How To Get Out of Debt

What You Can Do On Your Own

Where do I start?

A budget is a roadmap to plan your finances and keep track of where your money goes. Budgeting is a helpful tool whether you’re working hard to make ends meet or if you have some extra income and want to adjust your saving goals. It will help you see where you spend your money and how you might spend money differently.

To make a budget:

• Gather your bills (utilities, insurance, etc.) and pay stubs.
• Collect receipts for things you typically spend money on like groceries, entertainment, transportation, clothing, and everyday expenses.
• Add up all of your paychecks and any other income. Subtract your expenses from that.

When you’re done, look for things in your budget you might be able to change so you have more money left over each month. Your goal is to stop adding to your debt, and also to pay down the debt you already have, if you can. You can find information about budgeting and money management online, at your public library, and in bookstores. Check out this worksheet for creating and tweaking your budget.

If you’re behind on your bills, don’t wait to call the creditors you owe money to. Do it before a debt collector gets involved. Tell your creditors what’s going on, and try to work out a new payment plan with lower payments you can manage.

What if my debt has already gone to a debt collector?

You may want to talk to the collector at least once, even if you don’t think you owe the debt or can’t repay it immediately. That way, you can find out more information about the debt and confirm whether it’s really yours. When talking with a debt collector, be careful about sharing your personal or financial information, especially if you’re not already familiar with the collector. Not everyone who calls saying that you owe a debt is a real debt collector. Some are scammers who are just trying to take your money.

A collector has to give you “validation information” about the debt. They either have to do that during the collector’s first phone call with you or in writing within five days after first contacting you.

The collector has to tell you

• how much money you owe
• the name of the creditor you owe it to
• how to get the name of the original creditor, and
• what to do if you don’t think it’s your debt

You also can get a collector to stop contacting you, at any time, by sending a letter by mail asking for contact to stop.

Collectors can’t harass you. For example, collectors

• can’t threaten to hurt you
• may not use obscene or profane language
  • can’t repeatedly use the phone to annoy or harass you

Collectors can’t lie. For example, collectors

• cannot tell you that you owe a different amount than what you actually owe
• may not pretend to be an attorney or from the government
• can’t tell you that you’ll be arrested, or claim they’ll take legal action against you if it’s not true

Collectors can’t treat you unfairly. For example, collectors

• may not try to collect interest, fees, or other charges on top of the amount you owe, unless the original contract says they can or there is a law allowing it
• can’t deposit a post-dated check early
• cannot publicly reveal your debts, including by sending postcards showing that you owe money or putting that information on envelopes

What if my debt is old?

Debt doesn’t usually go away, but debt collectors do have a limited amount of time to sue you to collect on a debt. This period of time is called the “statute of limitations,” and it usually starts when you first miss a payment on a debt. After the statute of limitations runs out, your unpaid debt is considered to be “time-barred.” That means the collector can no longer sue — or threaten to sue — you to pay the debt because so much time has passed. It’s against the law for a debt collector to sue you for not paying a debt that’s time-barred. If you do get sued for a time-barred debt, tell the judge that the statute of limitations has run out.

How long the statute of limitations lasts depends on what kind of debt it is and the law in your state — or the state specified in your credit contract or agreement creating the debt.

Under the laws of some states, if you make a payment or even acknowledge in writing that you owe the debt, then the debt isn’t time-barred anymore. The clock resets and a new statute of limitations period begins.

What should I do if I’m having trouble paying my mortgage?

Contact your lender immediately. Don’t wait, or a lender could foreclose on your house. Most lenders will work with you if they believe you’re acting in good faith and your situation is temporary.

Your lender might be willing to

• lower or suspend your payments for a short time
• extend your repayment period to lower your monthly payments

Before you agree to a new payment plan, find out about any extra fees or other consequences. If you can’t work out a plan with your lender, contact a non-profit housing counseling organization. Reach a free, HUD-certified counselor at 800-569-4287. Also, contact your local Department of Housing and Urban Development office or the housing authority in your state, city, or county. You don’t need to pay a private company for these services.

Some companies promise to make changes to your mortgage loan or take other steps to save your home, but they don’t deliver. They’re scammers. Never pay a company upfront for promises to help you get relief on paying your mortgage. Learn the signs of a mortgage assistance relief scam and how to avoid them.

What if I’m having trouble paying my car loan?

Most car financing agreements say a lender can repossess your car any time you’re in default and not making your car payments. They don’t have to give you any notice. Before you can get back your repossessed car, you may have to pay the balance due on the loan, plus towing and storage costs. If you can’t, the lender might sell the car.

If you know you’re not going to be able to keep up with your loan payments, you might be better off selling the car yourself and paying off the debt. You’ll avoid the costs of repossession and a negative entry on your credit report.

What  can I do if I can't pay my student loan?

If you have federal loans (government loans), the Department of Education has different programs that could help. Applying for these programs is free. Find out more about your options at the U.S. Department of Education’s StudentAid.gov or by contacting your federal student loan servicer. You’ll also find more about how to get out of default.

With private student loans, you typically have fewer options, especially when it comes to loan forgiveness or cancellation. To explore your options, contact your loan servicer directly. If you don’t know who your private student loan servicer is, look at a recent billing statement.

You don’t have to pay for help with your student loans. A company can’t do anything you can’t do for yourself. Student loan debt relief companies might say they will lower your monthly payment or get your loans forgiven, but they can leave you worse off.

What can I do if I’m way behind on paying my credit card debt?

Talk with your credit card company, even if you’ve been turned down before for a lower interest rate or other help with your debt. Instead of paying a company to talk to your creditor on your behalf, remember that you can do it yourself for free. Find their phone number on your card or statement. Be persistent and polite. Keep good records of your debts, so that when you reach the credit card company, you can explain your situation. Your goal is to work out a modified payment plan that lowers your payments to a level you can manage.

If you don't pay the amount due on your debt for several months your creditor will likely write your debt off as a loss, your credit score may take a hit, and you still will owe the debt. In fact, the creditor could sell your debt to a debt collector who can try to get you to pay. But creditors may be willing to negotiate with you even after they write your debt off as a loss.

Credit Counseling

What do credit counseling agencies do to help?

A reputable credit counseling organization can give you advice on managing your money and debts, help you develop a budget, offer you free educational materials and workshops, and help you make a plan to repay your debt. Its counselors are certified and trained in credit issues, money and debt management, and budgeting.

Good credit counselors spend time discussing your entire financial situation with you before coming up with a personalized plan to solve your money problems. Your first counseling session will typically last an hour, with an offer of follow-up sessions. Good counselors won’t promise to fix all your problems or ask you to pay a lot of money before doing anything.

How can I find a credit counselor I can trust?

Most reputable credit counseling organizations are non-profits with low fees, and offer services through local offices, online, or by phone. If you can, use a credit counselor you can meet in person. Non-profit credit counseling programs are often offered through

• credit unions
• universities
• military personal financial managers
• U.S. Cooperative Extension Service branches

Your financial institution or local consumer protection agency also may be able to refer you to a credit counselor.

How do I check out a credit counseling organization?

Just because an organization is a non-profit doesn’t guarantee its services are free or affordable, or that it’s legitimate. Some credit counseling organizations charge high fees, which they might not tell you about.

• A reputable credit counseling organization should send you free information about its services before you say anything about your situation.
• You can check out organizations you’re considering with your state attorney general and local consumer protection agency. They can tell you if they have any complaints about the organizations. Even if there are no complaints, it’s not a guarantee that they’re legitimate. Also ask your state attorney general if companies are required to be licensed to work in your state. If so, ask whether the companies you’re considering are licensed.
• The U.S. Trustee Program keeps a list of credit counseling organizations approved to give pre-bankruptcy counseling, but it doesn’t endorse any particular organization on the list.

After you’ve done your background investigation, interview the final candidates. Choose an organization that:

• does not charge you in advance for help that it hasn’t given yet
• has credit counselors that are accredited or certified by an outside organization
• offers a range of services, including budget counseling, debt management classes, and free educational materials
• will give you a specific quote in writing for any one-time or monthly fees
• will help you even if you can’t afford the fees or contributions

Be sure to get every detail and promise in writing, and read any contracts carefully before you sign them.

What’s a debt management plan?

A good credit counselor will spend time reviewing your specific financial situation and then offer customized advice to help you manage your money. After that review, a counselor might recommend that you enroll in a debt management plan to help repay your “unsecured” debts like credit card, student loan, or medical debts. (Debt management plans aren’t for debts “secured” by collateral like houses or cars.)

But if a credit counselor says a debt management plan is your only option, and says that without a detailed review of your finances, find a different counselor.

If you and your counselor decide a debt management plan is best for your situation, it’s a good idea to check with all of your creditors. You want to be sure they offer the types of modifications and options the credit counselor describes to you.

Here’s how a debt management plan generally works:

• The counselor develops a payment schedule with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees.
• You deposit money each month with the credit counseling organization.
• The counselor uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to the payment plan.

Is a debt management plan a good idea?

Whether a debt management plan is a good idea depends on your situation. They don’t help everyone. A successful debt management plan requires you to make regular, timely payments, and can take 48 months or more to complete. You might have to agree not to apply for — or use — any more credit until the plan is finished. No legitimate credit counselor will recommend a debt management plan without carefully reviewing your finances.

Debt Settlement

What is debt settlement?

Debt settlement programs are different from debt management plans. Debt settlement programs are typically offered by for-profit companies to people with significant credit card debt. The companies negotiate with your creditors to let you pay a “settlement,” or lump sum of money that’s less than what you owe. They agree that this amount will settle your debt. Meanwhile, you have to set aside a specific amount of money every month in a designated account until you have enough savings to pay off any settlement that’s reached. These programs often encourage you to stop making any monthly payments to your creditors.

Debt settlement programs can be risky. If a company can’t get your creditors to agree to settle your debts, you could owe even more money in the end in late fees and interest. Even if a debt settlement company does get your creditors to agree, you still have to be able to make payments long enough to get them settled. You also have to watch out for dishonest debt settlement companies that make promises they can’t keep, charge you a lot of money, and then do little or nothing to help you. You may not be able to settle all your debts. While you’re in the debt settlement program you may still get calls from debt collectors and your credit report and credit score are likely to be damaged. The process can take years to complete.

If you do business with a debt settlement company, you may have to put money in a special bank account managed by an independent third party. The money is yours, as is the interest the account earns.

The account manager

• may charge you a reasonable fee to manage the account
• must transfer money from your account to pay your creditors and the debt settlement company when settlements happen

What does a debt settlement company have to tell me upfront?

 If you decide to go forward, even after reviewing the risks, there’s more to know. Before you sign up for its services, the company must tell you

• the fees, any conditions, and terms of service
• how long it will take to get results: how many months or years before it will make an offer to each creditor for a settlement
• the possible negative consequences of stopping payments to your creditors (if the program relies on you doing that).
• how much you must save in a dedicated account before the company will make an offer to each creditor on your behalf

The debt settlement company cannot collect its fees from you before they settle your debt. Generally, there are two different types of fee arrangements (a proportion of the amount of debt resolved or a percentage of the amount saved). Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you only a portion of its full fee.

The debt settlement company also must tell you that

• the funds are yours and you are entitled to the interest earned;
• the account administrator is not affiliated with the debt settlement provider and doesn’t get referral fees
• you may withdraw your money any time without penalty

What are the risks of debt settlement?

• There might be a negative impact on your credit report and credit score. Debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors. That means late fees and penalties may grow, put you further in the hole, and hurt your credit.
• Creditors might start debt collection. While you’re in the debt settlement program you may still get calls from debt collectors requesting repayment. You could even be sued for repayment. If the company wins, it might be able to garnish your wages or put a lien on your home.
• You might not be able to settle all your debts. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.
• You might not finish the whole program. Many people have trouble making payments long enough to get all — or even some — of their debts settled. They drop out of the programs as a result. If that happens, you’re out the fees you paid the debt settlement company for any debts they’ve already settled, you will still owe any debts that haven’t been settled yet, and your credit report probably shows late payments which can hurt your credit. Before you sign up, review your budget carefully to make sure you’ll be able to set aside the required monthly amount for the whole time.
• There could be tax consequences. Any savings you get from debt relief services could be considered income and taxable. Talk to a tax professional to learn how this might affect your situation.

What are some signs I’m dealing with a debt settlement scam?

Spot and avoid scammy debt settlement or debt relief organizations — whether they’re offering credit counseling, debt settlement, or any other service.

Never pay any group that tries to collect fees from you before it settles any of your debts or enters you into a debt management plan.

• No legitimate organization will guarantee to settle all of your debts or get you fast loan forgiveness.
• No legitimate organization tries to enroll you in its program without first reviewing your financial situation.
• No legitimate organization will guarantee you results from a “new government program.”
• No legitimate organization tells you to stop communicating with your creditors without explaining the serious consequences.
• No legitimate organization tells you it can stop all debt collection calls and lawsuits.

To learn more about the companies you’re considering, search online for the company’s name, plus “complaint” or “review.” Read what others have said. Also check out any company you’re considering with your state attorney general and local consumer protection agency.

Can I work out a solution to eliminate my debt on my own?

Instead of paying a company to talk to creditors on your behalf, you can try to settle your debt yourself. If your debts are overdue the creditor may be willing to negotiate with you. They might even agree to accept less than what you owe. Sometimes it’s possible to work out an agreement so your debt is eliminated and debt collectors can’t sue you for the debt. If you do reach an agreement, ask the creditor to send it to you in writing. And just like with a debt settlement company, if your agreement means late payments or settling for less than you owe, it could negatively impact your credit report and credit score.

Debt Consolidation Loans

What’s a debt consolidation loan?

It is a way of consolidating all of your debts into a single loan with one monthly payment. You can do this by taking out a second mortgage or a home equity line of credit. Or, you might take out a personal debt consolidation loan from a bank or finance company.

Are debt consolidation loans a good idea?

Some of these loans require you to put up your home as collateral. If you can’t make the payments — or if your payments are late — you could lose your home. Most consolidation loans have costs. In addition to interest, you may have to pay “points,” with one point equal to one percent of the amount you borrow. It can be an expensive way to get money, so do some calculations to see if it’s worth it to you.

Bankruptcy

What does filing for personal bankruptcy do?

People who file for personal bankruptcy get a discharge — a court order that says they don’t have to repay certain debts.

Bankruptcy is generally considered your last option because of its long-term negative impact on your credit. Bankruptcy information (both the date of your filing and the later date of discharge) stays on your credit report for 10 years. That can make it hard to get credit, buy a home, get life insurance, or get a job. Still, bankruptcy can offer a fresh start if you’re in financial trouble.

What are the main types of personal bankruptcy?

The two main types of personal bankruptcy are Chapter 13 and Chapter 7. You must file for them in federal bankruptcy court. Filing fees are several hundred dollars, and attorney fees are extra. For more information, visit the United States Courts.

Both types of bankruptcy may discharge and get rid of unsecured debts like credit card or medical debt, and stop foreclosures, repossessions, garnishments, and utility shut-offs, as well as debt collection activities. They also give exemptions that let you keep certain assets, though how much is exempt depends on your state.

What’s the difference between Chapter 13 and Chapter 7 bankruptcy?

Generally, Chapter 13 lets people with a steady income keep property, like a mortgaged house or a car, which they might otherwise lose through the bankruptcy process. In Chapter 13, the court approves a repayment plan that lets you pay off some of your debts in three to five years, rather than give up any property. After you make all the payments under the plan, the court discharges your debt so you don’t owe anything else.

Chapter 7 is known as straight bankruptcy. In general, Chapter 7 involves liquidating all of your assets that aren’t exempt. Exempt assets might include cars, work-related tools, and basic household furnishings. Some of your property may be sold by a court-appointed official, called a trustee, or turned over to your creditors.

What debt won’t be erased by filing for personal bankruptcy?

Filing for personal bankruptcy usually won’t erase child support, alimony, fines, taxes, and most student loan obligations, unless you can prove undue hardship. And, unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually doesn’t let you keep property when your creditor has a lien or financial interest in it.

What do I need to do before I file for bankruptcy?

You have to get credit counseling from a government-approved organization up to six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved agencies at the U.S. Trustee Program, the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. You have to file a certificate with the bankruptcy court proving that you took the course.

Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test” where you confirm that your income doesn’t exceed a certain amount. The amount varies by state —learn more from the U.S. Trustee Program.

What do I need to do after I file for bankruptcy?

You have to take a debtor education course from a government-approved organization about things like developing a budget, managing money, and using credit wisely. To find a counseling organization, check the list of approved debtor education providers. You have to file a certificate with the bankruptcy court proving that you took the course.

Credit Repair

After I pay off my debt, is there anything I can do about my credit?

No credit repair company can legally remove negative information from your credit report if that information is correct — so don’t believe anyone that tells you otherwise.

Only time can make accurate information go away. A credit bureau can report most accurate negative information for seven years and bankruptcy information for ten years. Information about an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer. The seven-year reporting period starts from the date the event took place. But there are steps you can take to repair your credit over time.

What To Do If You Paid a Scammer

Scammers often ask you to pay in ways that make it tough to get your money back. No matter how you paid a scammer, the sooner you act, the better. Learn more about how to get your money back.

Report Debt Relief Scams

Where do I report a debt relief scam?

If you have a problem with a debt settlement or other debt relief company, of if you see a scam, fraud, or bad business practice, report it

• to the FTC at ReportFraud.ftc.gov
• your state attorney general
• your local consumer affairs office