On paper, my new business idea looked hot. My associates and I would tour the country, producing seminars for teenagers. So I cleared out my overstuffed savings account and started spending: an office, employees, computers, video and sound gear, brochure mailings and print ads and plane tickets. Our events were a hit.

Just one problem. We had figured on breaking even by the end of the first year. But the attendance, as good as it was, wasn’t as high as planned. So we scaled back the next year’s tour and borrowed money to pay for promotion and travel. We had another good tour ... but expenses still outweighed income. It happened again the next year, and the year after that. I had to keep borrowing to keep us afloat. Then I ran out of lenders.

Good thing I did, because the red ink had flowed to six figures. I owed money to many friends, and a dozen increasingly unfriendly banks. With insufficient income to make even the minimum payments on all the loans, I started rationing: pay one batch this month, another batch the next. After several months of this hit-and-miss business, the creditors ran out of patience. One by one, they closed my accounts and demanded immediate repayment of everything I owed them.

The creditors were very demanding. Every other phone call was from someone wanting to know why I was such a reprobate and whether they could expect my $10,000 cashier’s check tomorrow or the next day, or would they have to sic their lawyer on me. My mailbox overflowed with collection notices — first from the creditors themselves, then from their collection agents, then from the debt recovery companies that had purchased that bad debt from exasperated creditors. And finally, from attorneys, who had the nicest envelopes, filled will the nastiest contents.

It would have been comical if it weren’t so painful. We — the creditors and I — were in near-total agreement: I messed up. I owed them money. I wanted to pay them just as badly as they wanted to be paid. Yet despite all our common ground, we couldn’t come to terms because of a single fact: I had absolutely no way to pay them. Even if I sold everything I owned — including the equipment I needed to make a living — I couldn’t pay off a tenth of my debt, much less the full amount they demanded.

I couldn’t even respond to their "gracious" monthly repayment plans — my budget was already trimmed to the bone. How could I cut back on a one-meal-a-day food allowance, or cancel medical insurance I didn’t have, or forgo entertainment expenses I no longer incurred because I was too ashamed to go out with friends to whom I owed money? My bleak budget had no room to budge. As I discovered, this is the kind of information no creditor wants to hear. Since there was nothing else I could say that would satisfy them, we had nothing to talk about. So I turned on the answering machine, ignored the doorbell, and wallowed in silence.

Climbing Out of a Debt Crisis
In last month’s column, we talked about how to climb out of debt. The steps I outlined assume that you have enough income to at least cover your minimum payments. If that’s not the case — if you’re missing payments or borrowing from one account to make a payment on another — you’re in a debt crisis, and the way out of it calls for drastic action. That’s what this month’s column is about. Even if you’re not in a debt crisis yourself, you may know someone who is (or is headed there). This information may help you to help them. So take notes.

1. Put Creditors on Hold: Do a quick forecast for your immediate financial future. If you know that relief is a few months away (and I mean for real, not just because you’ve got a tip on a racehorse), then you may be able to postpone some payments. Call your creditors and tell them the situation. Under the right circumstances, they can be very gracious here. The rule about it being easier to ask for forgiveness than permission doesn’t apply with creditors. They like to know what you’re about to do, and will punish you with late fees and nasty marks in your credit report when they don’t. Actually, they may do that anyway, but they’re nicer when forewarned.

2. Unload Cargo: If you’ve got no financial relief looming in the immediate future — or you did but your horse dogged it in the stretch — then you’re going to have to make some tough choices. When most people get to this place, they just keep rationing payments, holding out for increasingly unlikely financial relief. Meanwhile, their balances continue to rise from all the late fees, back payments, and the ever-growing interest on it all. That means more expenses, more missed payments, and sooner or later, closed accounts.

Don’t wait till that happens. If you know you’ll never make it to the end of this journey with the load you’re carrying, it’s time to jettison some cargo. Reorder you debt list, placing the most crucial accounts at the top. (What debt list? Read Get Out! (of debt) to see what we’re talking about here.) If you’ve got a secured loan on something you can’t afford to have repossessed, that’s a candidate for the top of the list. If you have more than one credit card account and you hope that at least one of them will still be with you when the dust settles, pick the best one and place it high on the list. Put the other credit cards at the bottom. Rank all your debts this way, then divide them into two lists — Now and Later. The Now list contains only those debts you can manage to keep current with monthly payments based on your budget. The Later list is made up of accounts that you’re going to have to ditch now and come back for later.

3. Say Goodbye: This next step is pretty awful because you’re going to disappoint a lot of people, especially yourself. Go down your Later list and prepare to say goodbye to the accounts on it. If the debt is secured — using your car, furniture or kid brother as collateral — the creditor is probably going to take the secured item away from you. (Before they come for your car or couch, be sure to dig out all the spare change under the seat — you’ll be needing it.) And if you owe money to the bank where you keep your savings or checking accounts, read the fine print on your agreements: You may have given them the right to seize that money to apply toward an unpaid debt. If that’s the case, consider opening an account at another bank. (This was tough to do in my case because I owed just about every bank in town.)

Now it’s time to write some Dear John letters. If the creditor on your Later list has issued you a credit card, request that they cancel your account. At this point, you may not want to tell them the whole story. ("Hi, I’m canceling my account ... and, by the way, I won’t be sending you any money for a long time.") If you do, you’ll immediately get besieged with phone calls and letters demanding immediate payment. It may be best to inform them of that second fact after you’ve had a chance to work out your new payment plan.

Whether you tell these creditors or not, they’ll soon figure it out. And they’ll keep tacking on interest and penalties and anything else they’ve written into the fine print. Unfortunately, there’s nothing you can do about that right now. They’ll also start calling you pretty frequently. Federal law says they can’t call before 8 am or after 9 p.m., nor leave embarrassing information with a roommate, family member, office peer or on your answering machine. They’re not allowed to threaten to hurt you, others or your property. And they can’t use profane or obscene language (for the rules regarding your use of such language, call your mom). Given these limitations, you’d think that their calls would be nothing but wonderful, but many creditors and their agents have figured out how to work within the law and work you over at the same time.

You can decide what to do with these unpleasant phone calls. If you choose to answer, be polite but firm: Stick to your plan, don’t divulge personal information (how much you earn, where on earth it all goes each month, etc.), take notes of what you agree to and don’t make promises you can’t keep. If you don’t want to take the calls, tell them that. By law, if you demand that they cease calling, they have to stop. It’s best to make that demand in writing (keep a copy of your letter). If they keep calling, contact the creditor, or file a complaint with the Federal Trade Commission (see sidebar, Looking for Help).

If you know it’s going to be many months (or years) before you can settle the debts on your Later list, I suggest that you not take the calls. For me, they were an all-too-frequent reminder of my failure — something I didn’t need when I was working like a madman to redeem the situation. If you take the calls but have no solution to offer, the creditors will keep calling. They have you on speed-dial. They also know the odds of their collecting the debt: If the account is three months overdue, they have a 75% of collecting. At six months it drops to 50%, and after a year, their odds drop to one in four. So it pays them to pounce soon and often.

When creditors have tried to settle things frequently, via phone and mail, without result, they’ll often turn things over to a collection agency that specializes in debt recovery. These folks generally play hardball, and may bring in a law office to do the pitching. If the debt is unsecured, there are just two things they can do to you (besides make you feel awful): They can fill your credit record with bad marks (not much you can do here), and they can sue you. If your creditor thinks you have assets, they may take you to court, hoping that the judge will take these assets out of your hands and into theirs. If you have a decent job, the judge can garnishee your wages — which has nothing to do with parsley, as it turns out.

Lawsuits aren’t cheap, so despite all threats to the contrary, a creditor isn’t going to start one unless they determine that you’ve got decent assets or a good paycheck. (Which is another reason not to share all your personal information with creditors — they write it down and use it to determine your lawsuit potential.) If you’re in college or just graduated, out of work or self-employed, and have no significant assets, you’re what creditors call "judgment proof." In layman’s terms, that means "broke, and likely to stay that way." If that describes you, you’re pretty safe from court. Isn’t it nice to know that your poverty comes with a silver lining?

If you are indeed judgment proof, there’s really nothing creditors can do to get their unsecured money back until you’re ready to pay them. And since you’ve already determined that you’re not ready yet (that’s why they’re on the Later list), it’s best just to set aside this list and get to work on the Now list.

4. Start Climbing: The good news is that you’ve got a list of creditors you can satisfy. So do it. Make all your payments to the accounts on your Now list. Stay current and in good standing with these people. You need all those rosy marks they’re putting in your credit record to offset all the bad ones you’re getting from the folks you’ve left behind. And more importantly, you need to prove to yourself that you have control over some of your finances. The discipline you build here will help you return to the Later list sooner.

When you’ve paid down the Now list to the point where you can address someone on your Later list, redo both lists and get ready to deal with some old but not-too-happy creditors. You may have to do some hunting to track them down. If it’s been too long, they’ve written off the debt and sold it to someone else. Contact the original creditor and ask for the current balance, or the name of the company that now owns your debt. Be ready for the bad news: While the creditor may have given up on you, their interest-giddy computers haven’t missed a penny. Your current balance will include interest on the long-unpaid balance and interest on the interest and late fees. Welcome to compound interest.

If the creditors on your Later list run long and deep, you may find it nearly impossible to pay off these debts. That’s what happened to me. When the bottom dropped out on my finances, no one made it onto the Now list: I had just enough income to survive, so every creditor had to be put off till later. By the time my finances stopped their freefall, the compounding interest on my debts had inflated the balances to outrageous proportions. So I had to make a choice: I could use the few extra dollars I now had each month to resume payments, or I could save up the cash and negotiate a one-time settlement with each creditor. I chose the latter.

My income, though rising, was still unreliable. I couldn’t stomach the thought of promising to pay my creditors a set amount each month when I didn’t know that the money would be there. Then the phone calls and letters would pour in again, and I’d fall back into the whole mess of failure and disappointment and depression. And even if I could manage the payments, it might take me 10 years to pay it all off. For me, the only practical solution was to save up a stack of cash, then work out some settlements. Many of the creditors were already offering to settle things for less than the full balance. Their odds of collecting years-old debt from a judgment-proof debtor are pretty slim, so getting some of the money is better than receiving none at all. I accepted their offers, settling each debt when I had the cash to do so with a single payment.

I need to confess something here. This settlement thing was one of the most unsettling moments in my journey. After all, when I borrowed that money I had promised to pay back all of it. How could I agree to pay them less? I sought counsel from two mature Christians I respected: the one a defaulted-then-redeemed debtor, the other a banker who dealt with us defaulters for a living. Both agreed that if the creditors were willing to forgive a portion of the debt, I was free to take it. So I did.

If your journey takes you to this crossroads, be aware that the settlement option comes with three catches. First catch: Your credit record may indicate that the debt is settled (this is not always the case, so try to make this a condition of your settlement), but it will still show the unsightly payment history that led up to it. Second catch: The IRS treats most types of debt forgiveness as income, so you’ll owe taxes on money you never really earned. If you settle a $3000 debt for $2000, you’ll have to pay income taxes on the $1000 you were forgiven — and the IRS knows that because the creditor had to report the settlement.

The third catch comes only after you read Matthew 18:23-35. Jesus used this startling parable to reveal how his father deals in forgiveness, but I believe it also applies to us and our own finances: If your creditor forgives a portion of your big fat debt, rejoice! Then call up all those flaky friends of yours (the ones who’ve stiffed you on pizza and movie tickets and gas money) and tell them you’re tearing up their little IOUs. Apparently, forgiveness — financial and otherwise — is something we’re supposed to pass along.

6. Honor Whom You Love: This last step is actually out of order, but it’s most important so I’ll end with it. If you owe money to friends and family, I have a hunch you put them at the bottom of your list. Maybe because they’re most forgiving ... or maybe because they’re not charging you interest. For those very reasons, you should consider putting them first. They’re the ones who’ve stood by you, putting your finances ahead of their own. Now it’s time to reciprocate. By paying them off first, you make it clear to them and yourself that your relationship is more important than your money. There’s a selfish advantage to this order too. When you pay off a bank, no one there will give you a hug. When you pay back your best friend, she’s so delighted she’ll make it feel like Christmas. And when you first attempt to dig yourself out of debt, you need all the positive reinforcement you can get.

I spent the first year of my ascent sending checks to friends. It was a very good year. The debt had worked like a wedge in some of these relationships. In most cases, it was a wedge of my own making. I felt so guilty about owing them money, I’d avoid them even when I needed their friendship most. When they asked me how I was doing, I felt it necessary to describe how tough things were at work, just so they’d know that I was still struggling with the debt. I’m sure they grew tired of my sackcloth-and-ashes routine. Most of them just wanted to know how their friend was.

So when I was able to settle these debts, I felt redeemed. A friend would call to say he got the check, and how he never expected it — that it made his day because he knew it made mine. Another would see me and say what she felt with a silent, welcome hug. One friend, a graphic artist to whom I owed thousands, wrote me a letter. Business had been bleak for too long, so she had decided to give it up at the end of the month. My check was her answer to prayer — God’s way of saying that she was doing what He wanted her to do. God kept this talented artist in business...and He used one of my first checks to do it. Even in the toughest of times, God never tires of surprising us with blessings. Regardless of how much they’ve lent you — five bucks or $5000 — your family and friends deserve first consideration. Put them first on your list.

Level Ground Again
To finish my story: I did indeed pay off all my friends first. That took a year. It was a wonderful year. Then I got to work stockpiling enough cash to settle with the long-neglected banks. That took two more years, which weren’t so wonderful because some of the income had to go toward the replacement of my 10 year old car, and to pay the dentist $2000 to fix the teeth I had neglected in my poverty. But patience and diligence and 100-hour weeks prevailed. The final debt was settled last December, allowing me to start this year on level ground. I bought a gray cashmere sweater to celebrate. Life is sweet.

Time for the disclaimer. I’ve described my own successful journey out of a debt crisis. I followed the counsel of wise friends and sought information from books and articles on the topic. Your journey may require a different path. Some people choose bankruptcy. I was certainly a prime candidate for that option, but I had broken too many promises in my life; my conscience could not have borne a new batch. I speak personally here — whether it’s an ethical option for others is something I cannot judge.

Whatever path you take, do so after you’ve done your homework. Read as much as you can about the options, seek counsel among your wisest, most trusted friends. I’ve listed some resources in the sidebar, Finding Help.

As much as I learned about finances on my long and painful climb to level ground, the greatest lesson had nothing to do with money. I discovered a strange and delightful thing about God: He won’t go away. You can think yourself the world’s deadest deadbeat, convince yourself that the debt will never go away and hide away in the darkness, in the lonely shame of it all. Then you turn around and He’s right there with you. Holding a match, no less.

You want Him to go away — to leave you in the darkness, or at least to go erase your creditor’s computer files, or get to work on your desperate prayers: "Tell me the Lotto numbers ... show me the buried treasure ... send Ed McMahon to my door." But He just sits there. And that’s enough. Because as dark as your situation is, with God in there, it’s never pitch black. So you learn to trust this only light source, and you start climbing, and He climbs with you.

I sure hope you don’t have to take a climb like mine. But if you do, you can be certain it’s possible. And totally worth the effort. You’ll discover the depth of friendship, the sweetness of forgiveness, the tenacity of our God and bonus — you’ll get out of debt in the process.