Inflation is defined as a general increase in prices and fall in the purchasing value of money. With inflation, you’re generally able to buy less and less with the same amount of money. You’ve probably seen inflation happen over your lifetime. If you’re in your 30s or 40s, you were probably able to buy a candy bar and a soda for just $1 when you were a kid. Now, you could probably barely buy a candy bar for a $1, much less a soda. Because of inflation, you’re generally now able to buy less for $1 than you were several years ago.

Inflation and Paying Off Debt

In terms of repaying debt, inflation is typically considered to favor the debtor since you’re paying the creditor back with devalued dollars. In other words, you borrowed $100 last year and got the benefit of that $100. This year, the same goods would have cost $110 and you’re only paying your creditor the original $100 you borrowed. Thus, the creditor would theoretically take a loss because they’re probably able to do less with the $100 you repaid than they could have done with the $100 you borrowed.
That’s a simple example, but inflation’s effect on your debt is typically more complex. Whether it gets easier or harder to repay your debt after inflation probably depends on a few other factors: any subsequent increase in your living expenses, whether you have fixed or variable interest rates and whether your income increases, decreases or remains stagnant.

If your income does not increase with inflation, it could become more difficult to repay your debt if the cost of everything else increases and you have less money leftover to pay your debts. The situation worsens if your debts have variable or adjustable interest rates and your adjustable interest rates rise and then your monthly debt payments will likely rise too. Again, if your income does not keep up with inflation, you’ll probably have a hard time making ends meet.

Inflation Examples

Let’s say your monthly income is $3,500 and you spend $1,200 of that amount on monthly fixed-rate debt. Assume your other monthly living expenses are $1,600. That would leave you with $700 of extra money left over each month.

Inflation With Fixed Rate Debts

Assume there’s a 7% inflation. Your fixed-rate debt payments remain the same and your monthly income remains the same. However, your same monthly living expenses increase by 7% to $1,712 leaving you with just $588 left. Whatever you were doing with your extra money last year, you’ll be doing less of it this year because you have less money because prices have increased with inflation.

The following graph shows how your living expenses could increase and your buying power could decrease with inflation (average inflation rate of 3.4%, given your income remains the same).

Inflation With Variable Interest Rate Debts

What if there was inflation and your debt had variable interest rates? That’s common with credit cards and adjustable rate mortgages.  Let’s assume that along with the 7% inflation, your interest rates also increased causing your debt payments to rise by 4%. Not only would you be spending $1,712 on the same monthly expenses, you’d be spending $1,248 on monthly debt payments. You’d be left with $540 after all your monthly living expenses and debt payments are covered.

The next chart shows how your living expenses and debt payments could increase with inflation when your rates are variable. Assuming your monthly income remains the same, your buying power could drop even more. If you were using your extra money to help pay off your debt, inflation would likely slow down your progress.

Inflation With Wage Increase

Let’s say you receive a 5% raise bringing your monthly income to $3,675. With 7% inflation and a 4% increase in debt payments, you’d have $715 per month leftover. Of course, your purchasing power is still possibly slightly lower than it was the previous year considering the increased prices that result from inflation. If all your debts had fixed-rates in this scenario, then your income after the same monthly expenses and debt payments would be $763.

The following chart shows the possible movement of your living expenses and buying power with inflation and an average 3% wage increase. Notice how your buying power, e.g. the money leftover after your bills are paid, could rise instead of fall. Under this scenario, you’d probably have an easier time using your extra money to pay back your debts because your wage increase probably improves your buying power.

This final chart indicates what could happen with inflation, variable interest rates and a wage increase.

Inflation without a corresponding wage increase likely hurts you in terms of your purchasing power and your ability to repay your debt faster. Inflation is likely to happen. You should watch the relationship between your living expenses and your income to be sure that your buying power isn’t disappearing.

For a detailed look into inflation in America, from the 1950s until now, check out the Grandfather economic report.

As retirement gets closer, you should get more serious about getting rid of your debt. When most people calculate the amount of money they need to have during retirement, they don’t typically consider debt payments. So, if you retire and you haven’t paid off your debt, you’ll have to make some serious living adjustments to live off your retirement income and continue paying your debt. Or worse, you might have to come out of retirement and return to work until you can pay off your debt for good.

The further you are from retiring, the more time you have to pay off your debt. You can take your time, but the years may fly by before you know it.

You should get rid of credit cards and other unsecured debts first. These debts typically have the highest interest rate and no fixed repayment period. As a matter of fact, if you make the minimum payment the credit card issuer sets in your billing statement, it could take several years to pay off your debt. In that time, you’ll have paid a ton of interest, money you could have been putting into your retirement savings.

You don’t necessarily have to stop your retirement contributions to pay off your debt, but it depends on how much money you have left after all your expenses are paid. If you don’t have enough leftover after taxes, retirement, and other expenses, you may consider reducing your retirement savings for a few years, just until you can pay off your debt. Then, once your debt is fully paid, you can start your contributions where you left off.

Debt Relief Options Before Retirement

You have several debt relief options available, but you should choose the one that works best with your finances and the one whose consequences are acceptable for you. You can pay off the debt on your own with a plan that you create, but it likely requires you to pay more than the minimum each month on at least one of your accounts. The more you can pay each month, the sooner you can probably pay off your debts.

Another popular option is consumer credit counseling. It may be a safe choice, with the credit counselor negotiating a lower interest rate and monthly payment with your creditors. Credit counseling goes on your credit report, but likely doesn’t hurt your credit score, and could a payment similar to your current minimum payments.

In the past few years, debt consolidation was another popular option. Homeowners would use the equity in their homes to consolidate their debt and pay off the debt at a lower interest rate and fixed repayment period. However, home equity loans aren’t as plentiful as they once were. They were always risky too, because you put your house on the line for your credit card debt.

You could consolidate your debt by borrowing against your retirement plan, but this money typically has to be repaid within a certain amount of time. And if you leave your job, you’ll probably have to repay the balance immediately or withdraw your retirement funds. That could mean taxes and early withdrawal penalties.

Debt settlement is another popular option where you settle your credit card debts for less than the full balance due. But, you typically have to first miss payments.

As you see, there are a variety of options available for paying off unsecured debt and there’s not one correct choice for everyone in debt. The closer you are to retirement, however, the more important it likely becomes to pay off your debt fast so you can avoid paying that extra expense out of your retirement income.

If you’re already in debt and contacted by a collection agency, it might be easy to believe the collection agent is pursuing you for a debt you really created. Even if you don’t remember the debt, a collector could have enough information to convince you that it’s real. However, debt collectors have been known to make up debts, so it’s in your best interest to verify that a debt is real before you pay or settle it.

Use Debt Validation to Reveal Fake Debts

The best way to verify that a debt is real is through the debt validation process. You have the right to ask a debt collector to send proof of a debt as long as you make the request within the first 30 days of being contacted.

When a collector contacts you about a debt that you’re not sure you owe, you should not admit to anything. Instead, you should ask for their name, address and the reference number they use for your debt. You may have already received a bill from the collector, but if not, you should also ask them for a written statement of what they say you owe. Then, once you have their name and address, you can send a letter, via certified mail, that requests debt validation. Once you send your request in writing, the debt collector has to back off until they send you “competent proof” that the debt is indeed yours.

The law doesn’t specify what exactly counts as “competent proof,” but a printout from the collector stating an alleged creditor and debt amount is likely not enough. To prove that you actually did create the debt, the collector probably needs to send something from the original creditor like a signed application or a receipt. Until you get something that confirms you actually created the debt, you should not acknowledge the debt could be yours and you should not pay or settle the debt.

While you wait on a response, you can dispute the debt with the credit bureau, if it appears on your credit report. The collector isn’t allowed to put the debt on your credit report if they haven’t sent the debt validation.

What to Do About Continued Collection Efforts

If the debt collector sends back “proof” that you feel doesn’t sufficiently show you owe the debt and you don’t have any record of the debt, you could ask that the collector not contact you anymore about the debt. You could also send a complaint to the Federal Trade Commission and your state Attorney General alerting them to the fact that a collection agency is pursuing you for a debt that doesn’t exist.

Credit bureaus are prohibited from reporting debts that can’t be verified. If the credit bureau continues to list the account on your credit report, even though you’ve disputed the debt, you could also report them to the Federal Trade Commission.

It’s probably a waste of money to settle a fake debt, even if it’s just to get a collector off your back. It’s illegal for debt collectors to say you owe a debt you don’t really owe. So, you should get law enforcement on your side when a debt collector presents you with a phony debt.

It doesn’t happen all the time, but attorneys do contact debtors. Being contacted by an attorney is scary usually because you don’t know what they can do. Can they file a lawsuit against you? Take your home? Garnish your wages? Take money from your bank account? If an attorney contacts you about a debt, don’t panic. Instead, keep a cool head and follow certain steps.

Confirm That It’s a Legitimate Attorney

First, make sure it’s actually an attorney that’s contacting you. Though it’s against the law, collection agencies have been known to misrepresent themselves as attorneys. They may insinuate that they’re an attorney or working with a law firm when they’re actually not. Some collection agencies outright lie and say they’re an attorney just to scare you into paying. Ask the “attorney” to give you the name of the state they’re licensed to practice in and their bar license number. A real attorney can give you both pieces of information. Collection agents usually cannot.

Once you have a name and bar license number, find the website for your state’s bar association and confirm the information. Do not deal with the attorney until you’ve verified they’re an attorney and contact them via the number you find on the bar association’s website, not necessarily the number you’re given over the phone. A collection agent could give you a real attorney’s name and license number, but a fake phone number.

Make Sure They’re Licensed in Your State

If you actually are dealing with an attorney, confirm that they are licensed to practice law in your state. Out-of-state collection attorneys are not likely to sue you because they generally need to be licensed in your state to sue you. (Note: that sometimes collection attorneys are part of a network or group and another attorney in that group may be licensed in your state.)

Even if you’re threatened with a lawsuit, you have up until the court date to work out a deal with the collection attorney. Try using the debt validation process if you need a little time to come up with the money for settling the debt. In debt validation, the attorney will likely have to contact the original creditor to get documentation proving the debt. In the meantime, you could figure out how you can get the money.

Work Out a Settlement Deal

You can settle debts with collection attorneys, but maybe not for a low amount. If you don’t have enough funds to pay a settlement deal, you can try to work out a payment plan with the attorney. Make sure it’s something you can afford and have the attorney agree not to sue you while you’re making payments.

Respond to Any Lawsuit

If an attorney does file a lawsuit against you, don’t ignore it. Failing to respond to a lawsuit will generally result in a default judgment where the judge awards the attorney whatever they’ve sued you for. Then, after a default judgment, the attorney could ask the court to garnish your wages or levy your bank account. If you’ve been saving up for other settlements, the attorney may be able to take that money. It’s probably best to get in touch with an attorney to help you if a lawsuit has been filed against you. An attorney could help you figure out your options and perhaps negotiate a settlement before the case goes before the judge.

Having lived through several weeks or even months of unemployment, you’re probably more than happy to get back in the work force and start bringing in a paycheck. You probably won’t be the only one happy about becoming employed again. All the creditors and collectors you’ve dodged during unemployment will likely come again with their hands outstretched and waiting for payment. You could easily feel like your paycheck is being tugged in all sorts of directions, but you should make a plan.

After returning to work, you’ll probably have a lot of responsibilities to catch up on. If you got severance from your last job, received unemployment benefits or had access to savings, you may have been able to stay current on your debts. If not, then make a list of all the payments you need to catch up on. You could use the bills you’ve received during unemployment or start collecting them as they come in the mail. Then, write down the past due amount for each debt and the amount of delinquency, e.g. 30 days past due or in collections.

You should create a budget based on your expected salary. You should create a budget even if you don’t expect to have enough money leftover to catch up on debts. A budget will likely keep you from overextending yourself, something that’s easy to do when you’re back to work for the first time in several months. You should make sure you include all your monthly expenses and some extra money that you can save every month.

You should get ready for the phone calls and letters from collectors. Once your creditors learn you’re back at work again, they’ll likely resume calling you and sending letters. That’s if they ever stopped. You may be able to keep your employment a secret for awhile, but if any of your creditors learns about your new job, they’ll all soon figure it out because it will likely show on your credit report. If you’re proactive about a plan to pay back your debts, you’ll probably know exactly how to respond to creditor and collector calls.

Consider settling debts. If your debts have become severely past due, it may be impossible to get caught up. On the other hand, you may be able to come up with enough money to settle with your creditors. Before you mention settlement to any creditor or collector, you should contact a debt settlement company or assess your ability to come up with the funds to settle your debts.

Resist the temptation to spend or go into more debt. Being back at work is probably a huge relief. Now that you’re back at work, you may feel compelled to start buying all the things you had to go without while you were out of work. Try not to let the feeling of material deprivation get you in trouble. Use your budget to decide how much money you can afford to spend on things like clothes and entertainment. You should keep this kind of spending to a minimum until you get your debt under control.

Most of the companies you have debt with report your account to at least one of the three major credit bureaus each month. The major three bureaus are Equifax, Experian, and TransUnion. These credit bureaus, or credit reporting agencies, have the task of collecting all your accounts and adding the details to your credit report. Years and years of accounts appear on your credit report, so your credit report could be a good place to go if you want to know about your debts.

What’s On Your Credit Report

Many details are usually listed for each of your accounts. These details generally include: the name of your creditor, a portion of your account number, the current balance, your credit limit or original loan amount, current monthly payment, the account status, and a list of any payments you’ve missed in the last seven years.

When you’re assessing your debt to come up with an attack plan, your credit report is typcially a great place to go because most, if not all, of your accounts and balances will be listed there. Note that creditors also have access to your credit report so they can know how much debt you have and whether you’re behind on all your debts or just the debt you have with them.

Negative details about your debt can only remain on your credit report for seven years. So, for example, if you made a late payment four years ago, that payment will disappear from your credit report in about three more years. Once this negative information is past seven years old, it can’t be on your credit report.

Debt Relief Solutions on Your Credit Report

Most debt relief solutions will appear on your credit report in some way. If you enroll in credit counseling, the creditor will report that your debt is being managed by a credit counseling agency or that it is part of a debt management plan. That note itself doesn’t affect your credit score, but it could scare future creditors away.

Debt settlement will also generally show on your credit report, usually as a comment that says something like “Settled in Full” or “Paid in Full for Less Than the Balance Due.” Debt settlement can affect your credit score.

Accounts included in a bankruptcy discharge will be noted on your credit report. Bankruptcy stays on your credit report for 10 years, longer than all other negative information. It’s important to keep this in mind as you consider all alternatives.

If you consolidate your debt, all the accounts you consolidate will have zero balances and the new consolidation loan will be added on your credit report. There’s no written note that you’ve consolidated your debt, though some creditors may be able to figure it out based on the account closures and new loan.

Bankruptcy can typically be a tedious process. You must do everything right because missing any steps could result in having your bankruptcy dismissed. If that happens, you likely can’t simply go back to the court and ask them to re-open your case. Instead, you likely have to wait 180 days (6 months) to file again. Because bankruptcy goes on your credit report when you file, you’ll probably have another bankruptcy listed on your credit report and factored into your credit score. It likely will be that much longer before the bankruptcy is removed from your credit report.

You failed to complete the required credit counseling. Bankruptcy law requires you to complete credit counseling from a court-approved credit counseling agency within 180 days before filing bankruptcy. In addition, you have to finish money management courses with the credit counseling agency before the court will discharge your debts. If you don’t  show proof that you’ve met these requirements, your bankruptcy can be dismissed.

You failed to appear in court or follow a court order. You’re generally required to be at court hearings pertaining to your bankruptcy case. It’s important that you know when you’re expected to show up in court or file certain documents. Timely compliance is key to ensuring your bankruptcy doesn’t get dismissed.

You failed to pay bankruptcy fees. Chapter 7 bankruptcy comes with a $299 fee and Chapter 13 has a $274 filing fee. If you can’t afford to pay the fee when you file, then you should talk with the court about having the fee waived or paying it in installments. If you go on an installment plan, your final payment has to be made within 120 days from the date you file your bankruptcy documents. You may be able to get an extension if you give a written statement explaining why you can’t pay the fee.

You missed Chapter 13 bankruptcy payments. Under a Chapter 13 bankruptcy, you’ll be required to make monthly payments for generally three to five years. Missing any of these payments could result in dismissal of your bankruptcy case. If you’ve included mortgage or auto loan arrears in your bankruptcy, foreclosure or repossession proceeding may restart after your bankruptcy is dismissed. Protection from this collection activity is another reason to stay current on your bankruptcy payments. If you can’t afford them, talk to your trustee about changing your plan.

Talk to the court if you’re having problems paying. Don’t just miss your payment or else your case will likely be dismissed. Worse, if you re-file because you missed your payment, you probably won’t be able to get an installment plan next time.

Voluntary Dismissal

You can volunteer to have your bankruptcy dismissed. For example, you might later decide that you don’t want to go through with the bankruptcy or that certain assets would be taken if you go through with the bankruptcy process. The proper way to have your bankruptcy dismissed is to file a motion to dismiss and appear at any required court hearing.

In the past several years, medical debt has become more burdensome for many families. So much so that medical bills have become a major cause of personal bankruptcy. It’s not that people have no health insurance. Many individuals who cite medical debt as the cause of their bankruptcy were actually covered under a health insurance plan at the time the medical expenses were incurred. The problem is that certain medical expenses are often uncovered. Debt settlement may be an alternative to bankruptcy for dealing with your medical expenses.

Make Sure It’s Not Covered

Confirm that your health insurance provider doesn’t cover the expenses. Have your doctor’s office verify that the right medical codes were used for your services and then have them resubmitted to your health insurance company. You should also read through your policy (understanding it as much as you can) to be sure those medical expenses were not covered. Also, have your health insurance company review the claim against your policy. Sometimes mistakes are made with medical bills. Going through these steps will save you some time.

Collections Process for Medical Debts

Medical expenses go through a collections process similar to other debts. The doctor’s office or medical facility will generally pursue you for payment for a few weeks or months, then likely they’ll turn the debt over to a collection agency. Settling the debt is an option at any point in the process. Settling while it’s still with the original creditor, i.e. the medical service provider, is usually a better option because it generally keeps the debt off your credit report.

Negotiating With the Doctor’s Office

You should start the negotiations sooner rather than later. The longer you wait to contact the doctor’s office about your debt, the closer the doctor’s billing department is probably to sending the account to a collection agency. Call the number on your billing statement and ask to speak to someone about paying your account. You could explain that you’re unable to pay the account in full and can’t necessarily commit to a repayment plan. Let them know that you have a set amount available that you can pay as settlement on the debt. Wait for a response. If you feel more comfortable making your request in writing, you can explain your position in a letter and make a settlement offer.

Whether you make the settlement offer in writing or by phone, have the money for the settlement available and ready to pay upon acceptance of the offer.

Negotiating Medical Debts With a Collector

Don’t worry if the doctor’s office doesn’t agree to your settlement offer the first time. You can wait a few weeks and try again or you can wait until the account goes to a collection agency. Making a settlement offer with a collection agency for a medical debt is similar to offering settlement for other types of debts. The upside is that you may be able to settle for a lower percentage of the debt, depending on the age of the debt. The downside is that the debt and any settlement will go on your credit report.

When to File Bankruptcy

Unfortunately, some medical bills are very expensive and even a settlement for a fraction of the debt may be too high. For these debts, consider a Chapter 7 bankruptcy where the debt could be discharged.

People typically add family members, significant others, and sometimes even friends as authorized users on a credit card to help boost the authorized user’s credit score. Sometimes parents add their kids to credit cards to help the kids learn how to use credit responsibly. A spouse may list another spouse as an authorized user on a credit card so that spouse can make purchases with the credit card too. Unfortunately, if you have authorized users on your credit cards, your debt settlement could affect their credit, too.

How Authorized User Accounts Work

Just like your credit card history is listed on your credit report, it’s also likely on the authorized user’s credit report, too. It can be helpful for the authorized user when the credit card balance is low and all the payments are made on time. But, if you settle the debt, that too will generally be added to the authorized user’s credit report, even if they had nothing to do with the settlement.

Authorized users have no legal responsibility for the credit card balance, even if they helped rack up the charges. When you default on payments, the credit card issuer isn’t allowed to go after the authorized user for payment because the user is just someone who has permission to make purchases against your account.

If you don’t want your authorized user’s credit history to be affected by your debt settlement, you should have that person removed before you settle your debt. In fact, it’s best if you remove them from the account before you ever miss a payment on the account. That way, anything having to do with the settlement process doesn’t hurt the authorized user. The authorized user’s credit report will still have the credit history up to the point that you remove them. If that authorized user wants to remove the entire account from their credit report, they’ll need to contact the credit bureau’s to make it happen.

Remove the Authorized User

Removing an authorized user from a credit card is a simple process. You can typically call the number on the back of your credit card and let the representative know you want to remove the authorized user from the account. That’s it. The authorized user should be taken off the account and the debt settlement (as long as it hasn’t already happened) won’t show up on that person’s account. If you want an extra guarantee, you can make the request in writing. That way you’ll have proof of your request if there’s ever a question about it.

Handle a Joint Account Differently

It’s a different situation if the other person on your credit card is a joint account holder instead of an authorized user. That’s because joint account holders are equally responsible for the credit card balance. Banks generally won’t let you remove a joint account holder as easily. On top of that, if you attempt a settlement, the bank may decide to purse the other account holder for the full balance. Or, if the bank does agree to the settlement, it will show up on the other person’s credit too and they won’t be able to dispute it with the credit bureau.

If you have a joint account holder instead of an authorized user, talk to that person about how to handle that account. Let them know what you’re planning and see if the two of you can work something out. You may have to keep up the minimum payments on that account, especially if the creditor won’t let you settle without the other person’s consent.

Not everyone who starts out on the debt settlement path make it to the end. Sometimes, people choose another option because they weren’t ready for the debt settlement process. If you’re strongly considering debt settlement, here are some tips to make your settlement successful, even if you’re not doing it yourself.

Understand the process. Many people who complain about debt settlement companies simply don’t understand how the debt settlement process works. They’re surprised to have been making payments for several months and haven’t yet seen results. Debt settlement results typically don’t happen for several months because you first have to save up enough money to settle an account. This is true whether you hire a debt settlement company or you do it yourself. Debt settlement companies are generally required to let you know how soon you can expect results. That could take much of the guesswork out of the equation.

Pick the right company. Since the government made stricter rules for for-profit debt settlement companies, many of them have gone out of business. The good news is that the companies left in the industry are likely to follow the law. Still, you should pick a debt settlement company like you would shop around for car insurance or any other service. Check the company’s reputation and ask about their track record.

Pay as much as you can. The speed of your settlements depends on how fast you can come up with the money for your settlement. The more you can put toward your monthly debt settlement payments, the sooner you can likely settle your debts. Push yourself to cut out extra expenses and make a payment that’s perhaps a little uncomfortable. It usually takes big sacrifice to pay off your debts in a shorter amount of time, but you’ll probably be happy with the results when it’s over.

Keep realistic expectations. Some of the most-repeated debt settlement success stories are from people who’ve settled their debts for low percentages and in record amount of time. Often these cases are the exception and not the norm. Companies more commonly settle accounts for 30% to 70%. If you reject their settlement offer because you’re holding out for something better, you might miss the opportunity to settle all together. Sometimes you have to take what you can get.

Explore your other options first. You’ll likely eliminate doubts about debt settlement if you’re sure that it’s the best thing for you. So, before you decide to go through with settlement, take a close look at other debt relief options to be sure you’re making the right decision. Credit counseling, debt consolidation, bankruptcy, even paying your debt on your own are all alternatives that may or may not work for you. You may want to rule them out so you won’t have any regret.

Based on changes to federal law, you can get a refund of the money you’ve paid toward your settlement if you later decide that debt settlement isn’t right for you (as long as the money hasn’t already been paid toward a settlement). However, keep in mind that any settlements made at the time you cancel have already been added to your credit report.