How can I reduce my debt?

March 8, 2008 12:09 PM

How can I reduce my debt? Does anyone have experience with debt reduction companies?

I am disabled and carry over $40,000 in unsecured debt. Together my wife and I receive $3,500 per month in social security. I am trying to sell my house but in this market the sales price might not cover the mortgage if it sells at all. I have $100,000 in a retirement account that I need to preserve.

Does anyone have experience with debt-reduction companies? I hear many advertisements from companies claiming to reduce debt by over 50%. Are they reliable?, ethical?

Aside from bankruptcy, what other options do I have?

posted by anonymous to work & money (10 comments total)

I've never worked with debt reduction or consolidation type places, but I've heard very mixed stories and some down right scary. I've heard that consolidating debt (particularly credit card debt) can hurt your credit score. I'm sure someone else can elaborate.

That said, you're not very clear on what type of debt you're talking about. Is it credit card debt? Has some of your debt gone into collections?

Generally the best way to attack debt involves looking at your income, your debt, and the percentages involved. You may find success in taking out a low interest line of credit on your home and paying credit cards off that way as you wind up saving on the rates.

However, since you're talking in terms of selling your home, I assume this means you're in a lot more trouble than just over some credit card debt.

You probably should bite the bullet and pay a professional financial adviser (someone not affiliated with debt consolidation firms) to look at your problem and craft a plan for you.
posted by wfrgms at 12:20 PM on March 8

Oh, and very few businesses in this industry are ethical. In fact, if you're even wondering about that aspect of it, I advise to go the financial planner route.
posted by wfrgms at 12:22 PM on March 8

This has been covered before.
posted by killy willy at 12:25 PM on March 8 [1 favorite]

There are non-profit charitable credit counselling agencies that can also do the debt-reduction stuff for you.

It will look worse on your credit report than paying the debt off in full on your own, but better than defaulting or regularly missing payments.
posted by winston at 12:27 PM on March 8

I've recommended Genus in the past.
posted by killy willy at 12:49 PM on March 8

MMI, which was recommended to me by MeFites, has been fine.
posted by k8t at 1:05 PM on March 8

I'd avoid debt reduction companies at all costs. Winston is right; you credit report will suffer significantly versus you paying it off, albeit slowly, on your own.
posted by Lucy2Times at 1:30 PM on March 8

Many consumer credit counseling companies are actually owned by large credit card companies. Even some of the so-called non profits. For this reason they may not always be in it for what is in your best interest. I have also seen dozens of cases where the ccc company was regularly paying their clients' payments late, further damaging credit.

I suggest scraping by on the bare minimum and pay all extra soc sec income to your debt.
posted by curlyelk at 1:48 PM on March 8

Here's what seems to be a good book on Chapter 7 bankruptcy - it mentions in there that retirement accounts may be exempt property.

That said, you do not necessarily need to go bankrupt, if you can withdraw an amount from that retirement account for an "offer of composition" in full and final settlement of the debt. Somewhere around 10-25% of the debt is a possibility. It seems from what you've said that it will be too late to roll your unsecured debt in with your mortgage, but if both are nominally with the same bank you may have some leverage there as well.

You need to take full and honest inventory of your prospects in life, your current and future employability if any, your medical condition and its likely effect on your life. Decide to what extent you will go to preserve your credit score, and find out what you can do to mitigate the practical effects, if any, of poor credit on your life. I would strongly suggest that your health, a stable and desirable place to live, and your family are all much more important.

Ideally, find a local charity that takes a position in their press releases and educational material that is hostile to credit card companies and similar entities, and ask them to refer you to a debt counsellor who is not funded by credit card companies, and who will try to preserve as much of your assets as the law permits. Credit card companies exist for one purpose only, and that purpose is to screw you out of money. Part of this process is making emotive appeals intended to invoke guilt or shame in your mind, to their financial benefit. Don't be fooled by this.
posted by aeschenkarnos at 3:43 PM on March 8

In addition to the above, the 1st step is to stop getting deeper in debt. In other words, reduce all non-essential spending, and be really fierce about what's essential. Good luck.
posted by theora55 at 5:07 PM on March 8