Coping With Debt

Federal Trade Commission | ftc.gov

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Having trouble paying your bills? Getting dunning notices 

from creditors? Are your accounts being turned over to 

debt collectors? Are you worried about losing your home 

or your car?

You’re not alone. Many people face a financial crisis at 

some point in their lives. Whether the crisis is caused 

by personal or family illness, the loss of a job, or 

overspending, it can seem overwhelming. But often, it can 

be overcome. Your financial situation doesn’t have to go 

from bad to worse.

If you or someone you know is in financial hot water, 

consider these options: self-help using realistic 

budgeting and other techniques; debt relief services, 

like credit counseling or debt settlement from a reputable 

organization; debt consolidation; or bankruptcy. How 

do you know which will work best for you? It depends 

on your level of debt, your level of discipline, and your 

prospects for the future.

Self-Help

Developing a Budget

The first step toward taking control of your financial 

situation is to do a realistic assessment of how much 

money you take in and how much money you spend. Start 

by listing your income from all sources. Then, list your 

“fixed” expenses – those that are the same each month 

– like mortgage payments or rent, car payments, and 

insurance premiums. Next, list the expenses that vary – 

like groceries, entertainment, and clothing. Writing down 

all your expenses, even those that seem insignificant, is 

a helpful way to track your spending patterns, identify 
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necessary expenses, and prioritize the rest. The goal 

is to make sure you can make ends meet on the basics: 

housing, food, health care, insurance, and education. 

You can find information about budgeting and money 

management techniques online, at your public library, and 

in bookstores. Computer software programs can be useful 

tools for developing and maintaining a budget, balancing 

your checkbook, and creating plans to save money and 

pay down your debt.

Contacting Your Creditors

Contact your creditors immediately if you’re having 

trouble making ends meet. Tell them why it’s difficult for 

you, and try to work out a modified payment plan that 

reduces your payments to a more manageable level. Don’t 

wait until your accounts have been turned over to a debt 

collector. At that point, your creditors have given up on 

you.

Dealing with Debt Collectors

Federal law dictates how and when a debt collector may 

contact you: not before 8 a.m., after 9 p.m., or while 

you’re at work if the collector knows that your employer 

doesn’t approve of the calls. Collectors may not harass 

you, lie, or use unfair practices when they try to collect a 

debt. And they must honor a written request from you to 

stop further contact.

Managing Your Auto and Home Loans

Your debts can be unsecured or secured. Secured debts 

usually are tied to an asset, like your car for a car loan, or 

your house for a mortgage. If you stop making payments, 

lenders can repossess your car or foreclose on your house. 

Unsecured debts are not tied to any particular asset, and 
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include most credit card debt, bills for medical care, and 

signature loans.

Most automobile financing agreements allow a creditor to 

repossess your car any time you’re in default. No notice is 

required. If your car is repossessed, you may have to pay 

the balance due on the loan, as well as towing and storage 

costs, to get it back. If you can’t do this, the creditor 

may sell the car. If you see default approaching, you may 

be better off selling the car yourself and paying off the 

debt: You’ll avoid the added costs of repossession and a 

negative entry on your credit report.

If you fall behind on your mortgage, contact your lender 

immediately to avoid foreclosure. Most lenders are willing 

to work with you if they believe you’re acting in good 

faith and the situation is temporary. Some lenders may 

reduce or suspend your payments for a short time. When 

you resume regular payments, though, you may have to 

pay an additional amount toward the past due total. Other 

lenders may agree to change the terms of the mortgage 

by extending the repayment period to reduce the monthly 

debt. Ask whether additional fees would be assessed for 

these changes, and calculate how much they total in the 

long term.

If you and your lender can’t work out a plan, contact a 

housing counseling agency. Some agencies limit their 

counseling services to homeowners with FHA mortgages, 

but many offer free help to any homeowner who’s having 

trouble making mortgage payments. Call the local office 

of the Department of Housing and Urban Development 

or the housing authority in your state, city, or county for 

help in finding a legitimate housing counseling agency 

near you.
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Debt Relief Services

If you’re struggling with significant credit card debt, and 

can’t work out a repayment plan with your creditors on 

your own, consider contacting a debt relief service like 

credit counseling or debt settlement. Depending on the 

type of service, you might get advice on how to deal with 

your mounting bills or create a plan for repaying your 

creditors. 

Before you do business with any debt relief service, check 

it out with your state Attorney General and local consumer 

protection agency. They can tell you if any consumer 

complaints are on file about the firm you’re considering 

doing business with. Ask your state Attorney General if 

the company is required to be licensed to work in your 

state and, if so, whether it is.

If you’re thinking about getting help to stabilize your 

financial situation, do some homework first. Find out 

what services a business provides, how much it costs, and 

how long it may take to get the results they promised. 

Don’t rely on verbal promises. Get everything in writing, 

and read your contracts carefully.

Credit Counseling

Reputable credit counseling organizations can advise you 

on managing your money and debts, help you develop 

a budget, and offer free educational materials and 

workshops. Their counselors are certified and trained 

in consumer credit, money and debt management, and 

budgeting. Counselors discuss your entire financial 

situation with you, and help you develop a personalized 

plan to solve your money problems. An initial counseling 
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session typically lasts an hour, with an offer of follow-up 

sessions. 

Most reputable credit counselors are non-profits and offer 

services through local offices, online, or on the phone. 

If possible, find an organization that offers in-person 

counseling. Many universities, military bases, credit 

unions, housing authorities, and branches of the U.S. 

Cooperative Extension Service operate non-profit credit 

counseling programs. Your financial institution, local 

consumer protection agency, and friends and family also 

may be good sources of information and referrals.

But be aware that “non-profit” status doesn’t guarantee 

that services are free, affordable, or even legitimate. In 

fact, some credit counseling organizations charge high 

fees, which they made hide, or urge their clients to make 

“voluntary” contributions that can cause more debt.

Debt Management Plans

If your financial problems stem from too much debt or 

your inability to repay your debts, a credit counseling 

agency may recommend that you enroll in a debt 

management plan (DMP). A DMP alone is not credit 

counseling, and DMPs are not for everyone. Don’t sign 

up for one of these plans unless and until a certified credit 

counselor has spent time thoroughly reviewing your 

financial situation, and has offered you customized advice 

on managing your money. Even if a DMP is appropriate 

for you, a reputable credit counseling organization 

still can help you create a budget and teach you money 

management skills.

In a DMP, you deposit money each month with the credit 

counseling organization. It uses your deposits to pay your 
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unsecured debts, like your credit card bills, student loans, 

and medical bills, according to a payment schedule the 

counselor develops with you and your creditors. Your 

creditors may agree to lower your interest rates or waive 

certain fees. But it’s a good idea to check with all your 

creditors to be sure they offer the concessions that a credit 

counseling organization describes to you. A successful 

DMP requires you to make regular, timely payments; it 

could take 48 months or more to complete your DMP. 

Ask the credit counselor to estimate how long it will take 

for you to complete the plan. You may have to agree not 

to apply for – or use – any additional credit while you’re 

participating in the plan. 

Debt Settlement Programs

Debt settlement programs typically are offered by forprofit companies, and involve them negotiating with 

your creditors to allow you to pay a “settlement” to 

resolve your debt – a lump sum that is less than the full 

amount that you owe. To make that lump sum payment, 

the program asks that you set aside a specific amount of 

money every month in savings. Debt settlement companies 

usually ask that you transfer this amount every month into 

an escrow-like account to accumulate enough savings to 

pay off any settlement that is eventually reached. Further, 

these programs often encourage or instruct their clients to 

stop making any monthly payments to their creditors.

Debt Settlement Has Risks

Although a debt settlement company may be able to settle 

one or more of your debts, there are risks associated with 

these programs to consider before enrolling:

1. These programs often require that you deposit 

money in a special savings account for 36 months 
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or more before all your debts will be settled. Many 

people have trouble making these payments long 

enough to get all (or even some) of their debts 

settled, and end up dropping out the programs as 

a result. Before you sign up for a debt settlement 

program, review your budget carefully to make 

sure you are financially capable of setting aside the 

required monthly amounts for the full length of the 

program.

2. Your creditors have no obligation to agree to 

negotiate a settlement of the amount you owe. 

So there is a possibility that your debt settlement 

company will not be able to settle some of your 

debts – even if you set aside the monthly amounts 

required by the program. Also, debt settlement 

companies often try to negotiate smaller debts first, 

leaving interest and fees on large debts to continue 

to mount.

3. Because debt settlement programs often ask or 

encourage you to stop sending payments directly to 

your creditors, they may have a negative impact on 

your credit report and other serious consequences. 

For example, your debts may continue to accrue 

late fees and penalties that can put you further in the 

hole. You also may get calls from your creditors 

or debt collectors requesting repayment. You could 

even be sued for repayment. In some instances, 

when creditors win a lawsuit, they have the right to 

garnish your wages or put a lien on your home. 
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Debt Settlement and Debt Elimination Scams

Some companies offering debt settlement programs may 

not deliver on their promises, like their “guarantees” to 

settle all your credit card debts for 30 to 60 percent of 

the amount you owe. Other companies may try to collect 

their fees from you before they settle any of your debts. 

The FTC’s Telemarketing Sales Rule prohibits companies 

that sell debt settlement and other debt relief services on 

the phone from charging a fee before they settle or reduce 

your debt. Some companies may not explain the risks 

associated with their programs, including that many (or 

most) of their clients drop out without settling their debts, 

that their clients’ credit reports may suffer, or that debt 

collectors may continue to call them.

Before you enroll in a debt settlement program, do your 

homework. You’re making a big decision that involves 

spending a lot of your money that could go toward paying 

down your debt. Enter the name of the company with 

the word “complaints” into a search engine. Read what 

others have said about the companies you’re considering, 

including whether they are involved in a lawsuit with any 

state or federal regulators for engaging in deceptive or 

unfair practices.

Fees

If you do business with a debt settlement company, you 

may have to put money in a dedicated bank account, 

which will be administered by an independent third party. 
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The funds are yours and you are entitled to the interest 

that accrues. The account administrator may charge 

you a reasonable fee for account maintenance, and is 

responsible for transferring funds from your account to 

pay your creditors and the debt settlement company when 

settlements occur.

Disclosure Requirements

Before you sign up for the service, the debt relief 

company must give you information about the program: 

● Price and terms. The company must explain its fees 

and any conditions on its services.

● Results. The company must tell you how long it 

will take to get results – how many months or years 

before it will make an offer to each creditor for a 

settlement. 

● Offers. The company must tell you how much 

money or what percentage of each outstanding debt 

you must save before it will make an offer to each 

creditor on your behalf.

● Non-payment. If the company asks you to stop 

making payments to your creditors – or if the 

program relies on your not making payments 

– it must tell you about the possible negative 

consequences of your action.

The debt relief company also must tell you:

● that the funds are yours and you are entitled to the 

interest earned;
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● the account administrator is not affiliated with the 

debt relief provider and doesn’t get referral fees; 

and

● that you may withdraw your money at any time 

without penalty.

Tax Consequences

Depending on your financial condition, any savings you 

get from debt relief services can be considered income 

and taxable. Credit card companies and others may report 

settled debt to the IRS, which the IRS considers income, 

unless you are “insolvent.” Insolvency is when your total 

debts are more than the fair market value of your total 

assets. Insolvency can be complex to determine. Talk to 

a tax professional if are not sure whether you qualify for 

this exception. 

Use Caution When Shopping for Debt 

Relief Services

Avoid any debt relief organization – whether it’s credit 

counseling, debt settlement, or any other service – that: 

Ì charges any fees before it settles your debts or 

enters you into a DMP

Ì pressures you to make “voluntary contributions,” 

which is really another name for fees

Ì touts a “new government program” to bail out 

personal credit card debt 

Ì guarantees it can make your unsecured debt go away 
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Ì tells you to stop communicating with your creditors, 

but doesn’t explain the serious consequences 

Ì tells you it can stop all debt collection calls and 

lawsuits 

Ì guarantees that your unsecured debts can be paid off 

for pennies on the dollar

Ì won’t send you free information about the services it 

provides without requiring you to provide personal 

financial information, like your credit card account 

numbers, and balances

Ì tries to enroll you in a debt relief program without 

reviewing your financial situation with you

Ì offers to enroll you in a DMP without teaching you 

budgeting and money management skills

Ì demands that you make payments into a DMP 

before your creditors have accepted you into the 

program

Debt Consolidation

You may be able to lower your cost of credit by 

consolidating your debt through a second mortgage or a 

home equity line of credit. But these loans require you 

to put up your home as collateral. If you can’t make the 

payments – or if your payments are late – you could lose 

your home.

What’s more, consolidation loans have costs. In addition 

to interest, you may have to pay “points,” with one point 

equal to one percent of the amount you borrow. Still, 
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these loans may provide certain tax advantages that are not 

available with other kinds of credit.

Bankruptcy

Personal bankruptcy also may be an option, although its 

consequences are long-lasting and far-reaching. People 

who follow the bankruptcy rules receive a discharge – a 

court order that says they don’t have to repay certain 

debts. However, bankruptcy information (both the date of 

the filing and the later date of discharge) stay on a credit 

report for 10 years and can make it difficult to get credit, 

buy a home, get life insurance, or sometimes get a job. 

Still, bankruptcy is a legal procedure that offers a fresh 

start for people who have gotten into financial difficulty 

and can’t satisfy their debts.

There are two main types of personal bankruptcy: 

Chapter 13 and Chapter 7. Each must be filed 

in federal bankruptcy court. Filing fees are 

several hundred dollars. For more information 

visit www.uscourts.gov/bankruptcycourts/fees.html.

Attorney fees are extra and vary. 

Chapter 13 allows people with a steady income to keep 

property, like a mortgaged house or a car, that they might 

otherwise lose through the bankruptcy process. In Chapter 

13, the court approves a repayment plan that allows you to 

use your future income to pay off your debts during three 

to five years, rather than surrender any property. After 

you make all the payments under the plan, you receive a 

discharge of your debts. 
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Chapter 7 is known as straight bankruptcy; it involves 

liquidating all assets that are not exempt. Exempt property 

may include automobiles, work-related tools, and basic 

household furnishings. Some of your property may be sold 

by a court-appointed official, called a trustee, or turned 

over to your creditors. 

Both types of bankruptcy may get rid of unsecured debts 

and stop foreclosures, repossessions, garnishments and 

utility shut-offs, as well as debt collection activities. Both 

also provide exemptions that let you keep certain assets, 

although exemption amounts vary by state. Personal 

bankruptcy usually does not erase child support, alimony, 

fines, taxes, and some student loan obligations. And, 

unless you have an acceptable plan to catch up on your 

debt under Chapter 13, bankruptcy usually does not allow 

you to keep property when your creditor has an unpaid 

mortgage or security lien on it.

You must get credit counseling from a governmentapproved organization within six months before you 

file for any bankruptcy relief. You can find a stateby-state list of government-approved organizations at 

www.usdoj.gov/ust. That’s the website of the U.S. 

Trustee Program, the organization within the U.S. 

Department of Justice that supervises bankruptcy cases 

and trustees. Also, before you file a Chapter 7 bankruptcy 

case, you must satisfy a “means test.” This test requires 

you to confirm that your income does not exceed a certain 

amount. The amount varies by state and is publicized by 

the U.S. Trustee Program at www.usdoj.gov/ust.
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Debt Scams

Advance Fee Loans: Some companies guarantee you a loan 

if you pay them a fee in advance. The fee may range from 

$100 to several hundred dollars. Resist the temptation to 

follow up on these advance-fee loan guarantees. They 

may be illegal. It’s true that many legitimate creditors 

offer extensions of credit through telemarketing and 

require an application or appraisal fee in advance. But 

legitimate creditors never guarantee that you will get the 

loan – or even represent that a loan is likely. Under the 

FTC’s Telemarketing Sales Rule, a seller or telemarketer 

who guarantees or represents a high likelihood of your 

getting a loan or some other extension of credit may not 

ask for – or accept – payment until you get the loan.

Credit Repair: Be suspicious of claims from so-called 

credit repair clinics. Many companies appeal to people with 

poor credit histories, promising to clean up their credit 

reports for a fee. But anything these companies can do 

for you for a fee, you can do yourself – for free. You have 

the right to correct inaccurate information in your file, but 

no one – regardless of their claims – can remove accurate 

negative information from your credit report. Only time 

and a conscientious effort to repay your debts will improve 

your credit report. Federal – and some state – laws ban 

these companies from charging you a fee until the services 

are fully performed.
The FTC works to prevent fraudulent, deceptive and 

unfair business practices in the marketplace and to provide 

information to help consumers spot, stop and avoid them. 

To file a complaint or get free information on consumer 

issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP 

(1-877-382-4357); TTY: 1-866-653-4261. Watch a 

video, How to File a Complaint, at ftc.gov/video to learn 

more. The FTC enters consumer complaints into the 

Consumer Sentinel Network, a secure online database and 

investigative tool used by hundreds of civil and criminal 

law enforcement agencies in the U.S. and abroad.


Federal Trade Commission

ftc.gov

October 2012