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Drowning in debt? Here's what to do

When you're paying out more than you're taking in, you're in trouble. If it's happening to you or someone you know, here's a 3-step guide for getting out.

By MSN Money Partner Sep 10, 2013 11:54AM

This post comes from Stacy Johnson at partner site Money Talks News. 

MoneyTalksNews logoWhat can you do when your outgo exceeds your income? If the situation is temporary, you borrow. But if it isn't, borrowing is just going to make the situation worse.

Past due stamp sitting on three bills. © Derek E. Rothchild, Stockbyte, Getty ImagesHere's this week's question:

I am on Social Security and my husband is on disability. We are paying out more than we take in. Our house payment is over $700 and we have over $25,000 in credit card debt plus a car payment and utility bills, groceries and gas. I have been thinking of filing bankruptcy. I cannot pay any more on my credit cards than I already pay. Do you think this would be the best way for me to go? I am 67 and my husband is 64. -- Hariette

While Hariette's plight may be depressing, based on the number of similar questions I've received, it's certainly not unique.

I'm going to give you some specific steps to take should you ever find yourself in a similar situation.

Step 1: Make a list of everything coming in and everything going out

If you go to the emergency room, the first thing the nurse or doctor will do is assess your situation. Only after doing this can the problem be isolated and the best course of action chosen.

If you're in a cash flow emergency, it's the same drill. Assess your situation by listing every monthly expense you have, then comparing that total with your monthly income. Do this honestly and you're going to see -- very likely for the first time -- the magnitude of the problem, as well as potential solutions.

When adding up your expenses, don't guess. Use bank and credit card statements to see exactly where your money has been going. If you use cash for a lot of your expenses, account for that as well.

Step 2: Do what you can yourself

When you go to an emergency room, you've already admitted you have a problem you can't solve. While the same may be true of a cash crunch, it's worth taking a look yourself to see if you can stem the bleeding.

There are three ways to address negative cash flow: Reduce your expenses, increase your income, or both.

Depending on what you're spending on, there are countless ways to spend less. This website alone has published thousands of ideas.

There are fewer ways to find more income, but there are some. 

You can also look at big expenses. For example, Hariette says her mortgage payment is more than $700, and she has a car payment. Maybe it's time for her to dump her car for something cheaper, or downsize her house. Granted, these strategies may not work, but the point is, when you're in trouble, everything’s on the table.

Whether you can solve the problem on your own or not, however, it still doesn't hurt to get some outside advice.

Step 3: Get professional help

Hariette's question to me was: "I have been thinking of filing bankruptcy. I cannot pay any more on my credit cards than I already pay. Do you think this would be the best way for me to go?"

That's like sending an email to a neurologist saying, "I have a headache. Do you think it's a brain tumor?"

While it's likely bankruptcy may be a viable option for Hariette, I can't answer her question without asking many more. Is she paying just the minimum on her debts? How high are the interest rates? Does she have savings? Has she already cut her expenses to the bone? Is there any potential to increase her income?

Choosing the correct prescription requires looking at lots of stuff and asking lots of questions. That's why practically everyone in Hariette's situation should seek the services of a professional, providing -- and this is a biggie -- the pro is trained, experienced and willing to holistically examine their situation and explore all options.

Visit an emergency room, and the doctor you meet may have graduated at the top of her class at Harvard, or barely scraped by at a state school. But while one may be smarter, both are probably competent.

Unfortunately, that's not the case when dealing with debt professionals. There's no standardized licensing, and the field is teeming with the self-serving, idiots and crooks.

In a post called "Where can I go for help with debt?" I explain in detail what to look for in a credit counseling agency. There's too much to repeat here, but if I had to give a one-line answer, I'd say look for an agency that's accredited by the Council on Accreditation and affiliated with the National Foundation for Credit Counseling. You can find one in seconds by visiting this page of the NFCC website.

If you want to learn more about bankruptcy, check out "Ask Stacy: When should you file bankruptcy?"

There's no law against talking to both a credit counseling agency and bankruptcy lawyer. In fact, talk to two or three of each. You won't pay for initial consultations, and within hours you're going to feel a whole lot better.

Do it now

Ever been sick, but unwilling to go to the doctor? Maybe you're hoping the problem goes away by itself; maybe you're afraid you're dying and don't want it confirmed. But after you finally go and discover the problem can be easily fixed, you feel like an idiot because you stressed yourself out for nothing.

Same with money issues. You stare at the ceiling at night, hide it from friends and family. You're afraid. You feel like a loser. You're depressed, anxious, maybe even suicidal.

Well, in the time it's taken to read this article, you could have started to turn things around. Right now, at the other end of a phone line is someone who understands you and your situation. They won't judge you or charge you.

If you end up filing bankruptcy, every credit card payment you're now struggling to make will have been wasted, because you may not finish paying those bills anyway. And no matter what you end up doing, if it's ultimately going to involve outside help, every stress-filled minute you delay asking for it is like hitting yourself on the head with a hammer.

Got issues? Make a call or two. Not today. Right now.

More on Money Talks News:

Sep 11, 2013 12:04PM

listen to and get his book "the total money makeover" it will show you how to make a budget.


Make a budget.


Stop using credit cards, pay cash for as much as you can, you can use your debit to pay standing bills if that is what you currently use it for.  Although while you are learning to use your money wisely I suggest cash using the envelope system (see book mentioned above)


Save $1000 cash as an emergency fund only.


I suggest: get rid of the car.  If it is a lease find out how much the buy out of the lease is, find out how much the blue book value is then get a small bank loan for the difference.  Then by a used car for $1000 bucks. 


Snowball your debt (see book above on this).


Have a garage sale or sell things online to get rid of stuff and get some money.  Use the proceeds to get your snowball going.


Sep 15, 2013 6:35PM
If you have older kids , see if you can move in with them , baby sit the grand kids , help out in their house work while they go to work . sell your home and pay off your debts. filing bankruptcy will not solve your future problems. It is too bad our government and rich politicians bail out big financial companies with trillion dollars gift without putting anyone in jail for stealing money,but they cannot give help to ordinary Americans to get a decent job which pays a living wages and universal health care.
Sep 14, 2013 6:41PM
You first must have a plan.   Filing bankruptsy may be the only way out of your current financial situation but it is not a long term solution.   You either must earn more or spend less.    If you have no means to earn more, that means you must look into various ways to reduce your out go of money.    You may have to move to a part of the U.S. where the cost of living is much less than where you live.    This likely means the southern part of the U.S.   You may look into moving to Mexico or another Latin American country where your income is suffient to live.   It will not be easy and nor will it be paradise but you will have the financial burden lifted off your back and be able to pay your bills each month.
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