3 Viable Options for Dealing with Overwhelming Debt

by Jamie Simmerman · 9 comments

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.

Basic Healthcare
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.

Get Help
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?

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{ read the comments below or add one }

  • Latoya @ Femme Frugality says:

    I think it’s important to note that by refinancing you would lose access to government based repayment plans or possible economic hardship deferment if you refinance student loans with a private lender. This could make the burden of debt worst for some.

    • David Ning says:

      Good point, but you really have to weight the options carefully because a lower interest rate could make payments MUCH easier to handle.

  • Cindy says:

    ong,…what does one do..when ones’ debt, snowballed after caregiving dying parents..then you-yourself…get sick unexpectedly and had asked your c cards for some assistance..real assistance…and ..you have dental surgery…for 12 abcess teeth..that goes great..you pay it off..! then scheduled for rest of teeth to be removed….lied to by staff…yeah..wonderful…your ignorant and go forward and surgery is not done like dentist’s plan…was worked up…..several visits back after botch job..orginal dentist..says..sorry cin—can’t help you any more…..so you quit paying that bill…and it snow balls from there…

    first bill in my entire life…that i blanantly just quit paying..though ..i am truly sick and have medical issues…and well now everyone ..collection agency or after me..for c card bals…my home was in foreclosure proceedings..twice now..and omg..im done…im trying ..don’t use credit any more..the collection agency..phriannas…sharks…they don’t b eleive any of it…and they want all the money now..i don’t have it…and frankly…i dont understand why they can’t take payments like everyone else..Is there a law…that they can’t take payments. It’s absolutely brutal…brutal days when a younger man..on the phone can all but call me a liar for not paying my bill in full…that I am trying to get out of my obligations. They have no idea. Tried to get an attorney for my own rights, my issues…you know what I hear…I’m sorry…it sounds like you have a valid case..concern…but its just not big enough for me to consider taking and representing you. Itsnt that wonderful. And the worst part. I don’t even have the final product..because once I was told that, that the dentist could no longer help me..I no longer felt welcome. Been turned down from 3 attorneys..I had a valid case, but it wasnt big enough…wow….what rights does the consumer have..against..bad work from a medical professional. If I sign a plan of treatment and its not carried out…I am still supposed to pay for it..even if it means..that I get my nourishment from ensure and soft foods. Yeah, out of all my creditors…not my actual credit cards..nope..not them…its wasnt them that so aggressively are coming after me…nope its a so called…loan company for health care…brutal….very very brutal..not bad enough…to be sick…and well…once one goes…they all start following suit..and because the economy is so bad, there are more collection agency’s popping up everywhere. Attorney/collection to do what…scare the little man…whom I know for my case…life has never been as bad..challenging as it is right now for me. I’m fighting back. Please anyone that can give me some feedback on the proper allowances..so I know. I’ve never gone thur this before. Offered to send in $50 on on account and they told me it wasn’t enough. I really don’t know what to do. Like I’m going to jail if I don’t cough it all up. Impossible

  • Really Trying says:

    I continue to hear about the “stigma” and “shame” of filing bankruptcy and I am a bit confused by it. I know several people who filed for bankruptcy and are now flourishing; couldn’t be happier. Their credit is better (after several years of discipline and making the right choices, of course), no harassing calls/mail…they literally seem to have received a “new start”. If it can work for corporations, companies and the uber rich (Donald Trump and other superstars) and no one seems to be laughing at them–then why shouldn’t it work for the average Joe/Jane?

    I am at the point (after 2 layoffs and a divorce and unable to find work to support a family of 5) considering bankruptcy. My debt is about $20K (not including student loans–which is a whole other nightmare) with no real prospects of employment any time soon. Much of my debt has been charged off and even though I’ve been working to pay them off as much as I can, it isn’t enough. At this rate I will never get out of the hole. Therefore, credit is already ruined…the charge offs will remain for at least 7 years–my credit score is like 530 (it was 725 before I lost my job and got divorced). I feel awful enough for being at this point in my life…so I should probably care less about the “stigma” of filing bankruptcy. I care more about getting out of this mess so that I can plan for a better future for my children (have started teaching them soooooo much more than I was taught). I have accepted that I may never be a homeowner, but am confident that my children will know better and be able to do better because of my mistakes.

  • Matt says:

    It is better to acknowledge your problems early on before they spiral completely out of control. When things start to get worse they typically escalate from that point on.

    • Patrick R. Carlson says:

      Matt, this is a very true point. We’ve had several clients who just watched their personal financial situation deteriorate further and further. They allowed their financial affairs to spiral completely out of control and every additional shock just furthered the descent.

      It can be hard to face a problem, but ignoring problems (especially financial ones) generally does little to further the situation. You usually get a better deal and save a lot of stress and headaches by being proactive about problems.

  • Marbella says:

    Good written, a person with bad economy and lots of problems often feel very bad at the same time. The best thing a bank can do is to work with the customer and sit down together and try to put up a new economic strategy that is sustainable for the customer. The bank does not lose money and they have a grateful customer.

  • Vince Thorne says:

    Bankruptcy is the absolute last resort in my book. I would not recommend it if you have some realistic hope of paying back the loans in the near future. Not worth living with the taboo.

  • Patrick R. Carlson says:

    With so many people still experiencing financial distress because of unemployment or underemployment, this is some useful advice. The best thing to do is stop ignoring the debt. Regardless of what your plan is, you should approach your debt with a plan. Otherwise, it is very unlikely that the problem will resolve itself.

    As a bankruptcy attorney, I can tell you that many of our clients have said that stopping harassing creditor calls was a significant reason they decided upon bankruptcy instead of trying to wait it out or negotiate piecemeal settlements with various creditors (which like the poster said can have negative income tax consequences).

    Now, bankruptcy does have a significant impact on your credit for some time. However, not paying your bills as agreed and allowing negative, late, and missed payment information to accumulate on your credit report isn’t doing much to help you or your financial future either. There are no magic, quick fixes to debt problems. If you are serious about getting back onto a solid financial footing, then sometimes bankruptcy can be the best option.

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