An English proverb goes, speak not of my debts unless you mean to pay them. Most of us will not find someone to pay our debts for us. Does that mean we shouldn’t discuss them?
On the contrary, talking about debt is one way to understand it, and therefore control it. Debt can be ruinous if not managed, especially to someone with little or no income. Maybe you’ve lost your job, been laid off, or gone on disability. Are you doomed to a lifetime of mounting debt? Of course not. Read on to find out a few techniques at your disposal. This article will show you how to pay off debt fast with no money (credit card debt, etc.) and also how to get out of debt on a low income.
What Are Good and Bad Debt?
The first step to successfully managing and paying off debt is understanding the difference between good debt and bad debt. Bad debt includes credit cards, payday loans, car title loans, and other short-term products. These financial instruments feature high-interest rates and short repayment terms.
Payday loans, for example, can have APRs over 800% and must be repaid from your next paycheck; two reasons why such loans are banned in some states. Other lenders like Lendmark or Time Financing make loans of one to two years and charge 25-30% APR. This is not quite as bad as a payday loan, but it’s in the ballpark. These short-term, high-interest loans accumulate interest quickly and are difficult to pay off before the loan term expires. When the debtor fails to pay them off in time, they often accumulate significant fees or higher interest rates.
Good debt, by contrast, is low-interest, long-term (5+ years), and often secured by something of value, like a house or a car. Home loan interest rates, for example, are at less than 5%. You can refinance the loan or sell the house, giving you options if you’re not able to keep up with payments. Student loans are another example of good debt, and likewise, feature very long loan terms and low-interest rates. Payments are also usually deferred until after you graduate.
Think of it this way: good debt is an investment that will grow in value. Good debt propels you forward by helping you invest in things like an education or property, instead of holding you back. Bad debt leaves you with nothing but a monthly bill.
Get Debt Counseling to Manage Personal Finances
Debt counseling can help some get their financial situation under control, often by creating a plan to pay off debts. Debt counseling, sometimes called credit counseling, is a process of learning how to repay debts and better manage personal finances. Debt counseling involves choosing and meeting with a counselor and then, if appropriate, creating a debt management plan to help you manage payments.
Step 1: Choosing a Debt Counselor
When choosing a counselor, you should pick from among accredited organizations with strong reputations. Trustworthy accreditors include the Association for Financial Counseling & Planning Education or the National Foundation for Credit Counseling. The AFCPE and NFCC have strict quality, financial, and ethical standards for membership—standards that protect you.
The following are three recommendable companies that provide debt counseling services, all accredited by the AFCPE and/or NFCC. Each is a non-profit and focuses on education as part of their debt management services.
- ClearPoint: This Atlanta-based company is one of the best. ClearPoint offers credit counseling and can help you set up a debt management program. They have low fees and useful resources, and the first credit counseling session is free. They can meet with you online, so services are available nationwide.
- AAA Fair Credit Foundation: Based in Salt Lake City, Utah, this company offers financial counseling for housing, student loans, and payday loans. They also help people create debt management plans in Arkansas, California, Florida, Georgia, Louisiana, Texas, and Utah. For those in the Salt Lake City area, they also offer educational events on debt management. Educational programs may also be live streamed and thereby available to those who live elsewhere.
- Credit.org: Since 1974, this company has educated consumers on bankruptcy, reverse mortgages, and debt management. Call 800-431-8157 to get started and speak to a counselor, or sign up for a debt management plan. Many services are free, and most are offered by phone or in person (and, some are also available online). Credit.org serves clients nationwide.
When you meet with a counselor, bring or have available info about your household income, like paycheck stubs; about your expenses, like household bills or food and transportation estimates; and about your debts, such as credit card bills. Be honest about your situation. After reviewing your finances, the counselor will advise you on a budget designed to pay off your debts as soon as possible.
Step 2: Developing a Debt Management Plan
Some clients need more than advice — they need a debt management plan. With debt management plans, the counselor negotiates with your creditors to reduce your interest or payments to something you can afford. You pay the counselor each month, and the counselor distributes the money to your creditors.
Debt management plans usually last three to five years. The best ones charge minimal or no fees, giving most or all of your payment to your creditors. You’ll most likely keep paying interest on the debt, but the interest may be reduced. You will probably also lose access to your credit cards, as your creditors will close the accounts. These setbacks, however, are preferable to the alternatives: falling so far behind that your creditors charge increased fees or sue you for non-payment.
Warning: A lot of so-called counselors are actually debt settlement companies, for-profit ventures (most reputable counselors are non-profit) that offer no education or counseling. These companies negotiate lump-sum settlements on your behalf, which sounds enticing but is risky. A settled debt shows up negatively on your credit score, and some companies charge high fees while providing little or no service. Avoid these companies if at all possible. See information on choosing a credit counselor on the Federal Trade Commission’s website.
To avoid debt settlement companies, chose a company from our list above. Or, if you stray from the list, make sure the company you choose is accredited by the AFCPE, NFCC, or both.
Consolidate Debts with a Low-Interest Loan (Your Low-Income Path)
As the saying goes, you can’t borrow your way out of debt. What you can do, however, is borrow at a lower interest rate and use that cash to pay off a higher-interest loan. This saves you money in the long run because you are paying less in interest. It can also reduce monthly payments, making it less likely that you will fall behind financially. The following are three type of loans best suited for this purpose.
1. Home Equity Loan
- What is it: Also called a second mortgage, refinancing, or refi, it is a loan secured by your ownership stake in your house, which is why the interest rates are low. You keep your house, of course, but get extra cash that can be used to pay off high-interest debt.
- What do you need to get one: A home and a credit score, though it doesn’t have to be great. Some lenders accept borrowers with FICO scores as low as 580.
- What are typical interest rates and fees: Rates can be as low as 3%, and some lenders don’t charge application or closing fees, which saves you money.
- What is the typical loan term: 5-15 years
- Where can I get one: LendingTree is one of the best providers. The company is not itself a lender. Rather, it connects you with one or more of its 300+ banks, enabling you to choose the one that best fits your needs.
2. No-Interest Credit Card
- What is it: A credit card with a low APR. The idea is to transfer the balance of your high-interest card(s) onto one of these. For this to work, the credit card must have minimal APR and balance transfer fees.
- What do you need to get one: A good FICO score (650 or above)
- What are typical interest rates and fees: 0% APR and no-fee (or low-fee) balance transfers
- What is the typical loan term: Usually, these cards have an introductory low or no APR term. The no-interest period doesn’t last forever — usually 12-18 months.
- Where can I get one: Chase and Citibank have some excellent offers on cards with low or no balance transfer fees.
3. Educational Loan
- What is it: Student loans pay for an education, so they are an investment in yourself, enhancing your job skills. Community college career or technical training programs, for example, are critical in meeting workforce demands, and they often last only a few months.
- What do you need to get one: For federally-funded student loans, there are a few basic eligibility criteria: be a U.S. citizen, be enrolled in a college, and demonstrate financial need.
- What are typical interest rates and fees: 3-5% APR. The best part is you can borrow more than you need for tuition and fees and use the cash to pay off high-interest debt.
- What is the typical loan term: 20+ years. Student lenders are very flexible with their arrangements. If you can’t make your payment for a couple of months, it is usually easy to get a deferment or forbearance.
- Where can I get one: Straight from the U.S. Department of Education.
File for Bankruptcy (Your No Income Path)
When discussing how to get out of debt with no money, bankruptcy is the real option. Bankruptcy the process by which a debtor asks a court to discharge the debtor’s debts and take away the creditor’s right to collect from the debtor. We don’t purport to offer legal advice here — you should consult an attorney about your specific situation. Bankruptcy law is complicated and nuanced. Here are the basic to help you get started.
The most common types of bankruptcy filings for individuals are under Chapter 7 and Chapter 13 of the U.S. Bankruptcy Code. To be eligible for either of these types of bankruptcy, you have to have sought debt counseling within 180 days prior to filing the bankruptcy claim. When deciding between either Chapter, be aware that filing under one generally precludes you from later filing under another for a specified length of time. Properly filing under either chapter will automatically stay the creditor’s right to collect from you for the duration of the court proceedings.
Chapter 7 Bankruptcy
Chapter 7 is total liquidation generally available to any individual, but if your income is above the state median, the Bankruptcy filing will be presumed abusive, unless you can show special circumstances. This may be referred to as the “means test.” For those who qualify and file properly, bankruptcy is granted 99% of the time.
Upon successful resolution, almost all debts are discharged — both the principal and interest or fees. Student loans, because they’re from the government, are not forgiven under Chapter 7 unless you can prove an undue hardship, which few people can. Another common debt that won’t be erased is any lien on property. Debts such as alimony, child support, and certain taxes can’t be discharged either.
The downside to a Chapter 7 lining is that you lose any property associated with the debt. The court repossesses it and sells it to offset what you owe. As with most things legal, there are limited exceptions to this general rule, so consult with an attorney about the nuances.
Chapter 13 Bankruptcy
A Chapter 13 filing, on the other hand, allows you to keep property but is only available to wage earners. Chapter 13 should appeal most to those who are at risk of foreclosure and are looking for a way to avoid losing their home. The source of income qualifying you for Chapter 13 need not be from employment — unemployment benefits, Social Security, rental properties, or other income can be used if the court approves it.
Under Chapter 13, your debts will not be discharged. Instead, you agree to a debt repayment schedule that typically takes three years. These payments are made to the bankruptcy court, which parcels it out to your creditors. You keep your house and car, and your creditors have to cease collection activity.
For some people, the impediment to filing for bankruptcy is the initial cost. While Chapter 7 does allow the court to waive court fees for those at 150% or less of the poverty line, there are still attorney fees. Most attorneys charge around $1,500, which you have to pay upfront. One option is to borrow that cost via a short-term loan and then discharge the loan through the bankruptcy. If you try to do this, chose an unsecured loan, so that there are fewer risks you will lose any property.
While some of it is good debt and some bad, it all has to be addressed, which can seem impossible when you have little or no income. Most of us want to be good stewards of debt and pay it off. You can do this through the methods discussed in this article. If those simply won’t work, you can try the only surefire method for debt reduction: filing for bankruptcy. Whether you have low income or no income, one of these strategies will work for you.
The most important thing to keep in mind is that debt is not a moral failure — it is a business decision that sometimes goes awry. Approach it as a problem needing a solution, stay calm and focused, and be creative. You’re sure to discover the most effective option for you.
Have you been getting calls from Penn Credit? Wondering who Penn Credit collects for? See our article for details.