Counseling agency should help with debt plan

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Dear Debt Adviser,
We need help! Due to medical expenses and a cross-country move, my husband and I have about $25,000 in credit card debt. Recently, our credit was reassessed and, because of the balance-to-credit ratio, all of our interest rates have been raised to obscenely high amounts ranging from 15 percent to 32 percent.

Now, we can barely afford to make the minimum payments, let alone work on paying down the principal. I have called a credit counseling service about consolidating with them, but because we have always paid our credit cards on time and aren’t behind on payments, they won’t take us. However, we aren’t getting anywhere scraping by to pay the minimum payments. I don’t know what to do. I feel like we are stuck in a Catch-22. Any suggestions!?
— C.M.

Dear C.M.,
I know how it feels when bad things pile up and it seems as though one problem feeds on another endlessly. Some say bad luck comes in threes. Based on my experience working with credit problems, I would say it’s even worse than that — it keeps on coming until you can start some positive actions that will begin to turn the tide. The good news is that once you get ahead of things, positive events will mount up, as well.

I have three suggestions for you to check out:

First, go back to the credit counseling agency you contacted and tell them you want a plan to get out of debt. This may or may not be a formal debt management plan where interest rates and fees are sometimes reduced, but it should at least be an action plan with specific steps for you to follow. Be sure the agency is associated with the Association of Independent Consumer Credit Counseling Agencies, AICCCA, or the National Foundation for Consumer Credit Counseling, or NFCC. If they are not, then find one that is.

You should expect to receive an action plan that will help you reduce expenses or increase income and will show what you can afford to pay and how long it will take to be debt-free. By the way, being current on your bills is not a reason for them to refuse offering you a debt management plan. You may have run into either a lazy counselor or an uninformed one. Don’t give up on this option too soon; get a second or third opinion.

Second, if a debt management plan is not for you, then, once you have an action plan that identifies all your income and expenses and what you can actually afford to pay on your cards, call your creditors. Explain about the medical emergency and ask for a hardship plan or an interest rate reduction. Many creditors will respond favorably to a well-documented history that shows events beyond your control caused your situation. Be sure you have a dollar amount you can afford to pay each creditor before you call them. Otherwise you may overcommit to the first few you call and not be able to satisfy them all.

Third, if suggestions one and two don’t work out for you, contact an attorney. I’d suggest two approaches for the attorney to pursue. First, ask that the attorney write and propose a repayment scheme you can afford. Often attorneys’ letters get good responses. Then, if that fails, ask about a bankruptcy. The new rules make it more difficult, but not impossible, for you to get relief this way.

One last tip: Your moving and medical expenses may be tax-deductible. If so, you may be able to reduce your withholding to free up cash or have a fat refund coming in 2007 that you can apply to your debts.

Even though right now it seems that paying your debts on time has worked against you, I think you will find in the end that you have been doing the right thing all along.

Good luck!