paying your bills? Getting notices from creditors? Are your accounts
being turned over to debt collectors? Are you worried about losing
your home or your car?
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.
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.
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 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.
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
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.
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.
Counseling and Debt Management Plans
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.
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
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.
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.
Be wary of credit counseling organizations that:
high up-front or monthly fees for enrolling in credit counseling
or a DMP
you to make "voluntary contributions," another name
- 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
- offer to
enroll you in a DMP without teaching you budgeting and money
that you make payments into a DMP before your creditors have
accepted you into the program.
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.
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.
generally is considered the debt management option of last resort
because the results are long-lasting and far-reaching. A bankruptcy
stays 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, it is a legal procedure that offers a fresh
start for people who can't satisfy their debts. People who follow
the bankruptcy rules receive a discharge — a court order
that says they don't have to repay certain debts.
two primary types of personal bankruptcy: Chapter 13 and Chapter
7. Each must be filed in federal bankruptcy court. The filing
fees run about $185 for Chapter 13 and $200 for Chapter 7. Attorney
fees are additional and can vary.
13 allows people with a steady income to keep property,
like a mortgaged house or a car, that they otherwise might lose.
In Chapter 13, the court approves a repayment plan that allows
you to use your future income to pay off a default 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
Known as straight
bankruptcy, Chapter 7 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. You can receive a discharge
of your debts through Chapter 7 only once every six years.
of bankruptcy may get rid of unsecured debts and stop foreclosures,
repossessions, garnishments, utility shut-offs, and debt collection
activities. Both also provide exemptions that allow people to
keep certain assets, although exemption amounts vary. 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 lien on it.
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.
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
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.
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.
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
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
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 Chapter 13 bankruptcy,
tell you everything that's involved, or help you through what
can be a long and complex legal process.
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
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.
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 carefully.