Nearly a decade ago, at the age of 23, Aja Williams became the proud owner of an $80,000 two-bedroom home in Detroit. But two years later when her property taxes ballooned from $768 to $2,500 and home insurance rose from $655 to $1,300, she began to rely on two credit cards. With the high-interest cards charging late fees, one with a 24% interest rate, her debt quickly snowballed. She borrowed $5,000 from family members. Soon, the single mother of a young son, Vincent, now 14, was $130,000 in debt, which included her mortgage and $35,000 in personal debt. "Everything spun out of control,†says Williams, now 32. "There were times when our heat and water were shut off.†Williams took action by creating a budget and downsizing her lifestyle. Her brother pulled her house out of foreclosure by purchasing it, and Williams rented two rooms from him to share with her son. Employed as a title coordinator, she paid her bills faithfully and also used tax refunds, raises, or any windfalls to chip away at her debt. By 2008, after six years, her entire debt was paid off. Today, Williams is leasing a house with the option to buy. She's also pursuing a bachelor's degree in finance at Wayne State University. Two grants cover just about her entire tuition. She teaches financial literacy classes in her community, sometimes without charging. She's come a long way. "I learned to delay gratification and stopped using credit cards for a quick fix,†Williams says. "I use cash for everything now.†It's a New Year and time to make good on promises to order your finances. Here's a guide to help you dig your way out of three common debts: credit cards, student loans, and taxes. (Continued on next page) CREDIT CARDS Develop a game plan. Look at your statements, which show how much you need to contribute monthly to pay off the bill in three years or less. Use this payment schedule as a guide and pay the amount needed above the minimum on each card in order to reach or accelerate that goal. Apply any extra money toward the card with the highest interest rate. Once you've paid it off, apply that payment amount toward the card with the next highest interest rate, and continue until all the cards are paid. "Can you pay what's required to get rid of the bill in three years for each of them? If not, get help,†says Gerri Detweiler, personal finance expert at Credit.com. Contact your creditors if you're in trouble. Once you realize you will have difficulty paying, tell your creditors. "Some creditors–for example, Bank of America–are coming up with hardship programs that reduce interest to as low as 0% for a period of time,†says Detweiler. You can ask any major credit card company if it has such a program, although you may need to meet certain eligibility criteria. Let them know what you can pay monthly and see what can be worked out. Whatever you do, don't skip payments. Skipping payments or paying 30 days after the due date can lower your credit score by 30 to 50 points. Contact a nonprofit credit counseling agency. Start with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. A credit counselor will review your debt and budget, and assess what you can afford to pay back. You may be advised about enrolling in a debt management plan. Generally, the goal of these programs is to have you debt free in five years or less. You make payments to the agency and it pays your creditors. The fee is usually $50 or less to set up the program and then you're charged about $25 monthly. In a case of financial hardship, fees may be waived. Don't raid your retirement fund. "Generally, your retirement money is not touched by creditors if you're in a crisis,†says Detweiler. Debt settlement should be your last option, she adds. Recent changes in the law require for-profit debt settlement (Continued on next page) companies that offer their services via phone to disclose fees and estimate how long it will take to resolve a case, and the companies can no longer charge up-front fees. "If anyone asks for money up front, go elsewhere, because they aren't following the rules,†says Detweiler. If your debt is forgiven through settlement, be aware that you may need to pay taxes on the forgiven amount. STUDENT LOANS Know your options. Today's typical college grad leaves campus with more than $27,000 in student loan debt, and that figure has risen about 6% annually over the past five years, says Lynnette Khalfani-Cox, author of Zero Debt for College Grads (Kaplan Publishing; $14.95). Loan forgiveness programs can help. For example, those employed by a federal agency can make use of the federal student loan repayment program. Through the program, any federal agency a graduate works for can pay off up to $10,000 annually in federal student loans, up to a maximum of $60,000. For more information, visit www.opm.gov. If you've fallen on hard times, speak up. If your federal loan is in default, filing a statement of financial status with the U.S. Department of Education may reduce your monthly payment. "You can also get forbearance if you're unemployed,†Khalfani-Cox adds. You will still be charged interest, however. In addition, there are several payment options (among them, standard, extended, graduated, and income sensitive). With the income-sensitive and extended payment plans, for example, you can pay as little as $25 a month for up to 30 years. To learn how these options work, go to www.finaid.org/calculators. Khalfani-Cox advises paying what you can afford. "With federal regulations and reform, starting in 2014, new borrowers who pay their loans on time can have their remaining balances forgiven after 20 years.†Those who work for certain nonprofit, tax exempt, 501(c)(3) organizations can have their loans forgiven after 10 years. Consider consolidation. As long as your loans are not delinquent or in collection, you can consolidate them into one new consolidated loan. To find out if you qualify, contact the Federal Direct Consolidation Loans Information Center. If you've already defaulted, you must bring your loans out of default by making three monthly payments on time in any amount you and the lender agree to. Read about the pros and cons of a consolidated loan at FinAid.org. Be aware that consolidating a defaulted loan does not remove the default from your credit report. Take steps toward rehabilitation. To rehabilitate a defaulted federal student loan, contact the loan holder. If you don't know which organization holds your loan, call the Federal Student Aid Information Center at 1-800-433-3243. Be prepared to make nine consecutive payments in the amount you and the loan holder agree to. Loan rehabilitation removes the default from one's credit report; though, of course, it's better to avoid defaulting in the first place. Khalfani-Cox estimates that nine (Continued on next page) months or more of late student loan payments will result in a credit score drop of 100 points, if not more. "Student loans can only rarely be written off in bankruptcy,†she adds, "but they can be [paid off and then] eliminated via loan forgiveness programs, service-based work, or if you become disabled.†BACK TAXES There are two things you're guaranteed to face in life, the old saying goes: death and taxes. There isn't much you can do about the Grim Reaper, but like most debts, a bill with the Internal Revenue Service can be negotiated. Make a request. You can request an installment agreement using Form 9465 for a fee of $105, or $52 if using electronic funds withdrawal, or $43 if you meet certain income requirements. Even if the IRS doesn't determine that you're eligible for the lower fee, you can still request it using Form 13844. You're guaranteed an installment agreement if you owe $10,000 or less, you've filed all returns on time for the past five years, and you agree to pay off the amount owed within three years, says Jean Wells, a certified public accountant, lawyer, and assistant professor at Howard University School of Business. If you owe between $10,000 and $25,000, you've filed all returns on time in the last five years, and you agree to pay off what you owe within five years, you can get a streamlined (meaning a financial statement isn't required) installment agreement, but it isn't guaranteed. Be aware that any installment plan will include hefty penalty and interest charges that will add substantially to what you already owe. Make an offer. If you can't pay the entire bill, even over time, you still have options. You can make an offer in compromise using Form 656, which like an installment agreement will require that you pay a fee ($150) for the privilege. "Without some extraordinary circumstance, an offer will not be accepted if the IRS believes that the liability can be paid in a lump sum or in installments,†warns Wells. You may need to send financial records in order for the IRS to determine if you can pay less than you owe. When dealing with Uncle Sam, it's smart to have backup like a CPA, lawyer, or enrolled agent. An offer in compromise doesn't have to be submitted by a tax professional, but it's probably wise to consult one. Know your rights. If there's an exceptional circumstance and you can prove to the IRS that collecting the tax would create an economic hardship or would be unfair and inequitable (for example, you have a sick child that requires expensive and prolonged medical care and providing that care is what you spend most of your money on), you might have your back taxes forgiven. You can also request an abatement of interest and penalties in certain circumstances by submitting Form 843. Debt isn't created overnight, and it won't disappear quickly. Acknowledge the problem, find solutions, and implement them. A thoughtful, step-by-step debt management plan can put you back in the black, and disciplined habits will keep you there.