proceedings to sue you for your past debts. In that case, I would put your creditors first.
I want you to pay your sister in full, so use the balance that's remaining from your budget to send her monthly payments. To regain her trust, send her the same amount on the same day of every month. If you can manage $500 each time, that debt will be gone quickly.
While paying your sister won't erase past damage, at least you know you did the right thing, and you can move forward. Maybe one day you can even lend her money if she ever needs it.
3. Deal with the collectors. You don't say how old the debts are, but if they are past the statute of limitations for being sued in your state, there isn't much the collectors can do. Honestly, if you don't want to pay them at all you don't have to, because they can't take you to court to force the issue. If paying what you owe would help you in your recovery, though, by all means, pay your debts. Just remember — if you agree to pay an old debt, you'll be re-starting the statute-of-limitations clock, so to speak. It's called re-aging a debt, and it means a debt collector can again sue you.
If your debts haven't passed your state's statute of limitations and you still can be sued, be very careful. You owe quite a lot of money, and if your creditors believe that you could pay it all at once and are playing coy, they may choose to take you to court.
So be very specific about what you can and will do to pay them back. If you don't have the cash up-front, you may want to start sending them installment payments until the balance is eradicated. In that case, be perfectly clear that you are doing the very best you can and can do no more. You may also save up your cash until you've amassed the total of your liabilities, then send it all over at once. Whatever you decide, get the agreement in writing before you start making any payments.
Keep in mind that debt settlements are also possible. Settling a debt lets you pay less than the total amount owed and you will be absolved of the remainder — although if that remainder is more than $600, you'll have to pay income taxes on it.
But if your goal is to pay in full, so be it. It will also look better on your credit report if you do pay the entire sum.
I wish you the very best of luck, Marvin.
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