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Having trouble
paying your bills? Getting dunning notices from
creditors? Are your accounts being turned over to
debt collectors? Are you worried about losing your
home or your car?
You’re not alone. Many people face a financial
crisis some time in their lives. Whether the crisis
is caused by personal or family illness, the loss of
a job, or overspending, it can seem overwhelming.
But often, it can be overcome. Your financial
situation doesn’t have to go from bad to worse.
If you or someone you know is in financial hot
water, consider these options: realistic budgeting,
credit counseling from a reputable organization,
debt consolidation, or bankruptcy. Debt negotiation
is yet another option. How do you know which will
work best for you? It depends on your level of debt,
your level of discipline, and your prospects for the
future.
Self-Help
Developing a Budget:
The first step toward taking control of your
financial situation is to do a realistic assessment
of how much money you take in and how much money you
spend. Start by listing your income from all
sources. Then, list your “fixed” expenses — those
that are the same each month — like mortgage
payments or rent, car payments, and insurance
premiums. Next, list the expenses that vary — like
entertainment, recreation, and clothing. Writing
down all your expenses, even those that seem
insignificant, is a helpful way to track your
spending patterns, identify necessary expenses, and
prioritize the rest. The goal is to make sure you
can make ends meet on the basics: housing, food,
health care, insurance, and education.
Your public library and bookstores have information
about budgeting and money management techniques. In
addition, computer software programs can be useful
tools for developing and maintaining a budget,
balancing your checkbook, and creating plans to save
money and pay down your debt.
Contacting Your Creditors:
Contact your creditors immediately if you’re having
trouble making ends meet. Tell them why it’s
difficult for you, and try to work out a modified
payment plan that reduces your payments to a more
manageable level. Don’t wait until your accounts
have been turned over to a debt collector. At that
point, your creditors have given up on you.
Dealing with Debt Collectors: The Fair Debt
Collection Practices Act is the federal law that
dictates how and when a debt collector may contact
you. A debt collector may not call you before 8
a.m., after 9 p.m., or while you’re at work if the
collector knows that your employer doesn’t approve
of the calls. Collectors may not harass you, lie, or
use unfair practices when they try to collect a
debt. And they must honor a written request from you
to stop further contact.
Managing Your Auto and Home Loans:
Your debts can be unsecured or secured. Secured
debts usually are tied to an asset, like your car
for a car loan, or your house for a mortgage. If you
stop making payments, lenders can repossess your car
or foreclose on your house. Unsecured debts are not
tied to any asset, and include most credit card
debt, bills for medical care, signature loans, and
debts for other types of services.
Most automobile financing agreements allow a
creditor to repossess your car any time you’re in
default. No notice is required. If your car is
repossessed, you may have to pay the balance due on
the loan, as well as towing and storage costs, to
get it back. If you can’t do this, the creditor may
sell the car. If you see default approaching, you
may be better off selling the car yourself and
paying off the debt: You’ll avoid the added costs of
repossession and a negative entry on your credit
report.
If you fall behind on your mortgage, contact your
lender immediately to avoid foreclosure. Most
lenders are willing to work with you if they believe
you’re acting in good faith and the situation is
temporary. Some lenders may reduce or suspend your
payments for a short time. When you resume regular
payments, though, you may have to pay an additional
amount toward the past due total. Other lenders may
agree to change the terms of the mortgage by
extending the repayment period to reduce the monthly
debt. Ask whether additional fees would be assessed
for these changes, and calculate how much they total
in the long term.
If you and your lender cannot work out a plan,
contact a housing counseling agency. Some agencies
limit their counseling services to homeowners with
FHA mortgages, but many offer free help to any
homeowner who’s having trouble making mortgage
payments. Call the local office of the Department of
Housing and Urban Development or the housing
authority in your state, city, or county for help in
finding a legitimate housing counseling agency near
you.
Credit Counseling and Debt Management Plans
Credit Counseling:
If you’re not disciplined enough to create a
workable budget and stick to it, can’t work out a
repayment plan with your creditors, or can’t keep
track of mounting bills, consider contacting a
credit counseling organization. Many credit
counseling organizations are nonprofit and work with
you to solve your financial problems. But be aware
that, just because an organization says it’s
“nonprofit,” there’s no guarantee that its services
are free, affordable, or even legitimate. In fact,
some credit counseling organizations charge high
fees, which may be hidden, or urge consumers to make
“voluntary” contributions that can cause more debt.
Most credit counselors offer services through local
offices, the Internet, or on the telephone. If
possible, find an organization that offers in-person
counseling. Many universities, military bases,
credit unions, housing authorities, and branches of
the U.S. Cooperative Extension Service operate
nonprofit credit counseling programs. Your financial
institution, local consumer protection agency, and
friends and family also may be good sources of
information and referrals.
Reputable credit counseling organizations can advise
you on managing your money and debts, help you
develop a budget, and offer free educational
materials and workshops. Their counselors are
certified and trained in the areas of consumer
credit, money and debt management, and budgeting.
Counselors discuss your entire financial situation
with you, and help you develop a personalized plan
to solve your money problems. An initial counseling
session typically lasts an hour, with an offer of
follow-up sessions.
Debt Management Plans:
If your financial problems stem from too much debt
or your inability to repay your debts, a credit
counseling agency may recommend that you enroll in a
debt management plan (DMP). A DMP alone is not
credit counseling, and DMPs are not for everyone.
You should sign up for one of these plans only after
a certified credit counselor has spent time
thoroughly reviewing your financial situation, and
has offered you customized advice on managing your
money. Even if a DMP is appropriate for you, a
reputable credit counseling organization still can
help you create a budget and teach you money
management skills.
In a DMP, you deposit money each month with the
credit counseling organization, which uses your
deposits to pay your unsecured debts, like your
credit card bills, student loans, and medical bills,
according to a payment schedule the counselor
develops with you and your creditors. Your creditors
may agree to lower your interest rates or waive
certain fees, but check with all your creditors to
be sure they offer the concessions that a credit
counseling organization describes to you. A
successful DMP requires you to make regular, timely
payments, and could take 48 months or more to
complete. Ask the credit counselor to estimate how
long it will take for you to complete the plan. You
may have to agree not to apply for — or use — any
additional credit while you’re participating in the
plan.
Protect Yourself
Be wary of credit counseling organizations that:
--charge high up-front or monthly fees for enrolling
in credit counseling or a DMP.
--pressure you to make “voluntary contributions,”
another name for fees.
--won’t send you free information about the services
they provide without requiring you to provide
personal financial information, such as credit card
account numbers, and balances.
--try to enroll you in a DMP without spending time
reviewing your financial situation.
--offer to enroll you in a DMP without teaching you
budgeting and money management skills.
--demand that you make payments into a DMP before
your creditors have accepted you into the program.
Debt Consolidation
You may be able to lower your cost of credit by
consolidating your debt through a second mortgage or
a home equity line of credit. Remember that these
loans require you to put up your home as collateral.
If you can’t make the payments — or if your payments
are late — you could lose your home.
What’s more, the costs of consolidation loans can
add up. In addition to interest on the loans, you
may have to pay “points,” with one point equal to
one percent of the amount you borrow. Still, these
loans may provide certain tax advantages that are
not available with other kinds of credit.
Bankruptcy
Personal bankruptcy generally is considered the debt
management option of last resort because the results
are long-lasting and far reaching. People who follow
the bankruptcy rules receive a discharge — a court
order that says they don’t have to repay certain
debts. However, bankruptcy information (both the
date of your filing and the later date of discharge)
stay on your credit report for 10 years, and can
make it difficult to obtain credit, buy a home, get
life insurance, or sometimes get a job. Still,
bankruptcy is a legal procedure that offers a fresh
start for people who have gotten into financial
difficulty and can’t satisfy their debts.
There are two primary types of personal bankruptcy:
Chapter 13 and Chapter 7. Each must be filed in
federal bankruptcy court. As of November 2005, the
filing fees run about $190 for Chapter 13 and $275
for Chapter 7. Attorney fees are additional and can
vary.
Effective October 2005, Congress made sweeping
changes to the bankruptcy laws. The net effect of
these changes is to give consumers more incentive to
seek bankruptcy relief under Chapter 13 rather than
Chapter 7. Chapter 13 allows people with a steady
income to keep property, like a mortgaged house or a
car, that they might otherwise lose through the
bankruptcy process. In Chapter 13, the court
approves a repayment plan that allows you to use
your future income to pay off your debts during a
three-to-five-year period, rather than surrender any
property. After you have made all the payments under
the plan, you receive a discharge of your debts.
Chapter 7 is known as straight bankruptcy, and
involves liquidation of all assets that are not
exempt. Exempt property may include automobiles,
work-related tools, and basic household furnishings.
Some of your property may be sold by a
court-appointed official — a trustee — or turned
over to your creditors. The new bankruptcy laws have
changed the time period during which you can receive
a discharge through Chapter 7. You now must wait 8
years after receiving a discharge in Chapter 7
before you can file again under that chapter. The
Chapter 13 waiting period is much shorter and can be
as little as two years between filings.
Both types of bankruptcy may get rid of unsecured
debts and stop foreclosures, repossessions,
garnishments and utility shut-offs, and debt
collection activities. Both also provide exemptions
that allow people to keep certain assets, although
exemption amounts vary by state. Note that personal
bankruptcy usually does not erase child support,
alimony, fines, taxes, and some student loan
obligations. And, unless you have an acceptable plan
to catch up on your debt under Chapter 13,
bankruptcy usually does not allow you to keep
property when your creditor has an unpaid mortgage
or security lien on it.
Another major change to the bankruptcy laws involves
certain hurdles that a consumer must clear before
even filing for bankruptcy, no matter what the
chapter. You must get credit counseling from a
government-approved organization within six months
before you file for any bankruptcy relief. You can
find a state-by-state list of government-approved
organizations at www.usdoj.gov/ust. That is the
website of the U.S. Trustee Program, the
organization within the U.S. Department of Justice
that supervises bankruptcy cases and trustees. Also,
before you file a Chapter 7 bankruptcy case, you
must satisfy a “means test.” This test requires you
to confirm that your income does not exceed a
certain amount. The amount varies by state and is
publicized by the U.S. Trustee Program at
www.usdoj.gov/ust.
Debt Negotiation Programs
Debt negotiation differs greatly from credit
counseling and DMPs. It can be very risky, and have
a long term negative impact on your credit report
and, in turn, your ability to get credit. That’s why
many states have laws regulating debt negotiation
companies and the services they offer. Contact your
state Attorney General for more information.
The Claims
Debt negotiation firms may claim they’re nonprofit.
They also may claim that they can arrange for your
unsecured debt — typically credit card debt — to be
paid off for anywhere from 10 to 50 percent of the
balance owed. For example, if you owe $10,000 on a
credit card, a debt negotiation firm may claim it
can arrange for you to pay it off with a lesser
amount, say $4,000.
The firms often pitch their services as an
alternative to bankruptcy. They may claim that using
their services will have little or no negative
impact on your ability to get credit in the future,
or that any negative information can be removed from
your credit report when you complete their debt
negotiation program. The firms usually tell you to
stop making payments to your creditors, and instead,
send payments to the debt negotiation company. The
firm may promise to hold your funds in a special
account and pay your creditors on your behalf.
The Truth
Just because a debt negotiation company describes
itself as a “nonprofit” organization, there’s no
guarantee that the services they offer are
legitimate. There also is no guarantee that a
creditor will accept partial payment of a legitimate
debt. In fact, if you stop making payments on a
credit card, late fees and interest usually are
added to the debt each month. If you exceed your
credit limit, additional fees and charges also can
be added. This can cause your original debt to
double or triple. What’s more, most debt negotiation
companies charge consumers substantial fees for
their services, including a fee to establish the
account with the debt negotiator, a monthly service
fee, and a final fee of a percentage of the money
you’ve supposedly saved.
While creditors have no obligation to agree to
negotiate the amount a consumer owes, they have a
legal obligation to provide accurate information to
the credit reporting agencies, including your
failure to make monthly payments. That can result in
a negative entry on your credit report. And in
certain situations, creditors may have the right to
sue you to recover the money you owe. In some
instances, when creditors win a lawsuit, they have
the right to garnish your wages or put a lien on
your home. Finally, the Internal Revenue Service may
consider any amount of forgiven debt to be taxable
income.
Damage Control
Turning to a business that offers help in solving
debt problems may seem like a reasonable solution
when your bills become unmanageable. But before you
do business with any company, check it out with your
state Attorney General, local consumer protection
agency, and the Better Business Bureau. They can
tell you if any consumer complaints are on file
about the firm you’re considering doing business
with. Ask your state Attorney General if the company
is required to be licensed to work in your state
and, if so, whether it is.
Some businesses that offer to help you with your
debt problems may charge high fees and fail to
follow through on the services they sell. Others may
misrepresent the terms of a debt consolidation loan,
failing to explain certain costs or mention that
you’re signing over your home as collateral.
Businesses advertising voluntary debt reorganization
plans may not explain that the plan is a bankruptcy
filing, tell you everything that’s involved, or help
you through what can be a long and complex process.
In addition, some companies guarantee you a loan if
you pay a fee in advance. The fee may range from
$100 to several hundred dollars. Resist the
temptation to follow up on these advance-fee loan
guarantees. They may be illegal. It is true that
many legitimate creditors offer extensions of credit
through telemarketing and require an application or
appraisal fee in advance. But legitimate creditors
never guarantee that the consumer will get the loan
— or even represent that a loan is likely. Under the
federal Telemarketing Sales Rule, a seller or tele-marketer
who guarantees or represents a high likelihood of
your getting a loan or some other extension of
credit may not ask for or accept payment until
you’ve received the loan.
You should be cautious of claims from so-called
credit repair clinics. Many companies appeal to
consumers with poor credit histories, promising to
clean up credit reports for a fee. But you already
have the right to have any inaccurate information in
your file corrected. And a credit repair clinic
cannot have accurate information removed from your
credit report, despite their promises. You also
should know that federal and some state laws
prohibit these companies from charging you for their
services until the services are fully performed.
Only time and a conscientious effort to repay your
debts will improve your credit report.
If you’re thinking about getting help to stabilize
your financial situation, do some homework first.
Find out what services a business provides and what
it costs, and don’t rely on verbal promises. Get
everything in writing, and read your contracts
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