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Unmanageable Debt? How to Get Help

With unemployment and home foreclosures still unusually high, consumer debt remains a major problem for many Americans.

When it comes to correcting debt problems, a plethora of options exist. For lower levels of debt under $5,000, self-help tactics such as reducing expenses, paying more than the minimum payments and transferring your debt balance to a zero-percent credit card are effective.

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But for larger debt levels totaling half or more of your annual income, more drastic measures are needed, including seeking help through a debt-management plan from a credit counselor, attending community events focusing on debt reduction, or in some cases, claiming bankruptcy.

Open communication with your lender is helpful when trying to solve debt woes on your own.

Lynnette Khalfani-Cox, author of The New York Times bestseller "Zero Debt," says negotiating with creditors is still a viable option, even amid the credit crunch. “It’s a smart and savvy decision to contact your creditor and ask for a lower interest rate," she says, "especially if you have good credit, you have been a customer for years, and have paid on time in the past.” Lower interest rates result in lower monthly payments, making the process faster and easier.

“Creditors don’t want to lose your business and would rather get some interest than nothing,” she adds.

However, contacting your creditor may not always be wise, especially if you have higher levels of debt.

Personal finance expert Liz Weston author of "The 10 Commandments of Money," advises talking to a credit counselor and a bankruptcy attorney before contacting your lender about your inability to repay the debt.

“Talking to your creditor can have some negative repercussions," she says. "It can have an account frozen or a credit limit lowered.”

A credit counselor can help you enroll in a debt-management plan, with the goal of paying off unsecured debt, such as credit cards and medical bills, within three to five years.

The not-for-profit National Foundation for Credit Counseling (NFCC) can refer you to a reputable credit counseling agency in your area. Or you can do some homework to find a trusted agency, ideally one that is accredited by the Better Business Bureau.

Credit counselors who are part of the NFCC are certified (they have passed tests relating to financial literacy).

Fees for counselors under the NFCC network vary, based on your income and state laws, but the cost is usually include a $50 setup fee and a monthly fee around $25. If you cannot afford these fees, ask for them to be waived.

Counselors typically contact your creditors and attempt to have the interest rateson your loans or credit cards reduced, making repayment easier. (Some lenders are more willing than others.) The counselor also negotiates with your creditor to stop late fees.

Credit counselors also offer services beyond debt management plans. “Credit counselors are a fountain of knowledge and can help with budgeting tips, advice on student loans, and how to deal with debt collectors,” says Howard Dvorkin, founder of Consolidated Credit Counseling Services.

Debt management plans come with a price. Your credit card will be closed to prevent you from racking up anymore debt. There is no point in paying off debt only to build it up all over again.

Fees for the debt-management plan, if any, vary based on each agency and state laws.

You may, however, decide a debt-management plan is not for you. If your unsecured debt is equal to or exceeds your annual income, then bankruptcy may be a more realistic option.

Meeting with a bankruptcy attorney is essential.

“Bankruptcy attorneys will want to figure out whether you qualify for Chapter 7 bankruptcy, which allows you to wipe out most or all of your unsecured debt,” says Gerri Detweiler, director of Consumer Education for Credit.com.

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With Chapter 7, you may lose some of your assets through liquidation. Each state has different laws about which assets are and are not protected by bankruptcy. Your attorney will be able to tell you if any of your assets, such as a second car or vacation home, are at risk.

“If you have property you want to keep (but would lose under Chapter 7) or you make too much money to qualify for a Chapter 7, Chapter 13 is an option,” Detweiler says.

Under Chapter 13 bankruptcy protection, you must pay back what you owe within three to five years, and your home will not be foreclosed upon.

Aside from unsecured debt, a variety of options exist when it comes to paying off secured debt, such as a home mortgage.

Especially when you are delinquent on mortgage payments or are having trouble refinancing, you can seek help through an NFCC-affiliated housing counselor. The counselor will assess your situation and in some cases even contact your lender.

Additionally, government programs and community outreach events from banks aim to help consumers solve secured debt problems.

In February, the Obama administration announced a new mortgage settlement plan, in which five of the largest banks agreed to commit $26 billion to help troubled homeowners. Some $17 billion will be allocated toward lowering the principal of those who have missed mortgage payments or are struggling with negative equity.

As for community events, the Financial Services Roundtable, a trade association that represents 100 of the largest financial services companies, aims to bolster relations with nonprofit organizations.

Roundtable companies worked on more than 45,000 financial literacy programs in 2011, spokeswoman Elise Brooks says.

The roundtable is a part of HOPE NOW, an alliance that holds mortgage modification events at convention centers in major cities. Homeowners in distress can meet with counselors in person to discuss to their situation.

Many of the major banks organize events where consumers who are delinquent on mortgage payments can meet face-to-face with the bank’s own mortgage experts to explore the mortgage modification process. The banks also offer online and in-person financial literacy programs to help educate consumers.

“When you are in financial trouble and have fallen behind on mortgage payments, there is nothing worse than doing nothing,” Brooks advises.

Keep in mind that bankruptcy protection can stain your credit report for up to 10 years, making it tougher to secure credit in the future.

Last year, Bank of Americaadded twice as many staff members than it initially had to help run community events and open assistance centers — with the goal of helping troubled homeowners avoid foreclosure. As of 2011, Bank of America says it has completed some 800,000 loan modifications over the past several years.

Ally Bank launched in-person financial and debt sessions, known as Wallet Wise, available in 16 states.

Citihas put forth its CitiMortgage Road to Recovery Tour in over a dozen major cities, to help consumers facing foreclosure and mortgage debt via face-to-face meetings with its mortgage experts.

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