Make a list of the debts with which you’d like help. Include the balance, interest rate, minimum payment and telephone number for each account.
Call each creditor and explain your situation briefly, then ask if they are able to lower your interest rate or change the term on your loan (this will work for unsecured debt only, such as a credit card). Customer service agents are often authorized to adjust rates over the phone, especially if you’ve been a good customer in the past.
If the interest rate is lowered, try to maintain your payments. Although it will not immediately improve your cash flow, more of your payment will be applied to the principal balance and your debt will be paid down faster. There are several free applications on the Web that you can use to track your progress (see Resources).
The National Foundation for Credit Counseling is the nation’s longest-running nonprofit debt relief agency. Their counselors undergo a rigorous training process, are certified and offer free one-hour consultations. The foundation will review your budget and make suggestions. If necessary, the counselor will enroll you in a debt-management program that can lower interest rates and payments and eliminate fees.
One hundred percent of payments made through NFCC member organizations are applied to creditor accounts. There are no counseling or setup fees, but debt management plan fees vary by state. Plans can last as long as five years and, in exchange for reduced interest rates, accounts are closed. Credit bureaus may also be notified that you are participating in a debt management program.
Negotiating or settling your accounts for an amount less than what is owed is a legal way to get debt relief. It is neither easy nor affordable and scams abound. Your credit rating also will plummet, a factor to consider if you will be applying for a loan in the near future (two to three years).
If you already are significantly late on your payments — three to six months — a debt negotiator will settle on your behalf with the creditor. Often, settlements will be half of the principal balance. You should be prepared to pay in full to get the best deal. Depending on how much you owe, you should also be prepared to pay thousands of dollars in fees.
Consolidation Loan Alternatives
If you have not yet damaged your credit but are about to fall behind on your bills, a consolidation loan is a possibility. Home equity loans often have low initiation fees, interest rates and tax-deductible payments. Use caution and review your spending habits carefully. If you’re in debt because of uncontrollable spending habits, this is not the solution for you. If your debt is the result of a job loss or medical expenses but your financial habits are sound, home equity loans offer a great, inexpensive alternative, especially when potential tax benefits are considered.
Be certain to check with the Better Business Bureau to verify the legitimacy of the organization with which you’re planning to work. The BBB site is easy to use (see Resources). Debt negotiators (or settlers) in particular have a difficult reputation. Fees are often front-loaded. This means you pay thousands of dollars before a cent goes toward your debts. State Attorney General offices are overloaded with complaints about companies that stole debt settlement money from consumers who needed the most help. In short, do your homework and you won’t be disappointed.