Overwhelmed by Debt

GOT SO MUCH DEBT that you can’t see any way out? To find a reputable nonprofit credit-counseling agency, try the Financial Counseling Association of America ( or the National Foundation for Credit Counseling ( Identify a local credit-counseling agency and ask for a list of fees. If the fees aren’t modest, you may have mistakenly contacted a for-profit credit counseling agency, debt-settlement firm or some other company hoping to profit from your misfortune.

If your debts are overwhelming, a nonprofit credit-counseling agency can help you settle on a debt management plan, which typically involves making loan repayments over a three- to five-year period. A debt management plan can lower your finance charges, reduce collection calls and help to repair your credit.

If part of your debt is forgiven, there could be tax consequences. You may receive a Form 1099-C for the amount of the cancelled debt, on which you might then have to pay income taxes. Talk to your credit counselor about whether there’s an exclusion or exception that may allow you to avoid the tax on this phantom income.

Even before you contact a credit-counseling agency, you might be tempted to raid your retirement accounts to cover the mortgage or pay the credit cards. Don’t do it. Not only would your retirement account withdrawals likely trigger income taxes and tax penalties, but you would also be spending money that would otherwise be protected from your creditors. If you end up in bankruptcy, you will probably be able to hang onto money you have in 401(k) plans and IRAs.

Next: Bankruptcy

Previous: Struggling With Debt

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