"I'm Buried in Debt"

To dig out, cut spending and get counseling.

By Jane Bennett Clark, Senior Associate Editor

From Kiplinger's Personal Finance magazine, May 2009

Laurie Redmond once used credit to take business partners to dinner; she now cooks at home.

Laurie Redmond thought she was making a smart decision when she quit her job in 2005 to become a mortgage broker. Her company, a large bank, had recently been bought out, and layoffs were imminent. Rather than compete with hundreds of other job seekers in the same profession, she says, "I jumped ship before I got laid off."

Until then, Redmond, of Wilmington, Del., had been prudent with money. A single mother, she earned a good salary and spent less than she made. Her savings included several CDs and a money-market account totaling about $7,000; a $2,500 savings bond for her toddler, Cindy; and another $7,000 in a 401(k). She paid off the balance on her two credit cards faithfully every month.

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The new job, which was based entirely on commissions, was "the biggest financial mistake of my life," she says. Over the next 12 months, as home sales and mortgage lending were beginning to plateau, Redmond earned $16,000 -- less than a third of her former salary -- and shelled out more than $1,000 a month in marketing expenses. She spent another $500 a month wining and dining real estate agents and other potential business partners. Meanwhile, months went by when she earned no commissions at all.

Determined to make the job work, "I hit my savings," says Redmond. During that year, she ran through all of it, including the savings bond -- redeemed for a fraction of the face amount -- and her 401(k), on which she had to pay taxes and a 10% penalty for early withdrawal. After those accounts bled out, she turned to credit cards. Redmond ended up with eight cards. On one, the card company yanked Redmond's credit and then set a hair-raising 33% rate on her balance.

Redmond ultimately maxed out all eight, to the tune of $23,000. She couldn't make the monthly minimum payments, much less cover basic living expenses. "I was waiting for my child support so I could pay my rent. I was out of available credit to pay for food. That was when I went in and talked to my boss. I said, ÔI'm out of money, I can't do this anymore.'" Redmond resigned.

In retrospect, she says, "I shouldn't have stayed with that job for as long as I did, but quitting would have meant admitting failure. I didn't want to fail. I kept thinking, 'one more marketing campaign, and things will turn around' -- but they never did."

Redmond eventually found a salaried job in a mortgage-related field and began chipping away at the debt mountain. "I was convinced I would pay it off myself. I paid hundreds and hundreds of dollars as soon as I got my job. My balances were going down, but it was a slow, grueling process."

In January 2007, Redmond turned to ClearPoint Financial Solutions, a national network of credit-counseling services. Such agencies offer credit counseling and budget advice, as well as debt-management programs that help clients work out a repayment schedule at lower interest rates. ClearPoint provides the counseling for free and charges $35 a month for debt management. The company set up an arrangement that brought down Redmond's interest rates and gave her a single monthly payment of $375 -- she had been paying $1,200 at the peak of her crisis.

Now, Redmond has enough to cover food, rent and other living costs and to treat her 5-year-old occasionally. "I can take my daughter to the movies. I can buy her a toy she's desperate to have. I can be a middle-class mom again."

Redmond will be free of her remaining debt, which is down to less than $8,000, in about two years. Getting help from the service "brought some sanity back to my life," she says. "It is not something I would brag about, but it has made a world of difference."

HERE'S WHAT YOU CAN DO TO PAY OFF DEBT

RELATED LINKS
	Live Debt-Free
	When Is It Worth Going Into Debt?
	How I Kicked the Credit-Card Debt Habit

Start by setting a budget. List all sources of income and fixed expenses, such as mortgage payments, car payments and insurance premiums. Cut costs on everything else, starting with food, clothing and entertainment. Budget Web sites can help you categorize spending and identify ways to save. Two candidates: Wesabe.com and Mint.com.

Ask your creditors to help. Call the "800" number listed on your statement and ask for a supervisor with authority to negotiate a lower rate and reduced payments.

Consolidate your debt to lower your interest rates and your payments. Borrow against home equity if you can because you may be able to deduct the interest on loans up to $100,000. (Caveat: If you fail to keep up with the payments, you could lose your house.)

For help, sign on with a credit-counseling service. These agencies help you set up a budget and clean up your borrowing habits. They also work out repayment plans and negotiate lower interest rates. Be aware that some credit services are more likely to rip you off than restore your credit.

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