Over-indebtedness can lead to stress, family problems, repossessed property, garnished wages and even bankruptcies; however, options exist to help families manage financial challenges when bills pile up and families are unable to manage them.

Develop a Debt Management Plan

If you have more bills than your monthly income can meet, develop a debt-management plan. To do so, follow these steps:

1. Determine who you owe and how much you owe.
2. Determine how much you can pay back and when it can be paid.
3. Develop a plan for paying your debts.
4. Discuss your plan with your creditors.
5. Control spending by following your debt repayment plan until debt is repaid.
6. Monitor your plan.

Who Do You Owe?

Check your credit statements and list the following information about each creditor:

• Name of creditor
• Creditor’s address
• Creditor’s phone number
• Your account number
• Collateral (property or any other asset that secures a debt
• Balance owed
• Remaining number of payments
• Monthly payment
• Payment due date
• Amount last paid
• Date last paid
• Legal action taken
• Collection agency or attorney

Determine How Much You Can Pay

After you have listed all of your creditor information, determine how much you can pay each creditor and how long it will take to pay each debt.

Try to limit your monthly credit payments to no more than 20 percent of your monthly take-home pay; 25 percent should be the absolute maximum. Most families need 75 percent of their income for daily living expenses.

Consider these options to help find money to repay debts while maintaining necessary daily living expenses:

• Track your expenses for at least a month to find ways to reduce expenses.
• Consider selling assets to increase money available for debt repayment.
• Increase your family income.

Develop Plan to Pay Debts

After you have a clear picture of how much money you can pay back and when you can do it, determine how much you will pay each creditor and how long it will take to pay off the account. Try to develop your plan so creditors can be paid within three years.

Consider Debt Pro-ration

Debt pro-ration is an arrangement between a debtor and creditor, often made through a credit counselor intermediary, to reduce payments to a portion of the balance due. First, living expenses are reduced to provide as much available income as possible for debt repayment. Next, the pro-ration is calculated using the following formula:

If, for example, the percentage of pro-ration is 50 percent, each creditor is then offered a prorated payment of 50 percent of his regular monthly payment. Pro-ration percentages below 2.5 percent are generally inadvisable.

If a debtor has secured property (such as a car) that cannot be prorated because partial payment would result in repossession, the debt pro-ration formula is:

Percent of Pro-ration  =	Monthly dollar amount available to repay debt
	- Total of monthly payments for secured items)
	Total debt balance - Balance on secured loans

The household would continue to pay its regular payment on the secured item, plus the prorated amount of the existing balance due unsecured creditors. It is absolutely essential that all creditors receive something each month and that no single unsecured creditor receive a disproportionately larger sum than the others.

Discuss Plan with Your Creditors

Convincing creditors to accept pro-rated payments may be the biggest challenge to implementing a debt pro-ration plan. Creditors are generally more responsive if you take the initiative to contact them first and express a sincere desire to pay your obligations.

Contact each creditor to explain your plan. A personal visit or letter is better than a phone call. Be sure to include the following:

• Why you fell behind in your payments (job loss, illness, divorce or poor money-management skills)
• Your current income
• Your other obligations
• Your plan for bringing this debt up to date and keeping it current.
• The exact amount you will be able to pay each month.

Make every effort to fulfill your end of the agreement. Failure to do so will harm your chances of getting future credit. Inform your creditor if there are any changes that may affect your payment agreement.

Debt Reduction Strategies

Many factors, including level of compliance to a household spending plan (budget) and the repayment plan, will influence your success. Consider these strategies to help reduce debt:

• Power payments. Repay one debt, then shift the money used to pay the initial debt to increase payment to another debt. Process is continued until all debts are paid. Contact your local LSU AgCenter Extension Office for a free PowerPay© computer analysis to develop a monthly repayment schedule. It will also calculate the time to payoff and savings that can be achieved.
• Professional debt counseling. Professional debt counseling services can assist households who have or wish to avoid serious debt problems. Consumers agree to commit a specific amount each pay period toward debt repayment and are required to surrender or destroy their credit cards. A small fee may be required for administrative costs.
• Refinancing. Benefits of refinancing include reducing monthly payments when interest rates decline, tapping home equity, consolidating high interest debt and switching to a different type of mortgage. Refinancing does not pay when closing costs will not be recouped or when a simpler, less expensive loan is more suitable.
• Home equity lines. These loans offer some of the best interest rates available, yet can entice continued spending. Credit lines count as a debt on credit reports, likewise affecting credit scores. Use credit lines to borrow only what is absolutely necessary.
• Voluntary surrender. Asset is returned to the creditor or sold (with creditor’s permission) to prevent repossession or foreclosure. Use as a last resort when foreclosure is unavoidable and little or no equity exists.
• Composition and extension agreement. A legal contract, agreed to by the borrower and creditors, to make specific partial payments to repay debts over an extended period.
• Deferment. Debt deferment is simply a postponement of delinquent payments. Overdue payments are added to the end of a loan contract, and the borrower's account is considered to be current. Contact lenders as soon as it is evident payments cannot be made on time.
• Negotiating with IRS to defer tax liability. Professional assistance is essential for this option. Be aware that the penalty for not filing a tax return is much higher than the penalty for not paying the tax bill.
• Seek cheaper money. Consider credit unions, family loans or cash value life insurance.

Monitor your Progress

Look at your plan occasionally to determine if you are keeping up with your debts and meeting daily living expenses. If there is a change in income or expenses, you may need to adjust your monthly payment plan accordingly.

Strategies for Salvaging a Home

When consumers are faced with the loss of a home, financial advisers may suggest:

• Negotiating a revised repayment plan
• Refinancing second mortgages or home-equity loans
• HUD Assignment (for FHA loans only)
• Recasting the loan to extend its term
• A forbearance agreement where lenders suspend payment for a limited period
• Sale-leaseback
• Reverse annuity mortgage
• State homeless intervention programs
• Sale of home
• Chapter 13 bankruptcy

Bankruptcy:  Going for Broke

Bankruptcy has become an increasingly common way to deal with debt. While bankruptcy gives people a fresh start to rebuild their financial lives, bankruptcy is not an easy way out. It is a last resort, to be considered only when all other options have been exhausted. Two types of bankruptcy exist:

Chapter 7. The Chapter 7 discharges most obligations. Filers must surrender all assets that are not legally exempt. Non-exempt assets are sold, with the proceeds divided among creditors. The right to future income is retained. Another Chapter 7 bankruptcy cannot be filed for six years from the date of initial filing.

Chapter 13. With a Chapter 13 bankruptcy, a voluntary payment plan is proposed and approved by the court to repay all or a portion of debts from future earnings within three to five years. Debtors are permitted to keep their property and submit a monthly payment to the trustee, who disseminates it to creditors. Chapter 13 is best suited to those with stable incomes and equity in secured assets like a home or car.

Both forms of bankruptcy remain on an individual's credit report for 10 years.

Summary

When debts seem overwhelming and your monthly income is not sufficient to cover your obligations, there are ways to solve your debt problem. The road to financial recovery takes a total commitment. First, decide that you want to be debt free. Discipline yourself to take the necessary action to pay back your debts. Success depends on your determination to make the necessary sacrifices to achieve your goal.

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References

Consumer Credit Counseling Service. (1999). It's All About Money. Baton Rouge, La.

Garman, E.T. & Forgue, R.E. (1997). Personal Finance. Boston: Houghton Mifflin.

Howell, B. R. (undated). How to Get Out of Debt. (Publication No. 1737). Starkville, Mississippi: Mississippi State University Extension Service. [On-line]

O'Neill, B.M. (1995). Dealing with Debt. Unpublished manuscript, Rutgers Cooperative Extension Service.