Presuming you are reading this because creditors are knocking on your door, you will find that with patience and perseverance you can prevail. Your first line of attack will be to try to set up a structured payment plan with your creditor. The amount of money you will owe is unlikely to be reduced in total, but the payments each month will be smaller and therefore perhaps manageable. You will of course have to continue to make all your purchases with cash, as adding any additional debt to any creditor would just dig you into a deeper hole than you are already in.
Unfortunately, companies that will work with you in this manner are few and far between and it is quite likely that you will need to take a more active approach. The first one you may consider is by no means drastic. It also may not stop the harassing phone calls, but there is always call blocking! If your debt is not overwhelmingly large in relation to the extra money you have can put towards reducing it, you can try what is referred to as the ‘debt snowball method’. Cute name, but it works.
Very simply, the ‘debt snowball method’ works like this. You pay your ‘top of the hierarchy’ bills, and your minimum to all your creditors. You then you choose one creditor and you pay that creditor every penny that you can afford to, every month. ‘Every penny’ includes bonuses, tax refunds, rebates, overtime pay, money given as a birthday present – everything! Your goal is to wipe out that one debt, and then move onto the next, eradicate that one, and so on. This procedure may take you months or even years, your credit rating will probably drop, but by sticking to this plan, you can pull yourself up and out of your financial rut. It probably took you a long time to get into this much trouble, so you cannot expect to get out of quickly.
Finally, if are completely unable to make your ‘top of the hierarchy’ payments, have changed your spending habits, and simply have no money to even begin catching up, you may want to consider filing for bankruptcy.
Before you do this, you must realize a few things about the process. Filing for bankruptcy (usually via Chapter 13) involves giving up your financial privacy completely. The moment you start the filing process you are prostrating yourself before the court, saying in effect, “I can’t handle this, please help me, please take care of me.” The court steps in. They issue injunctions to stop the creditors from contacting you, and at the same time they take control of all your assets.
An arbitrator is assigned to your case. This person takes over your bank accounts and your assets and is granted something similar to a power of attorney. The arbitrator determines which of your assets you can keep and which will be liquidated (if necessary) as well as which debts will and will not be paid. If you are granted Chapter 13 bankruptcy, your paychecks are sent directly to the arbitrator who will then disburse funds your creditors.
Another type of bankruptcy, Chapter 7 bankruptcy, used to be fairly an reasonable alternative, but this is not the case anymore. A Chapter 7 bankruptcy effectively liquidate's all your debt. You start your financial life from scratch. You have no debt and pretty much a zero credit rating.
Regardless of the method you choose, you must realize that it will take you a while to restore your financial health and credit. However, your peace of mind will be skyrocket and you stress level will be drastically reduced the moment you begin with any of actions described above.