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Chapter 2: Debt Repayment

Financial crises and debt problems often go hand in hand. Many people rely on credit to get them through the storm, then have to face repaying a boatload of debt. Not being able to keep up with payments is also common.

You probably would rather repay your debt than ignore it, especially if you are getting hounded by bill collectors. The first step in tackling debt is establishing an accurate inventory of who and how much you owe. If you have a stack of unopened bills on your kitchen table, take a deep breath and open them. If you don’t have recent statements, call your creditors and ask them for up-to-date account information. You can list your debts in the Debt Worksheet (make sure to include the monthly payments in your budget).

Debt Worksheet

Next, create a plan of attack. You may want to vary your approach depending on the status of the account.

Accounts in good standing
If you have accounts that you were able to keep current, they don’t require any urgent action. However, keep in mind that if you owe a significant amount and only pay the minimum required payments, it could be years before you are debt free.

One way to accelerate debt repayment is to pay more than the minimum. You should only do this if you are comfortably meeting all of your debt and other obligations. (It doesn’t make sense to pay an extra $100 a month on your credit card if you are three months behind on your phone bill.) If you have multiple accounts, it is better to be systematic and focus your extra payments on one creditor at a time instead of sending a little extra to everyone. Many people like to start with the debt with the lowest balance because it can be paid off the soonest, providing a sense of accomplishment that makes it easier to keep going. However, you will save the most money by starting with the debt with the highest interest rate. Once the first debt is paid off, put that money toward the debt with next lowest balance or highest interest rate (depending on the option you choose) and so on until all of the debts are paid off.

Debt repayment can also be accelerated by finding ways to lower your interest rates. Want to know a simple way to get a lower rate? Just call your creditors and ask. They may say no, but it only takes up a few minutes of your time. If you have a good credit score, you could also look into transferring balances to a low-rate credit card or getting a consolidation or home equity loan. However, you have to be very careful to not charge up the old accounts – you could wind up with more debt than you had before. Another option is a debt management plan (offered through credit counseling agencies), in which many creditors give you lower rates in exchange for closing your accounts and going through counseling. It is very important to use a reputable agency – ask your financial institution for a referral if you are interested.

Delinquent accounts (not with a collection agency)
It is a good idea to tackle any account you are delinquent on right away. If you fall far enough behind, it is possible it will be charged off and sent to a collection agency, which will severely damage your credit report. (This typically happens after 4-6 months of non-payment).

When you fall behind, usually the payments you miss are added to your minimum required payment. You may be wondering how you can catch up if your creditor is expecting $1,000. Keep in mind that the payment listed on your statement is not necessarily the only option. Most creditors want you to pay your bills and are willing to work with you. Give them a call and ask if it is possible to pay the back amount over a few months. You can also see if they are willing to settle the debt for less than the amount owed. Typically, when you settle, you must pay the amount all at once or within a short period of time, so it is more practical for smaller debts than larger ones.

When you are talking to a creditor, remember to remain calm and polite. It is easy to get frustrated, but would you be more likely to help someone who was nice to you or who screamed? If you don’t succeed at first, don’t give up. Ask to speak to a supervisor. Call back at another time. Send a letter. (Make sure to send it to the address for billing inquiries and concerns, not the payment address.) Ultimately, the creditor may not agree to anything, but at least you will know that you tried your best.

Collection accounts
Once an account goes to a collection agency, the damage to your credit report has already been done. Paying off collection accounts shouldn’t be your number one priority, but it is not a good idea to permanently neglect them either. You probably don’t want to be worried about bill collectors breathing down your neck, and you could be sued for not paying a debt.

Collection agencies are usually very willing to settle debts for a fraction of the amount owed. You should always get a settlement agreement in writing before sending a payment. Although they are not required to do so, as part of the settlement agreement, you can ask them to remove the collection account from your credit report. At the very least, they are required to report that the account was paid. Check your credit report a month or two after settling to make sure they did. (If not, you can submit proof of payment to the credit bureau.)

Most collection agencies will also accept monthly payments. Even if they say they won’t over the phone, chances are, they’ll cash your check instead of throwing it in the trash. Since you may not receive statements from a collection agency, it is very important to keep your canceled checks or other proof of the payments you made. Keep in mind that while sending monthly payments may be enough to satisfy them, it is possible to be sued as long as you have an outstanding balance and the statute of limitations has not expired. (The statute of limitations is the amount of time that a creditor has to pursue legal action against you to collect a debt. It varies from state to state.)

Beware of debt settlement agencies
Have you ever seen commercials on television for companies that promise to help you settle your debt? Don’t call the number on your screen. They typically charge high up-front fees and may not contact creditors for several months, if at all. In the meantime, your accounts fall further behind, late charges get piled on, and you could get sued. You are much better off negotiating with your creditors on your own or going with a reputable credit counseling agency.

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