How to recover from debt depression

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Dear Debt Adviser,
I have a few credit cards — four bank cards, one retail card and I also have school loans. Last year I fell into a depression and completely stopped all payments. Now that I’m better, I’m trying to begin the process of paying. I just don’t know where to begin. The minimum payments are so high and I’ve tried to pay but the interest at this point is so high it doesn’t seem to make any difference if I pay. Please help. What can I do?
— Ruth

Dear Ruth,
Depression is a terrible affliction that can immobilize the best of us. Overcoming it is no easy matter, so I am glad to hear that you are feeling better and are up to tackling your debt. Over the years I have worked with a large number of individuals and families who found it overwhelming and hard to know what to do after having stopped making payments on credit cards and other obligations for an extended period of time.

Certainly, you could try to contact each of your creditors and work out a payment plan that fits your budget. My experience is that your odds of success go down as the number of creditors increases. It only takes one unsympathetic or aggressive collector to derail your best efforts. Fortunately for you and others in your situation, quality, dependable help is available from a nonprofit credit counseling agency.

What I would encourage you to do is visit either the National Foundation for Credit Counseling or Association of Independent Consumer Credit Counseling Agencies and find a credit counseling organization you feel comfortable working with. The members of these associations must meet strict quality standards for dealing with vulnerable consumers. You can expect that any of the member credit counseling agencies will give you good advice and assist you in getting started with a workable repayment plan you can afford.

The first thing I suggest you do is to gather all your monthly billing statements, including bank card statements, retail card statements, student loan statements as well as your monthly rent/mortgage, utility bills, grocery bills for the month and any other expenses. In addition, you’ll need a copy of your paycheck stub and any other income sources. This information is what your counselor will need to have in order to come up with a solution that fits your situation.

To get your interest rates under control and give you a manageable payment that you can afford, I believe you might benefit from a debt management plan, or DMP. For accounts placed on a debt management plan, many major creditors will deeply discount or eliminate fees, penalties and even interest. Others may accept a less than full balance repayment plan. Under a debt management plan you will need to temporarily swear off using consumer credit (because your accounts will be closed) and agree to make one monthly payment to the credit counseling agency for the agency to disperse to your creditors.

Although the credit counselors should be able to help you with most of your creditors, expect that you will have to deal with your student loan providers yourself. Your counselor may be able to help you identify any student loan workout, deferral or forgiveness options that are available and that you may be able to use once you get your financial feet back on the ground.

Many people I have worked with become distracted by looking at their credit score. Because you have not made payments in quite some time, your credit score will have dropped dramatically. I suggest that you focus on getting your debts under control and paid off. Do not worry about your credit score at this point. It is bad and it may get worse before it gets better. However, if you put your accounts on a debt management plan and make on-time payments for several consecutive months, your accounts can be re-aged (industry term for the creditor reporting to the bureau your account as current and paid on time), which should improve your credit over time.

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