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How to get out of $40K credit card debt

Steve BucciDear Debt Adviser,
I was reading an article on debt and found your column. I need help. I have about $40,000 in credit card debt, and I'm one month behind on my mortgage. I'm probably a few months behind on some of my credit card debt and not sure what to do. Is bankruptcy an option? Should I sell my house and work on correcting my financial problems? Or should I just pay what I can? Thank you, Ronald.
-- Ronald

Dear Ronald,
I'm glad you found me. If you're willing to work at this problem, I'm sure I can help. Let's start with the good news -- you're back to work! A regular income is important when trying to take control of your finances. Now you just need to decide what to do.

Because you use the word "probably" to describe how far behind you are on your credit card accounts, it's clear you don't have a good handle on how much you owe, how late you are or how close you are to a foreclosure. To set you straight, I want you to begin your comeback by speaking with a counselor at a nonprofit credit counseling agency. You can find one through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Your counselor will make sure you don't fall into foreclosure by mistake. Most mortgage payments have a 15-day grace period. However, once a payment is late, the next month's payment is considered late if not received by the first of the month. So, by the time you think you're two weeks late, you may actually be two months late and on the verge of a foreclosure action. Most creditors do want to help, but only on their terms and terms that their regulators approve. Your counselor can help you take advantage of any assistance programs that might help.

Once you have your options laid out from your housing and credit counseling, you will have some decisions to make. Some things to consider are:

  • Are you better off renting or owning? You need to live somewhere.

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How to dig out from a mountain of credit card debt?

Between the Great Recession and stagnant incomes, more than a few Americans have found themselves still trying to reduce sometimes massive credit card debts.

If you are employed and find yourself in such a bind, the good news is that you have income to work with.

Start the journey with a counsel at a nonprofit credit-counseling agency. Look for one through the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

Taken together, income and desire can help you work through a debt management plan, which the credit counselor should be able to devise.

The deal here has you paying off your balances in about five years with creditors' assistance in the form of lower interest charges and waived late fees.

Bankruptcy is often an option of last resort, in which case you'll need an attorney.

  • If you need to get out of your mortgage, the Mortgage Forgiveness Debt Relief Act will run out Dec. 31, 2013. This shields you from a huge tax bill in a foreclosure or short sale. So if you are going to get out of your home, this may be the year to do it.
  • Can you catch up on your missed mortgage payments? If you don't have the money, and if your lender is unwilling to work with you, you may need to sell your home.

Your next decision will be how to handle your $40,000 in credit card debt. If you have the income and the desire, a debt management plan through the credit counseling agency may work for you. You would pay off your balances in five years or so with your creditors' help in the form of lower interest charges and waived late fees. Debt settlement may also be an option for you. But I rarely recommend it, and then only if you either do it on your own (not easy) or through an attorney (expensive). Either way, it's no fun!

Bankruptcy may be an option, but from what you have said, I think you can get out of this mess without the years of damage to credit, higher insurance bills, reduced job and promotion prospects, and more. Bankruptcy is a last resort. But, if you don't have the income to both live and repay your debt, bankruptcy may be necessary. After you've explored your other options, you may want to contact an attorney for a consultation.

Good luck!

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To ask a question of the Debt Adviser, go to the "Ask the Experts" page and select "Debt" as the topic. Read more Debt Adviser columns and more stories about debt management.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

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