By Sarah Kleiner Varble
The numbers may seem like a nightmare even as you lie awake at night.
How many times did the debt collectors call today?
How much will it cost in penalties and fees for missing payments that were impossible to make in the first place?
How far can a credit score drop?
Here are a couple more numbers to chew on: Thirty-six percent of Hampton Roads adults have debt that’s so overdue, it’s been sold to debt collection companies, according to a recent study of delinquent debt by the Urban Institute, a nonpartisan research organization. On average, they owe $5,400.
Similarly, about 35 percent of American adults have debt that’s gone into collections, and they owe $5,180 on average.
It’s a problem that weighs on the minds of consumers — “financial worries” keep 80 percent of people up at night, according to the National Foundation for Credit Counseling’s survey respondents — and that, in turn, weighs on the economy.
The nation’s cumulative consumer debt dropped around 11 percent to $11.23 trillion in September 2013 from $12.68 trillion in the same month in 2009, according to the Urban Institute study.
Still, an indicator of the vast scope of the problem lies in our own backyard. Norfolk-based Portfolio Recovery Associates Inc., one of the world’s biggest buyers and collectors of delinquent consumer debt, boosted its profit to $177 million in 2013 from $101 million in 2011 — a 75 percent increase, according to Securities and Exchange Commission filings.
The economic impact of unpaid debt is compounded by the effect it has on credit scores. Negative marks reported to the nation’s three credit bureaus — TransUnion, Equifax and Experian — usually stick on consumers’ files for seven years.
Bad credit can keep job seekers from finding employment and families from buying or renting a home. It also makes it difficult, expensive and perhaps even impossible for debtors to get credit for anything else, even in an emergency.
Help is out there in several forms, but many people try to ignore the problem, hoping it will disappear, said Iris Borden, credit counseling coordinator for the Hampton-based nonprofit Consumer Credit Counseling Service of Hampton Roads.
“They’re scared,” Borden said, “especially if they get called on a daily basis, and the collections agents are nasty to them.”
But the financial hole they’re in grows deeper and the consequences graver as time passes, she said. If a collection agency resorts to court action, debtors may wind up forfeiting part of their paychecks.
“The chances of it going away are probably slim to none,” Borden said, “because if you owe something to the creditor, they eventually will get you.”
Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, said members of her organization worked with more than 1.7 million people in 2013 — but 77 million people have debt in collections.
Many stop opening their mailboxes or answering their phones because they know a collector is trying to reach them, Cunningham said.
Often, debtors worry that counseling would add expenses to a budget that’s already in or heading toward dire financial straits. They also worry about the effect it would have on their credit scores, she said.
Another possible reason for a gap between those with debt in collections and those who seek help is debtors who are in the dark.
“It’s quite possible that people have collections and don’t even know about it,” said John Allen, vice president of The Up Center’s housing and financial counseling. The Norfolk-based organization works with the United Way to provide counseling services through a network of local experts.
Some debts aren’t as aggressively pursued as others, and in cases where time has lapsed, collectors might shift their efforts elsewhere. Still, “the bottom line is, unless you resolve a collection, you’re always at risk of it popping up at the worst possible time for you.”
Allen recently led a debt management class at the Suffolk Workforce Development Center. He advised the six students, all middle-age women, that a healthy budget dedicates no more than 20 percent of take-home pay to debt payments.
“You have to take charge,” he told them.
Here are some of the paths Allen and other local experts suggest taking to get out of debt.
What is it? This is probably the least invasive way a debtor can get help. Several nonprofit agencies offer individual or group sessions with financial counselors who can map out the fastest and least expensive ways to pay down debt.
You can think of this almost as a do-it-yourself option.
The National Foundation for Credit Counseling, which requires its members to be recertified every four years, provides counseling for free or for fees around $25, Cunningham said. The group has 600 locations across the country.
Pros: Counseling services are not reported to the three credit bureaus, which means getting help won’t drag down your credit score. Professionals can examine budgets individually and suggest, among other things, which debts to pay down first.
Cons: If you are deep in debt, it may be too late to get help from a credit counselor.
What is it? Numerous television ads tout debt consolidation, which happens when companies pay off consumers’ creditors and assume all of that debt for themselves.
Pros: Instead of paying a handful of creditors each month, you send money to just one place.
Cons: You still have the debt. You still have to pay it. And if you didn’t read the fine print carefully, you may wind up paying much more than you would have if you had left your debt alone.
DEBT MANAGEMENT PROGRAM
What is it? The Federal Trade Commission cautions consumers not to sign up for a debt management program until a reputable counselor has thoroughly studied your finances. It might not be necessary to take that step.
Under a debt management program, a nonprofit or a business will collect a single payment from you and divvy it up among your creditors each month. Both types may tout their abilities to negotiate for lower rates, reduced principals and fewer fees.
The nonprofit Consumer Credit Counseling Service of Hampton Roads, a member of the credit counseling foundation, is an example. It charges a $37 setup fee and a monthly service fee of no more than $39, but the fees can be waived or negotiated based on need.
Borden cautioned debtors not to choose an out-of-state company because their laws may be different.
Pros: You might wind up having to pay less than you owe if your debt manager negotiates with your creditors. Like debt consolidation, you’re sending money to one place instead of many. Debts are usually paid off in three to five years.
Cons: Your credit score will almost certainly drop, even if it is already low. Typically, for three to five years, a note will remain in your credit bureau files alerting potential lenders that you participated in a debt management program.
For-profit companies negotiate with collectors to reach an agreed-upon lump sum payment that is less than what you owe. Federal law does not allow the companies to charge fees before they reach a settlement. Debtors usually transfer a monthly payment into an “escrow-like account” that’s used to pay the settlement, according to the Federal Trade Commission.
Usually, debtors are instructed to stop paying creditors every month. Cunningham said this strategy can make it easier to argue for a lower settlement because the client appears to be in a desperate situation.
Pros: Your “debt” is wiped clean with the creditors that agree to a settlement that’s for less than what they’re owed.
Cons: If you stop paying your creditors every month, your credit score will drop. Debt settlement is recorded on your files with the three credit bureaus. The Federal Trade Commission says debt settlement is risky because it can have serious financial consequences, and some companies fail to keep promises they make.
This is a last resort, experts said. It’s basically like hitting the reset button. If you can’t get your finances in control through credit counseling or a debt management program, you can file papers with the court declaring to debt collectors that you aren’t able to pay what you owe.
There are several classifications of bankruptcy, and each affects you in different ways.
Pros: Collectors are supposed to leave you alone. Depending on the type of bankruptcy you file, you can be debt-free immediately, or you can come up with a manageable repayment plan.
Cons: Your credit score will be decimated, probably for seven years. All of your credit cards will be canceled, and you won’t be able to get loans for purchases like homes or cars. Severely damaged credit can prevent you from getting a job or qualifying to rent an apartment or home. And, important in Hampton Roads, members of the military and contractors with bankruptcy on their records can lose their security clearances.