Asking for advice is one of those things that can either be helpful or disastrous — it depends on the topic and who’s offering tips.
When it comes to get-out-of-debt advice, the stakes are high, so choose your advisers carefully and keep an open mind when it’s time to make decisions. It’s not so much that there are good choices and bad choices as it is being able to decide what’s best, based on your unique situation.
Gerri Detweiler, Credit.com’s director of consumer education, said consumers looking to get out of debt need to explore their options to make sure they’re making the best choice, but they also need to be wary of getting overwhelmed by the options.
“Give yourself a timeline to make a decision,” she said, “and make the best decision you can then.”
There are some bits of get-out-of-debt “wisdom” floating around out there that are flat-out terrible. Mostly, options for getting out of the red have positive and negative consequences, and the pros and cons will impact everyone differently. It’s about what works for you.
1. You have to use a credit counseling agency.
Not all debt requires professional attention. You can make a plan on your own, or if you have only an account or two to manage, you can try to work with the creditor and request a hardship plan or a lower interest rate. That doesn’t mean credit counseling can’t be a good option for some people though.
The idea that you have to call for backup on your finances can be intimidating, or even embarrassing, so if people think credit counseling is the only way out of debt, they may put off tackling the problem. There are also misconceptions about debt management that make people keep their distance, like the idea that it ruins your credit. Detweiler said credit counseling used to be similar to bankruptcy in the way it was reported to credit bureaus, but that’s no longer the case.
“There may be a notation that it’s being repaid through a credit counseling agency,” Detweiler said, but that won’t impact your credit score. “The major effect is that you will have to close your credit cards, and that will affect your credit score. It’s certainly not as severe as having bankruptcy or having charge-offs.”
A few more things on credit counseling agencies: It can take about three to five years to go through, and you’ll likely have to pay a monthly fee. If you can’t afford the fee, they may waive it, Detweiler said.
2. Close your overdue accounts.
The intention behind this piece of advice is that you won’t rack up any more debt if you don’t have access to the account. That makes sense, but there are easier ways to control your spending (cut up the credit card so you can’t use it, for instance). In this case, you still owe the money, so your debt levels don’t decrease, but with the account closed, your available credit declines. That hurts your credit utilization rate, which is the second-most important factor in determining your credit scores.
3. Bankruptcy is the easiest way out.
Take a look at your debt before going the bankruptcy route — is it eligible to be discharged? If you’re dealing with a mountain of student loan debt and a mortgage for a home you want to keep, bankruptcy isn’t going to cut it. It will also do serious damage to your credit, and the effect can last up to 10 years.
Bankruptcy is not an “easy out.” It’s a difficult and complicated process that may require professional help, as Detweiler notes: ”In the large majority of cases, if you mess up, your case will be dismissed and you’re back where you started.”
She also suggests that if you think bankruptcy is a possibility for you, talk to a professional earlier rather than later.
“I think the worse advice is to make bankruptcy your last resort,” Detweiler said. “People wait too long and then hurt themselves financially in the meantime.”
4. Get a co-signer for a consolidation loan.
Consolidation can be very helpful for consumers dealing with high-interest debts. But if you’re already having trouble meeting those payment obligations, the consolidation loan payments may be a struggle, too. If you need a co-signer to get the loan, your payments (or lack thereof) will affect — perhaps ruin — his or her credit. Maybe that person says they’re willing to help, but it’s a high-risk situation that could ruin not just the co-signer’s credit, but your relationship with him or her.
5. Use your retirement funds to pay your debt.
Detweiler said she hears of people doing this all the time: In the moment, the credit card debt is overwhelming, and there’s the retirement fund, full of cash. It’s tempting, but there’s a reason you spend decades saving for retirement (or should): You’ll need the money. Detweiler also noted that retirement funds are protected from creditors, so even if creditors sue you for unpaid bills, they can’t touch your retirement savings.
6. If you ignore debt collectors, they will go away.
Ignoring debt collectors isn’t going to do much for you, other than slowly drive you crazy. People don’t always realize they can work with the collection agency to make payments work within their means, but it’s a good way to start the resolution process. A cease-and-desist letter can stop third-party collectors from calling, but it doesn’t resolve the debt, and it won’t keep the original creditor from calling. When it comes to dealing with a debt collector, you need to focus on how you will settle or dispute it, depending on your situation.
7. Claiming identity theft to get out of debts.
No, that’s illegal. Please don’t do that. Some people have actually tried it, and it didn’t work out well for them.
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt
- Understanding Your Debt Collection Rights
- The Best Way to Loan Money to Friends & Family
- Top 10 Debt Collection Rights
Image: Wavebreak Media