En español | You may have reviewed your finances in December and thought the amount of debt you carried was just fine. But as the coronavirus pandemic has ground the nation to a halt, your debt may be crushing you. If you’re wrestling with debt, it may be time to seek a credit counselor — but you need to be careful choosing one.
U.S. household debt has risen steadily for the past five years, reaching nearly $14.2 trillion at the end of 2019, according to the Federal Reserve Bank of New York. Households accustomed to paying monthly bills may not wake up to a debt problem until it’s spiraling out of control.
Hiding credit card statements from a partner is one clear warning sign. Others are repeatedly making just the minimum payments and having trouble keeping up with other regular expenses. And if you’ve lost your job — as record numbers have during the coronavirus epidemic — debt that once seemed manageable can become overwhelming, especially if you don’t have much savings. “If you find there’s nothing or very little in your savings account, then you’re no longer dealing with a nuisance. You’re dealing with a crisis,” says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC).
Make a budget and get help
The first step to get debt under control is to start a budget. You don’t have to use Excel or an accounting ledger. Budgeting apps like Mint or YNAB (for You Need a Budget) can help you track every dollar coming in against every dollar spent. Then you can separate all your expenses between the necessary ones — such as utilities, or rent or mortgage — and the discretionary ones — such as entertainment, travel or dining out. Cutting discretionary expenses can quickly free up money to pay off debt.
If you’re still having problems with debt, reach out for help. You can get plenty of good help for free. McClary says that most lenders and credit card companies have programs to modify or reduce monthly payments to prevent accounts from falling into delinquency, even if they don’t advertise them. You simply need to call and ask about them. Many universities, military bases and credit unions offer low-cost or free credit counseling services. Or ask a trusted financial adviser, accountant or friend for a referral to a good credit counseling service — a much better way to find help than online or TV ads.
You can also turn to the NFCC, which has a rigorous vetting process for nonprofit credit counseling agencies. The industry organization conducts onsite audits and interviews, and checks compliance with state regulations, McClary says. And the U.S. Department of Justice maintains a list of approved credit counseling agencies by state.
Most credit counseling organizations will offer a free hour-long consulting session. Gather information beforehand on your income, expenses and all creditors, along with a clear expectation of how you want to resolve your debt issues. Then make a list of questions to ask:
- What’s the organization’s track record in helping others?
- How long has it been in business?
- Is it accredited and licensed, and if so, by whom?
- Does it offer references?
- What help exactly is it offering, and does it match your needs?
- Will it offer assistance if you’re sued by collectors?
- How will repayments be handled, and what access will you have to your money?
- What fees are being paid, and when?
The Better Business Bureau and the Consumer Financial Protection Bureau also have databases that list complaints and how they were resolved. And watch for warning signs, such as guarantees to solve your debt problems. “If they ask for your money up front, that’s an immediate red flag,” says Leslie Tayne, founder of Tayne Law Group. “If what they’re saying doesn’t sound right, or if you get a gut feeling that makes you uncomfortable, you don’t have to go ahead with them.”
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What type of counseling?
Credit counseling companies can offer several different types of services, all of which you should research carefully.
Credit repair companies may offer to consolidate your debts into one loan, typically with a lower interest rate. For example, they may help you roll high-interest credit cards into a low-rate card. You’ll need a good credit score to do this, and if you don’t repay by the time the low rate offer expires you could wind up with a much higher rate than you began with. And you’ll have to be sure that you don’t rack up new charges while paying off your card.
Debt-management companies negotiate with creditors to pay a reduced amount from an escrow-like account you contribute to each month. Be especially wary of companies that tell you to stop paying creditors directly or even communicating with them. Creditors may simply opt to sue you for any money owed, and may damage your credit rating as well. And any amount of forgiven debt over $600 is considered taxable income by the Internal Revenue Service. Ask up front about fees, how long it will take to get results, and whether you can withdraw your money without penalties, if necessary.
Other credit repair agencies may suggest declaring bankruptcy, which may be appropriate for some people but can stay on your credit report for 10 years, and can make it harder to get a mortgage, insurance or even a new job, even though it’s illegal to fire someone or deny employment because of a bankruptcy. “Once you go through the bankruptcy process, you can’t undo it,” McClary says. “It’s usually an option only after you’ve exhausted almost every other possibility.”
Whatever solution helps you climb out of debt, acting on the first sign of a growing problem can save money in the long run. “I’m a big believer in an ounce of prevention,” Tayne says. “People should reach out for help sooner rather than later. But in 23 years of doing this, I’ve seen that most people do not reach out when it’s still a potential issue. They wait until it’s a big issue where it just seems crazy.”