Getting Help With Debt

Cheryl Allebrand

Gerri Detweiler began helping consumers cope with credit card debt in the late 1980s. That was back when the national consumer debt level was about one-sixth of today's $937-plus billion, according to data from the Federal Reserve.

At a glance
Name: Gerri Detweiler
Hometown: Sarasota, Fla.
Education: B.A., international business and political affairs, Taylor University; M.A., adult education and psychology, Vermont College

Career highlights:
Wrote "The Ultimate Credit Handbook" (Plume, 1993, revised 1997, 2003); co-author of "Slash Your Debt: Save Money & Secure Your Future" (Financial Literacy Center, 1999) and "Invest In Yourself: Six Secrets to a Rich Life" (Wiley, 1998).

Former executive director of the nonprofit consumer education and advocacy group, Bankcard Holders of America (1987-1993).

Former policy director for the National Council of Individual Investors (1995-1996).

Co-hosted an award-winning syndicated financial radio program, "From Here to Security" (1997) and hosted the weekly Internet program, "Everyday Wealth Radio" (2004-2006).

Debt is one of the biggest expenses many people face, Detweiler says. That's why she recommends that paying off debt should trump savings and investing efforts. She reasons that paying off high-interest debt ultimately offers a better return to consumers than retaining high-interest debt while parking savings in a money market account or perhaps even investing in the stock market.

Detweiler's bottom-line logic is likely rooted in her early financial training. In college she aspired to be an international banker, but ended up on the other side of the industry when she took what she thought would be an interim job at the consumer advocacy group Bankcard Holders of America. Now she is a personal finance author, credit expert and consumer educator who doesn't believe in one-size-fits-all financial solutions. Instead, she believes that the best debt-tackling strategy is the one to which you can stick.

She recently spoke to Bankrate about what consumers can do to dig themselves out of debt.

Debt busters

Investing in debt
Q: Mounting debt is a growing problem for consumers in our country. But does paying off debt take top priority over stashing any money away in savings?

A: Certainly you're going to get the most bang for your buck by paying down high-rate debt. Particularly if you've got credit card debt and your interest rates are not very low, you're probably better off paying all you can toward that debt and using your credit cards as emergency backup.

There are caveats; it's good to get into a savings habit even while you're fighting debt. If you have never been a saver, it may be something as small as emptying your pockets of change at the end of each day into a jar and then putting the accumulated money into a bank account.

If you haven't participated in a retirement plan at work, you may set aside a small amount to be taken out of your paycheck each month so that you get in the habit of setting aside that money. But if you have high-rate debt, that's the first place you should focus your financial attention because once that's paid off you'll free up a lot of money that you can then quickly start accumulating in savings or investments.

One size doesn't fit all
Q: Many people manage to dig out of debt but then fall back in again. Does it make sense for some people to cancel credit cards, despite credit score implications?

A: If credit cards are too much of a temptation, then yes, it does make sense to get rid of them. When it comes to getting out of debt, you really have to spend the time to figure out why you are where you are.

It's different for everyone; there's no one-size-fits-all solution. If your debt is due to an unusual situation or circumstance, say a car accident or you were laid off, then you might be fine using credit cards. It's not temptation that's your issue.

If you frequently find yourself turning to credit cards, and you spend more than you can afford with them, and as soon as you pay down one you start charging up another, then maybe you need to get rid of the cards altogether.

Expensive credit booster
Q: What would be some of the credit implications of ditching the cards? If someone's got a problem with credit card use, would the dings incurred while keeping the credit cards going be more damaging to their credit score than getting rid of the credit cards?

A: It's interesting because when I talk to consumers in distress, one of the most common things that they'll say is, "I don't want to hurt my credit rating." They may have a very high level of debt, but they don't want to seek help because they're afraid it will knock down their credit score. Of course, nearly a third of the credit score is based on the debt they carry, so their credit score may already be affected by the debt.

But we don't always see that. We usually look at whether we've paid our bills on time as a judgment of whether we are financially responsible.

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Sometimes it's not so much how much it will affect your credit score as how much it costs to maintain your credit score. In other words, someone who's constantly running up debt and having to pay high interest rates, or someone who has a lot of debt but doesn't get the help they need such as through a debt settlement company or credit counseling, will pay a lot just to maintain that credit rating -- literally thousands of dollars to maintain that credit rating, once they've paid interest.

If they bite bullet and get it taken care of, yes, their credit rating might take a hit. Yes, they may pay more for their auto insurance. But in the long run they'll pay a lot less because they wipe out the debt and start out fresh. So you have to look at it from both sides, what it will cost you if you damage your credit rating and how much it will cost you if you keep (your debt).

For the typical consumer, you do want to pay attention to your credit rating because it does affect other things besides your credit card costs. It is going to affect your mortgage, your auto insurance and everything else. But that cost is usually relatively small compared to what you pay in interest.

Getting back on track
Q: You speak about "biting the bullet" and taking the hit to the credit score to get back on track. Do you mean bankruptcy? Or is bankruptcy out of the question for all but the most desperate cases these days?

A: It can mean bankruptcy, but it doesn't have to, and here's where I differ from some of the other consumer advocates: There are a few ways to handle it.

First, if you have the means to dig out on your own in three years or less, then by all means do that. If you can't, then go talk to a credit counseling agency. Many people who would like to go that route can't because they can't afford the monthly payment on the credit counseling program.

Bankruptcy may be an appropriate solution. Anytime I talk to someone with a lot of debt, I always encourage them to talk with a bankruptcy attorney. It's confidential, it won't hurt your credit to talk to them, it won't cost anything to talk and it will get you over that biggest hurdle, which is the fear of what will happen if you file.

People have misconceptions that they'll lose everything, that men will come into their house and take all their furniture. That may or may not happen. Talking to an attorney gives them accurate information.

In between bankruptcy and credit counseling is the option of debt settlement. It's gotten a bad rap, understandably, because there are a lot of companies in that arena that are less than reputable. But it is an option for consumers, whether you decide to do it yourself or whether you decide to hire a company to help you. You may be able to settle your debts for less than what you owe and get the problem behind you, so you can work on rebuilding your credit and your financial life.

Debt settlement option

Q: How do you determine if debt settlement is a good option?

A: Nine out of 10 consumers I talk to absolutely don't want to file for bankruptcy. They'll do anything they can to try to pay back as much of their bills as possible. That's where debt settlement comes in. There's a number of criteria for choosing a reputable firm, but one thing to keep in mind is if a company pushes you toward debt settlement without taking the time to help you understand whether it's a good option, or if they're misrepresenting it as an easy solution to your debts, then run the other way.

Debt settlement is painful, just like any other solution. It's the surgery, it's not just the pill you take every day to make you feel better. It definitely has its pros and cons, but it can be a good option. For do-it-yourselfers, I often recommend It was founded by Charles Phelan, who was in the industry and now teaches people to do it themselves, and it's very, very good.

His program costs nearly $400. The average person who is deep in debt would be hard-pressed to pay that much for a do-it-yourself kit.

It goes into great detail about how debt settlement works, pitfalls to avoid, dealing with different types of collection tactics, etc. I do think it's worth every penny and that consumers will save much more than the cost by effectively negotiating their debts.

The basic program is $197 -- the $397 program includes some coaching from Charles, which is also very helpful for consumers who need one-on-one help. Also keep in mind, the average consumer will pay more than that in fees throughout a credit counseling program. This is also much less expensive than hiring a consumer law attorney to negotiate debts, though, again, there is a time and place for that too!

Q: Is debt settlement a lesser credit offense than bankruptcy?

A: Your accounts have to go delinquent in order to settle them. Period. You can't settle if your accounts are current -- your creditors will just not allow it -- so you're going to ruin your credit temporarily. It's for someone who needs a solution but cannot or will not file for bankruptcy.

Debt settlement and bankruptcy will have a pretty negative effect on your credit report. Chapter 7 bankruptcy stays on your report for 10 years. With debt settlement, you're going to have a bunch of collection reports on your report where they will remain for seven and a half years from the date you first fell behind on the original debt. And, if it takes you two years to pay off your settlement, I would say the effect is roughly the same.

With either one, whether it's bankruptcy or debt settlement, when you're done you can start rebuilding your credit.

Best strategies
Q: You had mentioned that it's best to try to tackle and pay down debt as much as possible. What's the best debt pay-down strategy to follow?

A: “It's best to look at paying down debt as a marathon rather than a sprint, because for most people that's what it is.” The best strategy for getting out of debt is the one that works for you. And everyone is different. There are many reasons that consumers end up in debt. The idea that it's just "spend less, save more" is misleading and frustrating for those who have run into medical debt or those who did everything right for 20 years and then had to drop out of the workforce to care for an aging parent. For everyone it's different. So I encourage people to find the approach that resonates with them and be willing to look at it as a marathon rather than a sprint, because for most people that's what it is.

If one program or strategy doesn't work for you, look for another one. If you need more support, look for the coach, class or group that's going to work for you. For some that may be Debtor's Anonymous, for others it may be going to Dave Ramsey's class at their church or it may be an online support group.

We're all different, so don't get discouraged if the first time doesn't take. Look at others who have been successful, look at what they've done and find an approach that works for you.

Staying out of trouble
Q: How can consumers avoid getting into problems with debt in the first place?

A: The most important thing you can do is to shore up your finances for when things go wrong, because inevitably everyone goes through some sort of challenge. Buy the smallest house that you can be comfortable in.

The biggest trap that most people fall into -- I've done it too -- is taking on debt based on where we currently are or where we think we're going, then finding out we can't follow through.

For example, you get the big car payment based on the job you have now, but then a year down the road you don't have the job but you still have the car and you can't get rid of the car because you're upside down. Same thing with houses: A lot of people are going through this right now. They bought the house based on where they were economically when they bought it and now the interest rate has changed, the taxes have gone up, or whatever it is and they're suddenly discovering it's not really affordable.

“We're faced with pressures every day to spend, spend, spend. It's challenging to go against that tide, to try to live more for the future than for today.” This is a very common and difficult trap and it's not easy. We're faced with pressures every day to spend, spend, spend. It's challenging to go against that tide, to try to live more for the future than for today.

Most of us have to take on some debt or payments -- whether it's a car or a house, you will take on some. But be careful about getting tied into something that's hard to get rid of. If you lose in the stock market, the money's gone and that's difficult, but if you can't sell your house and you have to go through a foreclosure, that's really tough.

Getting help
Q: What thought would you like to leave our readers with?

A: Debt is very stressful, it's very isolating, it's very scary. If you're in that situation, don't try to do it all on your own. Don't be afraid to reach out for help, whether you end up talking to an attorney, a counseling agency or someone you trust. It's tough and you need someone to encourage and motivate you.