Handling Debt Problems

By K. Zimka

Millions of Americans are in over their heads.

How do you know if you are in financial trouble? If you are overextended with debts you can't pay back within 6 to 12 months (not including your mortgage or maybe your car payment), or if you spend more than 15 to 20 percent of your after-tax income on short-term credit purchases, you may be in financial trouble. Do not, however, feel alone, It's not uncommon for even careful spenders to find themselves in debt.

Some signs that you are financially overextended include:

• You would have an immediate financial crisis if you lost your job.
• You spend more than you earn.
• You must borrow to pay current bills.
• You pay for everyday expenses, such as groceries by using savings or credit.
• You're paying the minimum amount, or less, due on your bills each month.
• You are being contacted by bill collectors.
• You can't avoid using credit during the holidays or for your children's birthdays.
• You're having problems in your relationships because of money problems.

These are signs that you need to change your spending habits. You may resist admitting you have a crisis because you think the problem will go away. You can't, however, ignore the problem. It won't go away. It's best to understand how your crisis came to be, so you can take control and make changes.

Your top priority should be to set a goal to pay off your debts as quickly as possible. Stop using credit and don't borrow any more money. Develop a plan to help keep you on track towards reaching your goal. Start by determining all sources of income now and for the next few months. Decide how much you owe and the cost of monthly payments. Depending on how much you owe, select a realistic time frame that will help you stick to your plan and get out of debt.

Determine which bills are essential. If you let an essential debt slide, you could face serious consequences.

Essential bills include:

• Your rent or mortgage (be realistic about whether you can afford to stay in your home)
• Utility bills
• Child support payments
• Car payments (particularly if you need your car to keep your job)
• Other secured loans linked to specific items of property
• Unpaid taxes (you may be able to negotiate to set up a repayment plan).

Stop using credit and apply cash to reduce existing balances. Find ways to generate extra income (overtime, a second job) and cut back on nonessential items (eat out less, shop for bargains).

Track your spending, the balances remaining on your debts and the minimum payments due. When you pay off one debt, apply the payment used for that debt to the next loan. When loan two is paid off, add that payment to the next until all loans are paid off.

Be cautious of people and groups that claim they can "fix" your credit. A credit repair clinic can do nothing for you-including removing inaccurate credit information-that you can't do for yourself. In addition, their fees can be high, ranging from hundreds to thousands of dollars.

You may be tempted to get a debt consolidation loan. Debt consolidation is borrowing money from one lender to pay off your debts. For some people with credit problems, debt consolidation may be an answer. Be wary, however, of potential problems, particularly if you don't change your spending habits. Making only one payment a month may make you think you are better off than you actually are. You may be tempted to buy something else on credit, which could create an even worse problem.

If your debt is out of control and you need expert help, contact reputable credit counseling sources or adult education programs. Information can be obtained by contacting the National Foundation for Consumer Credit (NFCC), which is the umbrella group for non-profit counseling organizations that provide face-to-face education and services about budgeting. They also consult by telephone, by mail and on-line. All members provide confidential services for free or a nominal amount. To locate the closest NFCC member office, call (800) 388-2227 or visit www.nfcc.org . Another resource is Extension.