Debt is debt. It doesn't matter how you incurred it. It doesn't matter why you cannot pay it right now. Whether you are a victim of the economy, bad health, impulsiveness or any other reason, it is of no concern to us here. This diary and discussion is about methods of managing debt you cannot pay, debt you have lost control of.
I am offering and soliciting common sense advice for dealing with too much debt in general. Some strategies that may be discussed here have been helpful in the past but may not be as useful right now if your creditor is feeling pinched, even though other creditors in similar positions might be more willing to deal. We'll try to make certain that none of the advice falls afoul the law, but both the federal government and state governments have rules about consumer debt that may be a bit different for you than for me. In some circumstances consulting an attorney is a very good idea. If you think realistically that you will not be able to manage your debt without going into bankruptcy, talk to a bankruptcy attorney before you do anything else. Don't try to put things off until you are at the point that there are no other choices.
The first step to managing your debt is to have the right attitude. That attitude is that this is a problem to be dealt with. At the moment, the cause of the debt does not matter. As budgeting pros say, it's a sunk cost. The money was spent. The question is, how will you pay the money back that you can and how will you settle the debt you cannot pay.
This is a business transaction. There is no moral culpability here. People lent you money, expecting to get paid back, but they also knew that they took a risk that you might not be able to pay it back. Some of those lenders took a secured interest in the item that you bought with the money they lent. You had agreed that you would give them the house or the car if you could not keep up the payments. Not surprisingly, most debtors are most concerned about those items because the agreement allows the lender to take back what you pledged to get the loan. Other debt, unsecured debt, is money you owe that the lender might need to go to court to get payment for. While you might think you are better off letting those things slide, don't make that decision until you know your finances well.
Don't try to avoid dealing with debt you cannot pay. Yes, it may feel oppressive. It may make you worry. It may seem nice for a bit to try to put it out of your mind, but it won't go away. The longer you put off dealing with debt, the more problems you can bring on yourself. People will start bothering you. They are collectors, even the ones who are scrupulously within the law are a pain. Don't wait until you hear from them. The faster you are at dealing with a debt you cannot pay, the better your opportunity to control the way the process plays out. This is particularly important if you have a history of good credit.
The first place to start, if you think you have a realistic ability to pay things off later on (if you are totally swamped and have no chance in the next couple of years to get things under control, go directly to bankruptcy), is your creditors. They want to get paid. They also don't like surprises. They may eve be the solution to your problems. How?
Often folks know they will be in a financial jam for a while, but know when they will get out of it. Historically, refinancing a house or taking out a second mortgage or home equity loan was a good way to manage temporary cash flow difficulties. Of course, that only works if you have a lot of equity in your house, not something that very many people with cash shortages have available today.
Many credit card companies still offer checks for their cardholders to use with special promotional rates, like 2% up front and 5.99% or so until paid. If you have such a current promotional check sitting around and you just lost your job, writing a check to yourself for a few thousand dollars might help you keep paying the bills while you sort things out. Paying off other credit card balances with that money before the interest rate on them zooms up may also be helpful. Warning, this is only a sensible way to handle things if you know you have a reasonable period of time to deal with the problems before the become overwhelming. If you anticipate bankruptcy in the very short term, this could make things less simple.
If you don't have a line of credit to draw on, you still need to talk to the folks you owe money to before you don't pay them. Work out for yourself a very realistic no-frills budget, you'll need this no matter what happens. Don't make it a budget that you cannot handle for yourself -- not only will you blow the budget, but it's human nature to give up -- putting you in worse shape. Say, for example, that you still smoke cigarettes. Don't tell yourself that you'll quit and won't need to budget for it. You won't, not under those circumstances. If you manage to quit, great, just don't plan on it.
Once you have a budget to work with, talk to everyone who will expect to be paid. Landlord or mortgage holder, utilities, hospitals, clinics, credit card companies, anyone who has routinely extended you credit that you won't be able to pay reliably. You won't be the first person that has had this problem. Tell them what you think you can pay, try to share the pain among all of them but you don't have to be perfectly fair. If your landlord is willing to let you pay 80% of the rent each month and owe the rest until you get back on your feet, that doesn't mean you need to offer 80% of the minimum payment to the credit card company. Don't make an agreement immediately. Tell each creditor your general circumstances and explain that you want to be as fair as you can to them. Tell them that you will be able to give them a definitive answer after you have talked to all of the creditors. If you cannot get an arrangement that works for you, if you cannot get the creditors to agree to enough deferrals to make things workable, or if you don't have the time or the personality that would allow you to do this, find a reputable credit counselor to help run interference.
Credit counseling, really debt counseling, is a very useful program when offered by folks who are trained properly in organizations that are not-for-profit in deed as well as in form. If you have no idea who a reputable credit counselor is, and almost no one does before they need one, talk to those who deal with them, including lawyers and bankers. While you will get some counseling which can certainly be useful in the future, credit counselors are in the position to help you set up a debt management plan, something you may not be able to do on your own. A bankruptcy filing might force you into using a credit counseling service, but even without bankruptcy credit counseling services are an important tool for those who have found that they cannot manage their debt.
Debt payment agreements can help you and they should stop any creditor from harassing you. Some debts are more challenging to work out. If you owe child support, make sure you talk to a family law attorney in the state you owe it before you try to do anything. Federally guaranteed school debt is another problematic area. Rescheduling can be done, but the law normally exempts school debt from discharge in bankruptcy.
Some assets can be protected in bankruptcy, but if they are security for a loan and you are in default of the loan, the bankruptcy protection won't help you. Again, state laws vary but it is usually a house and a car that are partially protected. That won't stop foreclosure or repossession though. Retirement programs are generally protected and some of the cash value in life insurance may be protected. Withdrawing money from those accounts should only be considered if you know you will be able to weather the storm without declaring bankruptcy.
Don't ignore the option of bankruptcy. I won't be saying too much here. I am not a bankruptcy attorney. There is a complex interplay of federal and local laws that makes it incumbent upon you to talk to a lawyer in your state about your choices. If you think you might end up in bankruptcy, start by meeting with an attorney.
The further behind you are in your bills, the more you are being harassed by collection companies, the better choice bankruptcy becomes. Just as creditors have to back off once they accept a debt management program, they have to back off once they have notice that you have filed bankruptcy.
For further information, the FTC has Knee Deep in Debt which expands on some things here.