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Help! How Do I Get Out of the Hole I’m In?

Freeze Those Credit Cards . . . and Other Practical

Advice on Paying Off Your Debts

By Elizabeth Lewin

Q: What is the best way to consolidate my bills to pay them off more quickly? Are debt-counseling companies worth it—or should I just go to my bank for a loan?

A: There are no quick fixes when your debts get out of control, but you can take some comfort in knowing that you’re not alone and that others have succeeded in consolidating and paying off debts that seemed to rival the national deficit. Once you make up your mind to pay off your credit-card bills, you’ll find great satisfaction in the progress you make along the way. Here are some tips to get you started down the road to freedom . . . from debt.

1. Apply for one or two lower-rate cards. You’ll have a better chance of being approved for these cards if you have good credit history and your debt is not sky-high. Issuers of low-interest cards have to be careful about whom they take on as new customers. Once you are approved, transfer balances from your high-interest cards to the newer low-interest ones. Introductory rates can be seductive, so read the small print carefully to determine what the rate will be in six months. Make sure that there are no fees involved in transferring a credit-card balance from one company to another.

2. Destroy your credit cards. Cut them up and return them to the issuers. Tell them to cancel your account and report the cancellation to the credit bureaus. This will keep you from charging new items on cards with outstanding balances. Keep just one credit card for real emergencies or, if you travel, for a rental car. Keep it in your safe deposit box or give it to your best friend or spouse for safe-keeping.

Marty put her credit card in water and placed the container in the back of the freezer. That way she has time to think twice about using it, while she waits for it to thaw out!

3. Get in touch with your creditors. If you can’t make your minimum monthly payments, explain why you aren’t able to do so right now, and ask them if they’ll either give you more time to repay your debts or reduce the amount of your monthly payments. Some creditors will agree to a lower monthly payment and/or a lower interest rate, while others will be hard-nosed about it.

4. Consider a debt-consolidation loan or a home-equity loan. These loans are not for everyone. They will work only if you are able to get a loan that reduces your monthly payments and the amount of interest you’re paying. You need to be especially careful if you’re putting your home on the line—which is exactly what you are doing when you take out a home-equity loan to pay off your debt. Be sure to cut up your credit cards. Otherwise, you’ll be in hot water all over again if you continue to charge. You’ll have new debts, on top of the home-equity loan that you’re paying off, and you’ll hurt your chances of finding a lender who’ll give you a low-interest loan to pay off the new debt.

Gigi, for instance, is in a real bind. She cannot get a home-equity loan, because her existing credit-card debt is too high, and the interest on a consolidation loan is higher than the interest she currently pays on her credit cards. She is someone who might benefit from professional assistance.

5. Go for credit counseling. If you want to get out of debt, but you can’t do it on your own, credit counseling might be right for you. The goal of these services is to help people devise a plan for managing their debt. Their staffers will work with you to establish a budget, create a debt-repayment schedule that you can live with, and even negotiate with your creditors on your behalf. Look in the Yellow Pages or on Internet search engines for reputable agencies and interview several before you sign up with one. They are not free. Ask for referrals, how much it will cost you, how they are compensated, and if they recommend bankruptcy, when that is the only way to go.

If you are a credit addict (you know who you are), consider joining Debtor’s Anonymous, which follows the 12-step Alcoholics Anonymous program (again, look in the Yellow Pages or on the Internet for local branches), to help you kick the spending habit.

6. Bankruptcy. Sometimes you just have to call it quits and declare bankruptcy. Last year, more than 1.4 million people did just that. Before you take the step of declaring personal bankruptcy, you should plan to talk to a lawyer about the various chapters of the Bankruptcy Act. Chapter 7 covers a straight bankruptcy: the court collects, sells, and distributes your assets with certain exemptions. Chapter 13 allows you to consolidate your debts and pay a percentage of them, as approved by the court, over a three-to five-year period. Certain types of debt cannot be discharged, including recent student loans, alimony, child support, and most taxes. Each state sets its own rules about which types of property are exempt from bankruptcy proceedings. Some states allow you to keep your primary residence.

Caution: Beware of advertisements for companies that promise to “repair your credit report.” What these ads don’t tell you is that a fairly hefty fee is involved and that the results are anything but guaranteed. All these companies can do to improve your credit rating is to write to the credit bureaus on your behalf and challenge certain items that appear on your report—and that is something that you can easily do for yourself for free.

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Financial planner Elizabeth Lewin is the co-author of the recently published book, “Family Finance” (Dearborn Trade). She is also the author of “Your Personal Financial Fitness Program,” “Financial Fitness for Living Together,” and “Kiss the Rat Race Good-bye.” Elizabeth has written articles for Redbook, Reader’s Digest’s New Choices, and Arthritis Today, among other magazines, and she has appeared on numerous national radio and television talk shows. She is a member of the editorial board of MAKING BREAD.