Reader Question: Breaking out of the debt cycle

On Friday, we received a fascinating email from one of our newsletter readers. In her email, Madalyn explains how she got into debt, the dangers of letting payday loans go unpaid and the challenges that she is currently facing:

First, I want to say "thank you" for this newsletter. It really hit home for me. I am currently going through a financial crisis....too much debt with creditors, payday loans, and helping family members out (including a member with MS), some medical problems along with being a single parent raising a 10 year-old. I have been going through this since November 2005. I used my Income Tax check in February to pay bills 90-days behind then. Now, I am working on 90-days delinquency again.

I am one person who used payday loans to help me out. But, I got out-of-hand with using them to help me out. They only made my situation worst. I have been paying this one payday loan since November and haven't paid it off yet. Payday loans interest rates are out-of-this-world....we are talking in the hundreds -- 18% is nothing compared to 690%. Tell consumers to make sure they get loans they can pay off  Payday loans are so easy to get. They require no credit check and you can have multiple loans. Plus, they don't go on your credit report. Payday loans are "off-the-record" loan sharks.

With my current situation:  I make over $88,000.00 a year and I have over $50,000 in debt (excluding my mortgage). Prior to my initial financial crisis in November I was able to manage my debt. Now, I am so far behind I don't know if I should seek a free agency for assistance like "Consumer Credit Services" or file Chapter 13. I would rather deal with delinquency on my credit report instead of bankruptcy....is my way of thinking wrong?

Thanks for listening. Because of this newsletter, I feel I can provide you my experience regarding communicating with creditors and using payday loans.

Madalyn 

Madalyn's story shows how easy it is for even someone with a good income to end up with serious debt problems. Unfortunately, her story of financial crisis is unfortunately all too common. There are many people out there just like Madalyn who have just been stretched too thin. In her situation, bankruptcy can offer a vital fresh start. Bankruptcy is certainly not a good choice for everyone but it can be a salvation for people who are overwhelmed by what they owe.

If bankruptcy is not an option, she can also investigate reducing her debts through other means.  Since her credit is already severely damaged by the 90-day late payments, a debt counseling program may be a good solution. With these kinds of programs, counselors work to negotiate drastically reduced settlements on the consumer's debts. This process can damage the participant's credit, but it is likely that Madalyn's credit doesn't have too much further down it can go.

In the meantime, Madalyn should make paying off those payday loans her number one priority. She should cut back on all your unnecessary expenses (cable, gym memberships, etc) and put as much as she can each month directly toward paying them off.  Considering how expensive these loans are, she can even consider paying them off using credit cards. Borrowing some money from a family member can also be a temporary solution. She should wok hard to clear these accounts before she start working on everything else.

Do you have some advice for Madalyn? Are you currently facing a financial crisis? Share your feedback in the comments section below.

Comments

[Ilya Bodner]

Waiting for a loan is more frustrating than ever, especially when already approved and the paperwork is eating away weeks. If you are reading this during the paperwork gathering chaos – hang on! That is all that could be said, just hang on and send in what is needed.
If you are planning to get a loan, or would like to know some of the easiest things to do to speed up fund release time please read on.
All loans require paperwork. Even with the “No Doc Loans” there is still paperwork that must be done. Usually it is the same few items: something proving you are you, the business is really a business, and future/past financials. Save yourself the headache and gather up all documents into one folder. All tax returns, all formal legal and less formal paperwork should be photocopied and set aside into one folder.
Believe it or not that’s it! That is the single most powerful tip that can be given to anyone applying for a business loan. By avoiding having to go back and forth for various items a small business owner can save weeks of runaround.
Furthermore, some alternative lenders require a specific set of documentation for the business based loans. It is not hard but rather time consuming to come up with the requested. Begin by searching for “strong business credit” (just like that in quotes) and a professional service may assist with the documentation.

Sincerely,

Ilya Bodner
Small Business Owner
Initial Underwriting Group

*Breaking Down The Barriers To Small Business Financing*