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.