Starting over after a big setback

A setback can be an injury, a divorce, a layoff, a business that didn't make it, or a medical bill nobody saw coming. Whatever it was, the first moves are the same.

The Four Walls come first: food, utilities, shelter and transportation to work. That's Dave Ramsey's term, and those bills get paid before anything else. Next, list everyone you owe, with the amount, the due date and a phone number. Then circle the hard deadlines: a court date, an IRS notice, a shutoff notice, a repossession warning. Call before each date, not after.

You can apply online. A short-term plan works if you owe less than $100,000 in combined tax, penalties and interest and can pay it within 180 days. A long-term plan works if you owe $50,000 or less and you've filed all your required returns. Either way, interest and some penalties keep adding up until the balance is paid in full, so pay it down as fast as the budget allows.

File every return you owe, even if you can't pay yet. The long-term plan requires it. VITA sites prepare basic returns free for many working families.

Example: Andre, 42, hurt his back in May and was off the crew for four months. He owes $4,100 on two cards, a $2,600 hospital bill and $3,200 to the IRS from side jobs, and his truck payment is a month late. He writes down his Four Walls first. He calls the truck lender before the next due date, sets up a long-term IRS plan online (he owes less than $50,000 and has filed his returns), asks the hospital about a payment plan, and books a session with a nonprofit credit counselor about the cards. Made-up numbers.

This is general education, not legal advice. Bankruptcy is a federal court process, and two kinds cover most people:

• Chapter 7 can wipe out most debts. A trustee can sell property that isn't protected to pay creditors, but most individual cases have nothing to sell. State law often decides what's protected. People with income above their state's median have to pass a means test.
• Chapter 13 is for people with regular income. You repay creditors through a plan over three to five years, and it can help you save a home from foreclosure.

Some debts usually survive bankruptcy, including child support, alimony and certain taxes. Before you can file, you need credit counseling from an agency the U.S. Trustee Program approves, with very limited exceptions. After you file, you take a debtor education course to get a discharge. A bankruptcy can stay on your credit report 10 years; most other negative items stay up to seven. Talk to legal aid or a bankruptcy attorney before you decide.

Rebuilding uses the same habits as anyone else: a written budget from your lowest month (P101.7), the starter cushion (P101.8), autopay on every bill, and a credit path you chose (P102.3).

People in trouble draw scammers. A debt settlement company generally can't collect fees until it settles a debt, so a demand for money up front is a red flag. The IRS warns that some tax "settlement" outfits overpromise and charge high fees to people who don't qualify for the deals they're selling. Anyone offering a "new credit identity" is running a scam.

Before you pay anyone to fix a debt problem, talk to a nonprofit credit counselor or legal aid. Nonprofit doesn't always mean free, so ask about fees up front. Legal aid may help for free if you qualify.

• National Foundation for Credit Counseling (NFCC), a network of nonprofit credit counseling agencies: 877-360-6322
• Legal Services Corporation: Find legal aid near you
• IRS: Free tax return preparation (VITA)
• IRS: Payment plans
• U.S. Trustee Program: Approved credit counseling and debtor education
• 211 for local help with food, rent and utilities, and 988 (call or text) if you're in crisis, any time