If you’re in debt up to your eyeballs with no relief in sight, what do you do? According to advice from NOLO.com, you have several options.
But whatever you do, don’t ignore your debt.
First, you need to be honest with yourself about your current situation. Read all the unopened mail, return the collection calls to find out what you owe to whom, and make a detailed list. If you know what you owe, you can make an informed decision about what your best option is at this point.
Option 1: Wait it Out
If you’re unemployed, and the prospects of getting a job in the near future are grim, you may elect to do nothing with your current debt if you don’t own any significant property. This is the old “you can’t get blood out of a turnip” approach – if you don’t have any assets to seize and no income to garnish you don’t have to do anything with your current debt. You won’t go to jail (even if you owe the IRS), and you won’t be denied basic necessities like clothing, food, unemployment benefits, disability benefits, or food stamps and DJFS assistance. New laws state that you may be evicted for nonpayment in certain instances, but a visit to DJFS (Department of Job and Family Services) can help you get emergency housing. If you have few possessions, it’s not likely that your creditors will sue for debts owed since they aren’t likely to get enough to cover their legal expenses, let alone the amount of money owed.
If you don’t have health insurance, make a visit to DJFS for an evaluation on getting Medicaid or Medicare started. If you’re opposed to public assistance, keep in mind that emergency rooms in the U.S. are required by law to provide basic medical care to all individuals, even those who cannot pay. This does not apply to private practices like your family doctor, but it means you won’t die of a burst appendix because you can’t pay for treatment.
Option 2: Tread Water
Another option is to slowly start to dig your way out of debt. You can sell a car, truck, boat, jewelry, gun collection, or other valuable asset in your possession to raise funds for your debt. If your 401K didn’t end up in the toilet, you can borrow money from your retirement fund to help pay for your debts. You’ll also need to cut back on expenses as much as possible (if you’re not doing so already). Learn to live frugally. Cutting expenses also demonstrates to your creditors that you are making a concerted effort to correct your financial situation.
Stay away from PayDay Loans, Tax Refund loans, borrowing from a finance company, pawnshops, and debt consolidation companies. If you negotiate a debt settlement with a creditor for more than $600 in principle value (unless you’re filling for bankruptcy), be aware that the IRS will expect you to report this amount as income on your next year’s tax return.
If you need help negotiating debt payments or making sense of your bills, call the United Way, your local church, or a Credit Counseling agency for help. You can also visit your local library and speak to the librarian about the resources available to help you learn about getting out of debt.
Option 3: The Big B
If you decide that your debt is overwhelming, you can opt to file for personal bankruptcy. Under the law, you have two options: Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.
Chapter 7 Bankruptcy
Under Chapter 7 Bankruptcy, your creditors are required by law to stop contacting you to attempt to collect debts. This puts an immediate stop to all harassing phone calls and mail. Simply tell the caller to contact your bankruptcy lawyer for all future correspondence. Creditors cannot garnish your wages, shut off your utilities due to nonpayment, or seize your assets without approval from the court. The courts may seize some of your personal property, like a second vehicle or second home, or that new 40” plasma TV in the living room. While in proceedings, you will not be able to pay off any debts or sell any property. After the court process is finished, your debts will be discharged, excluding certain things like student loans, child support, alimony, income tax, or fees from illegal activities.
Chapter 13 Bankruptcy
Chapter 13 Bankruptcy is less harsh than Chapter 7. This type of bankruptcy essential serves to buy you a little time in paying back your debts. Under Chapter 13, you have between three and five years to pay back your debts in regular monthly payments. This is a good option for many consumers who are falling behind in payments and have recently had a cut in wages but are still working.
While these are the three main options recommended by NOLO for those in serious debt, there are other options available (like taking out a mortgage for those with equity in their home).
If you’ve been (or are currently) in a debt-filled state of affairs before, what strategies and practical advice helped you in your situation?