Money Advice: Legal Ways To Cope With Debt

There are many legal ways to cope with your debts when you owe too much.

When you owe a lot of money, thinking clearly about what to do about your debts can be tough to do, especially if debt collectors are hounding you to pay up. Under the circumstances, you may be tempted to take the pressure off by writing a check when you don't have the money to cover it or you may be lured in by the promises of companies that tell you make your financial problems go away--for a steep fee of course. However, writing "hot checks" could land you in legal hot water and most companies that make big promises about improving your financial situation are rip offs and they may even encourage you to do things that skirt the law. Don't waste your bucks. Here are some legitimate and legal suggestions for how to deal with your debts.

1. Stop using your credit cards. If you have too much debt, the last thing you need is more!

2. Figure out the total amount you spend each month by tracking what you pay out to cover your living expenses and your debts. Track your cash expenditures too--those three dollars here and five dollars can really add up. Write down how much you spend and what you spend it on. Your spouse or partner should do the same. At the end of the month, compare your total spending to your total income (take home pay) for the month. If the total amount of your financial obligations, living expenses and cash expenditures is greater than your total income, figure out where you can cut back in order to bring your spending in line with your income. Then, create a monthly budget that shows exactly how you will allocate your household dollars each month and stick to it. At the very least, as a result of this exercise you should be able to pay all of your debts on time and your day-to-day living expenses too; but ideally, you should also be able to begin paying more than the minimum due on your credit card debts and on any other higher interest debts you may owe.

3. If you don't have enough money to cover all of your monthly debts and expenses or you want to accelerate the rate at which you get out of debt, earn more money. Work a second job, do freelance work on the side, or find a new, better paying job. If your spouse or partner does not work, he or she should consider getting a job outside the home, at least until your financial situation has improved.

4. If you can't afford to meet all of your financial obligations despite your efforts to improve your finances, pay the most important ones first. They include: your mortgage or rent; your home equity loan or any other financial obligation you may have secured with your home; your car payment if you need your car to get to and from work; your taxes; your child support obligation; and any federally guaranteed student loans you may owe. Also, expenses like groceries, utilities, phone service and medical insurance are important essentials too although you should minimize how much you spend on each of them.

5. Reduce your mortgage payment by refinancing your current loan. You may be able to qualify for a new, lower interest loan if your finances are not in bad shape.

6. Contact your creditors to find out if they will let you make smaller payments on your debts or interest only payments for a while. They may agree to your request, especially if up to now you have had a good payment history. Before you call your creditors however, review your budget to figure out how much you can realistically afford to pay each month.

7. Consolidate your debts. For example, if you have a lot of high interest credit card debt, transfer the balances to a card with a lower rate of interest, or borrow money from your bank or credit union to pay off your credit cards and any other high interest debts. Other debt consolidation options include borrowing against the equity in your home, your insurance policy, or against your 401(k) plan. However, be clear about the risks and drawbacks of any option you may be interested in.

8. Meet with a reputable credit/debt counseling organization about your debts. A counselor should take time to understand your financial situation, help you develop a budget and provide you with the information you need to avoid getting into financial trouble in the future. After becoming familiar with your finances, the counselor may suggest that you enroll in a debt management plan, which would involve negotiating lower payments with your creditors. However, the counselor would do the negotiating, not you, and rather than your paying your creditors directly, you would pay the credit counseling organization who in turn would pay them. Be aware that credit counseling organizations only negotiate with unsecured creditors so it will be up to you to contact your mortgage and auto lender to try to lower your payments on those loans. Also, steer clear of counseling organizations that try to push you into a debt management plan before they have spent time analyzing your finances.

9. Consider borrowing the money you need to make a dent in your debt--from a relative or close friend. However, be aware that you risk damaging your relationship with that person if you don't pay back the money you borrow according to your agreement with one another. Therefore, don't borrow from a friend or relative unless you are sure you can afford to repay them and unless you intend to treat the debt as seriously as you would any other debt you owe. Be sure that the terms of your loan are spelled out on paper, just as if you were getting a bank loan. Both of you should have a signed copy of the agreement. Also, it's a good idea to let the lender place a lien on one of your assets to secure the loan. That way, if you file for bankruptcy later, your friend or relative will be a secured creditor in the bankruptcy and therefore, will be better positioned to get at least some of the money you owe to him or her. Unsecured creditors often get little or nothing in a bankruptcy.

10. If your finances are in such bad shape that none of the previous alternatives can help you, or if your mortgage lender, your auto lender or the IRS begins sending you threatening letters and you are afraid that you may lose your home, car or another important asset, schedule an appointment with a consumer bankruptcy attorney. The attorney will explain your bankruptcy options--filing a chapter 13 reorganization bankruptcy or a chapter 7 liquidation--and will advise you about the actions you should not take prior to filing if you want to gain maximum benefit from filing.

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