Climb out of bad debt with a payment plan

Dear Debt Adviser,
I’m only 22 years old and I am already in really bad debt! How can I get the information I need in order to pay the companies I owe money to? I don’t want to take too long to get my debt back in line and I need help! Can anyone help me?
— Debra

Dear Debra,
You and half of America are up to their eyeballs in bad debt right now! The silver lining in this is that because you have so much company, many lenders are being more accommodating than they used to be. You didn’t tell me what kind of bad debt you are in, so I’m going to assume that at 22 years of age you have student loans, maybe a car loan and some toxic credit cards.

Because you are asking how to get information on who you owe, it sounds as if your accounts have already been placed with outside collection agencies. Before you do anything, I want you to find out how much you can afford to repay in as short a time as possible to rid yourself of this bad debt. To get to this number, you will need to put together a budget that includes where you are spending all your money.

Now, I want you to cut out everything that is not essential. I know this will make for a really boring life, but it will only be temporary, and just imagine having all those nasty bills paid off. Then you can live the good life. So let’s do it in record time. You can find easy to follow instructions on developing your budget at

To increase your chances of success, I strongly urge you to have all the money that is not going to essential expenses automatically deducted from your paycheck and deposited directly into a separate bank account that will be dedicated to bill paying only. Your company’s human resources department can do this easily. This will be your financial independence fund!

Next, I suggest you try to get back in touch with the original lenders or stores you owe. Ask if they will take the accounts back. It’s a long shot, but this way you’ll be dealing directly with the creditor and eliminating the middleman collection agency. Collection agencies are often much more aggressive than the original creditor so see if they’ll take you back. You have nothing to lose by asking. If you don’t know which companies you owe money to, visit and get free copies of your credit reports. You can download the reports directly from the site and have them right away.

Of the debts I’m assuming you have, the car loan is most dangerous. The student loan is the one that will never go away, and the credit cards will be the most vocal. Let’s start with the car. Make sure you catch up on your payment and don’t even think about doing a voluntary repossession. You’ll end up with no car and still have a big bill for any deficiency between the price that the car wholesales for (minus fees) and what you owe.

Student loans are best dealt with early in the delinquency period. You’ll have more options and a better chance of restructuring your loans if you catch them before they default. Check out It offers a number of alternatives, including the Income-Sensitive Repayment Plan that requires a payment of only 4 percent of a borrower’s income per month for loans serviced by lenders in the Federal Family Education Loan Program. The monthly loan payment is pegged to a fixed percentage of gross monthly income, between 4 percent and 25 percent. The percentage is determined by the borrower and the resulting monthly payment must be greater than or equal to the interest that accrues.

The credit cards will want to get as much from you as quickly as possible. Be ready for them with the budget you put together earlier. Once you have deducted the amounts for the car and student loans, you will know what you can afford to pay on your cards. Try to offer at least 5 percent of the balance as a monthly payment option. Ask them to reduce your interest and waive any late fees. Who knows, they might! Either way, don’t be late or short on any future payments or all bets will be off, and they will probably take you to court. That’s no fun and can be expensive.

Good luck!

Bankrate’s content, including the guidance of its advice-and-expert columns and this Web site, 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 Web site is governed by Bankrate’s Terms of Use.

Read more Debt Adviser columns and more stories about debt management. To ask a question of the Debt Adviser go to the “Ask the Experts” page.