How to get out of mounting debt

First the market — and your portfolio — nose-dived. Then the economy softened. Now what?

Many Americans are experiencing something they haven't experienced for a long time — financial tough times stemming from job loss, market declines or both. Here are some ideas from Dennis Filangeri, a certified financial planner based in San Diego, on how to reduce the mounting debt and keep you from sinking into bankruptcy.

{h3} Stop the Bleeding

This is the toughest part because it involves cutting back the one thing most consumers love to do — spend. Immediately cut spending to the bare bones — food, clothing, shelter, utilities, insurance payments, telephone and so on.

Forget about buying a new DVD player or designer clothes. Don't buy anything on the installment plan — pay cash or forget it. Postpone the vacation. Rent videos or go to discount movies, not first-runs. Eat at home. Shop with a list and coupons. Lots of sources exist that offer cost-cutting ideas. Don't overlook the bigger cost-cutters you may not have bothered with before, such as switching to less-expensive automobile insurance policies.

A spending plan will help this process. Identify critical expenses and sources of income. At the least, try to get expenses down to match the income so you don't run up more debt. Obviously, look for ways to boost income: If you're out of work, take a job of any kind. Or if you are employed, find an extra job.

{h3} Stay Away from Credit Cards

These typically are the biggest cause of debt problems. Transfer the debt on your higher interest rate cards onto a single card with a lower interest rate, and close out the high-interest cards. Then don't use the lower-interest card — just work at paying it down. Pay more than just interest payments.

{h3} Fold Down Debts

You can do this one of two ways: (1) Pay off the highest-interest debts first. That saves the most money in the long run. (2) Psychologically, you might want to pay off a smaller debt first, then apply that money toward the next smallest debt, and so on.

Put extra cash such as a tax refund or the sale of property toward the debts.

{h3} Consolidate Debts, But Be Careful

Beyond consolidating multiple credit cards, you might be tempted to consolidate debt by taking out a home equity loan or borrowing from your retirement plan. Although the interest rates are usually attractive on these loans, there are risks. A home equity loan puts your home at risk if you can't make payments. Pulling money out of a retirement plan will hurt your future nest egg, and you'll pay income taxes, and perhaps even penalties, on any money you fail to pay back. Be careful that you don't transfer lower-interest debt to a higher-interest consolidation loan. Be sure your consolidated payments are smaller than the total of all your payments during the same period.

{h3} Talk to Your Creditors

They may be willing to let you make smaller payments, at least temporarily, though you probably won't be able to do that on secured loans such as a car or house.

If that doesn't work, go to a credit counseling service. They'll work with your creditors and help you set up a realistic plan.

{h3} Look at How You Got into Trouble

Market decline or other financial catastrophe may have precipitated your debt problems, but deeper problems usually underlie an inability to weather the difficulties. A review won't help cure the current situation, but it can help minimize problems in the future. For example:

* A decimated portfolio may reflect one that was not well-diversified to weather a market decline, or one that was overloaded in the stock of the company that just laid you off.

* Lack of a cash emergency fund with three to six months of bare-bones living expenses forces you into mounting debt if you lose your job.

* Too much debt accumulated when times are good can break your back when income declines.

* Mishandling of stock options in a declining market can generate a huge tax bill for a stock whose value has plummeted, leaving you without the resources to pay the bill.

The main thrust of these efforts should be to avoid filing for bankruptcy. Bankruptcy should be viewed as a last resort, not the first strategy.

Zall is a retired federal employee who since 1987 has written the Bureaucratus column for Federal Computer Week. He can be reached at miltzall@qis.net.