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Coming Face-To-Face With Debt

October 29, 2010 · 27 comments

in Personal Finance

With the economy still struggling to climb out of the recession, many people are feeling the pinch in their wallets. However, many do not actually take the time to sit down and examine their finances closely, especially if the financial picture is not so pretty.  Often times, people who are in debt do not know how to evaluate their finances, and may not know where to get help.

However, there are many companies who offer debt help in the form of advice and tips.  These companies provide a wide range of services, and in some cases, will devise a formal debt plan and contact creditors on the debtor’s behalf.

If you do find yourself struggling to meet all the bills, the first essential piece of advice is not to panic. You aren’t the first person to struggle financially,  and you certainly won’t be the last.  You need to be honest about your debt, and not hide from it.  No matter what the size of the debt is, help can be found.  A common mistake is to avoid creditors in the hope they will give up and go away.  They won’t.  A creditor will pass any bad debts on to a debt collection agency, who are likely to pursue the debt even more vigorously.  Often times, collection agents will even make house calls.

So what steps should you take to dig out of debt?  Whereas you need to decide how much to pay each creditor, you need to understand where your money is going first.  If possible, get someone else involved in this process that understands your spending (spouse, partner, etc) to ensure you have all your bases covered.   Be creative when seeking solutions to reduce debt.  Sometimes just cutting out expenses may not be enough- you may also have to figure out how to reduce fixed expenses if possible.  You also can’t just rely on  switching credit cards to zero interest rate/reduced rate suppliers.  You must also alter your spending habits.  Consider obtaining items through Craigslist or ‘recycling’ websites instead of going to the mall.   Ask for discounts whenever possible, and don’t be afraid to haggle!

Once expenses are evaluated and a revised spending plan is in place, it is time to work with the creditors.   Negotiations to reduce payments or freeze interest can either be attempted personally, or by a company.  In cases where there is maybe just a creditor or two, it may be possible to manage the repayment schedule without assistance.  However, in cases of multiple creditors, it may make sense to seek advice from a professional agency.

This post was written by Andrew, who represents payplan.com.

From Kris:   Don’t wait to be so deep in debt before evaluating your expenses!   The more information you have, the better prepared you will be to make financial decisions.

What tactics would you employ if you found yourself overwhelmed with debt and were getting swarmed by collection agencies?  If anyone has ever been in this situation, I would love to hear how they got back on their feet.

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{ 25 comments… read them below or add one }

The Biz of Life October 29, 2010 at 7:40 am

I dumped all my debt years ago. And as Dave Ramsey says, “I’m living like no one else,” and have absolutely no regrets.

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Roshawn @ Watson Inc October 29, 2010 at 9:52 am

I’m in the same boat….never going back!

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Kris October 29, 2010 at 10:07 am

No debt for you either Shawn? Then you are doing fantastic too!

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Roshawn @ Watson Inc October 29, 2010 at 11:38 am

Kris, this excludes the home because we’re selling it soon. Renovators in the home as I speak!

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Roshawn @ Watson Inc October 29, 2010 at 11:40 am

as I “write.”

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Kris October 29, 2010 at 4:49 pm

I could hear you Shawn… 🙂 Are you moving far? New house? Very exciting. I think we will be in my current house a looooonnng time!

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Roshawn @ Watson Inc October 29, 2010 at 8:39 pm

We are moving far…to the Delaware/PA area. We’ll be renting until we know the area better, and then we will buy again. I really can’t wait!

I wish we were in a position to settle in one place like you, but our careers are influencing where we live.

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Kris October 29, 2010 at 10:07 pm

Shawn – Our family totally determined where we live. Believe it or not, we turned down an offer to go work for Microsoft back in 1997 because of family situations. I don’t regret it though as it all worked out for the best, even though I would be able to afford a Mercedes had we gone…

Are you relocating far? I think it is great that you are renting first to get to know the area first. You can get to know school districts better and you can take time to see what you like and find a great deal!

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Kris October 29, 2010 at 10:03 am

Biz, I am so envious. I still have 7 years on my mortgage, but trying to pay it off sooner. So many people say you should just keep that mortgage if the interest rate is low, but I don’t care. I want it gone.

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Roshawn @ Watson Inc October 29, 2010 at 11:46 am

I’m with you here: decrease your risk by paying it off and invest the difference.

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The Biz of Life October 30, 2010 at 9:08 am

I made the decision to jettison my debt about 8 years ago, when the company that I worked began downsizing in earnest. Since then, they’ve RIFed in bulk 2 to 3 times a years. I knew the time was coming when they would get me because of my age and years of service. I’m glad I was ready when they let myself and 15,000 other people go at the end of this summer.

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Nicole October 29, 2010 at 8:02 am

A talk I went to said that the big thing that people find when they foreclose on someone’s house is a huge pile of unopened mail. People who are in real financial straits often just put their heads in the sand and let life happen to them. (Which is why some modification programs just don’t work– they can’t get the people who need them to open their mail!)

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Kris October 29, 2010 at 10:06 am

Nicole, I am sure it is incredibly depressing to be in such financial straits. I think people feel it is just black and white. They owe so much money and they don’t think anyone is willing to work with them to straighten it all out. If I did try all other avenues and was still losing my house and everything else, I probably wouldn’t open the mail either! (I would probably turn off my phone too…)

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Squirrelers October 29, 2010 at 9:56 am

I think a big thing for people is to be open and honest with themselves, and not try to hide reality. If a person’s in debt, it’s best to acknowledge reality. Otherwise, you’ll never get back on track, and might keep engaging in self-defeating behaviors that make it even tougher to get your life in order.

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Kris October 29, 2010 at 10:08 am

Monsieur Squirreler- I think a lot is a lack of knowledge of what help is available, and also denial (as you said). Some people truly love to spend, and will end up in that same cruddy boat over and over.

Avoiding the problem will only make it a million times worse, but some people prefer to keep their head in the sand, which is kinda scary.

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Aloysa October 29, 2010 at 12:19 pm

Well… We managed to pay down about 8K in our debt this year. We are still deep in debt but hey it’s 8K less! I swore that when we are done with our debt, we will NEVER EVER never ever (I cannot repeat it enough) will go back!

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Kris October 29, 2010 at 4:51 pm

Hey that is great Aloysa! I loved when the student loans and wedding were paid off, but it did take a long time. Be patient and celebrate small victories!

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Suba @ Wealth Informatics October 29, 2010 at 1:50 pm

We don’t have any debt, right now… but we will have it when we buy a home. We have started talking to some folks about calculating how much we can afford, closing cost etc. The mentality we see is – we should go for the largest house possible. For example, we would like a house that we can afford with just my husband’s income. When I says, I always get – but you won’t get much with that, you can’t have a baby in that small house… I just smile and leave it at that. But what I want to say is 1) I grew up in a 1 bedroom apartment. And we had 6 people in that 1 bedroom apartment. So I think we will manage just fine 2) even if we won’t get much with that, that also means we can’t afford more than that either, who said I deserve to have a bigger house? if the small home is all I can afford then that is what I get… coming back to the debt. I think if people don’t cheat themselves thinking they deserve more than they have, it will be fine.

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Kris October 29, 2010 at 4:57 pm

I love your attitude Suba! I have never understood why people have to buy such giant homes. I do think there is some value to buy a little bigger house than you need at the moment if your family might expand, but I would never buy the largest house I could afford. If you do that, then you are totally working to support your house, no thank you!

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Nicole October 29, 2010 at 7:59 pm

As someone who did buy the biggest house she could afford (luckily DH didn’t have a job offer at that point yet, or we might have ended up with something even bigger!), I totally agree with your philosophy and wish we’d thought that way several years ago. (Check out our mortgage update on Nov 1st. The amount we’ve paid so far would buy a reasonably decent house in town… but so would the amount we have left.) AND they’ve changed the school districts on us… so… we might have to move anyway, or go private.

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Kris October 29, 2010 at 10:03 pm

Nicole – I am shocked they were able to change school districts on you. Was there an uprising? I mean that affects property values and all kinds of things.

Looking forward to your post November 1st!

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Nicole October 30, 2010 at 8:39 am

They changed school districts ALL OVER TOWN. They specifically said they didn’t care about how close kids were to the school or what school the kids were going to previously. They just wanted to even out the poverty levels across districts.

Of course, they didn’t change the school districts for the 300K+ neighborhoods (average housing costs in town are somewhere in the 140s, my neighborhood is in the 200s). So the school with 22% poverty still has 22% poverty (they’re not busing the rich kids to schools far away from them) and moving us changed a district from upper 50% poverty to lower 50% poverty, while not changing the demographics of the district they moved us from much (still lower 50% poverty) but breaking all sorts of volunteering ties etc. from our neighborhood that are going to take a few years to build up at the new school. It’s stupid and I think the school district has WAY too much money. If they had to worry about the cost of gas they would never have done anything this dumb. On top of that, they’re going to redistrict AGAIN in 5 years. And they redistricted 5 years ago. Basically the only way to keep stable property values is to live 30 min away from work in one of these fancy newer subdivisions with the expensive houses. Ugh. I could go off for ages. We may end up doing Catholic school… but we’ll have to see.

It’s definitely a boon for real estate agents. House sales perked up after the change.

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First Gen American October 30, 2010 at 2:16 pm

The hardest part is just starting.

Although I don’t have a debt problem, I currently feel a little overwhelmed by the amount of renovations that are needed at my mom’s house. She’s got two rotting bathrooms, siding flopping off her house, a broken garage door, gutters coming loose. I just have ignored it for a month and have done nothing.

I guess even if you just open the mail, that’s a start.

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Len November 2, 2010 at 10:47 am

I think this is an excellent article and people should learn to live within their means especially nowadays with so much uncertainty. Thankfully we were fortunate to be able to pay off our mortgage 2 years ago so thats one thing not around our necks.
Very good info 🙂
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Kris November 2, 2010 at 11:27 am

Congrats on paying your mortgage off, what a great accomplishment!

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