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Struggling with debt

Question: I have four credit cards with over $27,000 on them. Three are within $50 of their limit and one is $1000 over the limit.

I only make $30,000 per year. The minimum monthly payments along with my mortgage, insurance and other "have to pay" bills (like electric/heat) leaves me with about $100 per month left over for groceries, gas, etc.

I have heard you refer people to credit counseling. How does this effect your credit compared to just paying the cards down over years? Also, is the debt reduction that credit counselors advertise something that I could just do by calling the cards and asking them to settle or do debt counselors help your credit by negotiating the reduction without it being on your credit? I'm trying to understand how they work, because if it's something I could do by calling for a settlement and it would still hurt my credit, why use them if they charge a fee and are doing the same thing? Jamie, Eden Prairie, MN

Answer: Your credit score doesn't matter right now. It's already tarnished. The real issue is getting control of your debts. And I don't have to tell you that it's hard to do when your debt is equal to your income.

Yes, you can call your credit card lenders and negotiate the interest rate on your debts as well as try to get a cut in your debt burden. It isn't easy to do but it's worth a try.

A good book for DIY debt repayment plans is Reduce Debt, Reduce Stress by Gerri Detweiler, Nancy Castelman and Marc Eisenson. The book reduce debt reduce stress
offers a lot of practical advice. For instance, you might want to try a debt roll-up. The basic idea is to pay the minimum on all your debts except the highest rate one. That's where you target your extra debt-reducing savings. Eventually that debt is gone. You then attack the next highest rate debt, paying the minimum on the others, and so on. It's a technique that starts out slow but gathers momentum with time.

Another self-help resource is Nolo.com. It has been around since 1971 and the company's lawyers offer affordable, plain-English books, forms and software on a wide range of legal and financial issues, including debt management and bankruptcy. I've worked with their experts for years, and I'm always impressed with the quality of their knowledge and their passion for helping people (and ot the lenders).

For many people, however, it's helpful to check in with someone who has seen a lot of debt workouts to get additional ideas. Sad to say, with more and more people struggling to get out from under large debt burdens the scamsters and fly-by-night operators are out in force. A common refrain is "pay us a steep fee and we'll slash your debts." Right! They do little (at best) to nothing (at worst).

That's why I usually recommend getting in touch with the National Foundation for Credit Counseling. It's the largest national nonprofit credit counseling organization. It has been around for a long time and, although the quality of its staff varies around the country, it's a legitimate organization. You can find a branch near you on their website or you can choose to get counseling over the phone and the Internet. The United Way and a number of churches also make personal finance referrals and services. Unions typically offer their members access to credit counseling, too.

When you go to a credit counseling service the counselor will go over your financial situation. If you want, the counselor and you can come up with a monthly spending plan that deals with your living expenses and payments to creditors. A consultation and practical advice is all you'll need.

But it might help to explore a debt repayment plan. In essence, you deposit money each month into an account at the credit counseling agency. It takes the money to pay creditors along the lines of your repayment plan. The agency lobbies creditors to try and get better loan terms for you, such as reducing the amount you owe or at least reducing the interest charge and fees. The agency will negotiate to stop collection actions against you. However, if a creditor won't participate in the debt repayment plan you have to pay that bill off separately.

The other advantage of consulting with a credit counseling service is to help you weigh whether bankruptcy is a better option for you. A reasonable rule of thumb--and it's just a rough guideline--is you should be able to come up with a realistic plan with a counseling service or on your own to get out of debt within 5 years--hopefully sooner. (That debt burden calculation doesn't include a primary mortgage and student loans.).If the numbers don't work within a 5 year time period then I would investigate bankruptcy. It's a drastic step, a last resort, but it's also a way to get a fresh start, a second chance.

Whatever course you choose it's critical to understand how you got so deep into debt and to make sure it doesn't happen again.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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