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If, like thousands of others, you are having trouble paying your debts, it is important to take action. Doing nothing can lead to much larger problems in the future—even bigger debts, the loss of assets such as your house, and a bad credit record. This Financial Guide suggests how you can help improve your relationships with creditors, reduce your debts, better manage your money and get a fresh start. Table of Contents
How can you tell when you have too much debt? What if bill collectors are not calling yet, but you are having difficulty paying monthly bills? If these problems seem familiar, you should take action.
If you find any of these statements apply to you, you may need to learn more about managing debt before you try to reestablish credit. Getting StartedHere are some specific steps you can take if you are in financial trouble: 1. Review each debt that creditors claim you owe to make certain you really owe it and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General. 2. Contact your creditors to let them know you are having difficulty making your payments. Tell them why you are having trouble—perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.
3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Consider substituting a debit card for your credit cards. 5. Use your savings and other assets to pay down debts. Withdrawing savings from low-interest accounts to settle high-rate loans usually makes sense.
6. Look for additional resources from governmental and private sources for which you may be eligible. Government assistance includes unemployment compensation, Aid to Families with Dependent Children (AFDC), food stamps, low-income energy assistance, Medicaid, and Social Security (including disability). Other resources may be available from churches and community groups. Often these sources are listed in the Yellow Pages of your phone book. 7. Try to consolidate your debts. There are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage.
8. Prepare a financial plan that can alleviate financial worries about the future and ensure that you will meet your financial goals—whether they relate to retirement, asset acquisition, education, or just vacations.
Credit Counseling AgenciesIf you are unable to make satisfactory arrangements with your creditors, there are organizations to help you accomplish this. For instance, Consumer Credit Counseling Service (CCCS) agencies, which are local, non-profit organizations affiliated with the National Foundation for Consumer Credit (NFCC), provide education and counseling to families and individuals. For consumers who want individual help, CCCS counselors with professional backgrounds in money management and counseling can provide support. To promote high standards, the NFCC has developed a certification program for these counselors. A counselor will work with you to develop a budget to maintain your basic living expenses and outline options for addressing your total financial situation. If creditors are pressing you, a CCCS counselor can also negotiate with these creditors to repay your debts through a financial management plan. Under this plan, creditors often agree to reduce payments or drop interest and finance charges and waive late fees and over-the-limit fees. After starting the plan, you will deposit money with CCCS each month to cover these new negotiated payment amounts. Then CCCS will distribute this money to your creditors to repay your debts. With more than 1,100 locations nationwide, CCCS agencies are available to nearly all consumers. Supported mainly by contributions from community organizations, financial institutions, and merchants, CCCS provides services free or at a low cost to individuals seeking help. To contact a CCCS office for confidential help, look in your telephone directory white pages, or call 1 (800) 388-2227, 24 hours a day, for an office near you. Or write to the National Foundation for Consumer Credit, 8611 2nd Ave., Suite 100, Silver Spring, MD 20910.
Personal BankruptcyBankruptcy is a legal proceeding that is intended to give people who cannot pay their bills a fresh start.
There are two types of bankruptcy available to most individuals:
Both types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property), and stop foreclosures, repossessions, garnishments, utility shutoffs, and debt collection activities. Both types also provide exemptions that permit most individual debtors to keep most of their assets, though these "exemption" amounts vary greatly from state to state. Bankruptcy cannot clean up a bad credit record and will be part of this record for up to ten years. Thus, filing bankruptcy will make it more difficult to get a mortgage to buy a house. It usually does not wipe out child support, alimony, fines, taxes, and some student loan obligations. Also, under Chapter 13, unless you have an acceptable plan to catch up on your debt, bankruptcy usually does not permit you to keep property when the creditor has an unpaid mortgage or lien on it. Bankruptcy cases must be filed in federal court.
Some public-funded legal services programs handle bankruptcy cases without charging attorney fees. Or these programs may provide referrals to private bankruptcy lawyers. Keep in mind that the fees of these attorneys may vary widely. Scams And PitfallsConsumers with credit problems have paid millions of dollars to firms that claim they can remove negative information, clean up credit reports, and allow consumers to get credit no matter how bad the credit history. These credit repair clinics charge consumers anywhere from $50 to $2,000, and often use questionable methods. Most clinics make misleading promises to consumers, and charge high fees for doing what you yourself could do.
Here are some common promises made by credit clinics, and the reasons consumers should beware of such claims: "Based on little-known loopholes in Federal credit laws, we can show you how to clean up your credit report!" The loopholes are merely the provisions of the Fair Credit Reporting Act (FCRA), under which you have the right to challenge information in your credit report you believe incorrect. We discussed these provisions before in the section on "What To Do If You Have A Bad Credit Report." Credit repair clinics often flood credit bureaus with requests to check whether or not all negative data is correct. Credit clinics hope creditors will not be able to verify the information in a reasonable time period, causing the negative information to have to be dropped under the FCRA. Some credit clinics even tell consumers to challenge neutral information (e.g., name and address), hoping to distort file data so that the old, negative file will no longer be identifiable when a creditor asks for a consumer's file. Creditors and credit bureaus have become familiar with such tactics, and they have sought to use the provision of the FCRA that allows them to dismiss "frivolous" disputes of file information and to refuse to respond to repeated disputes of the same data. "We can show you how to remove negative information from your file—including judgments." Some clinics tell consumers to pay off any bills outstanding with the creditor in exchange for removal of negative information. Or, they may tell a consumer who has an account in collections to pay part of the balance with a check. The check is to carry a disclaimer saying that, by cashing the check, the creditor agrees to remove the account from collections and remove any negative information about the account from its files. Creditors are under no obligation to agree to such measures, and the fees paid to clinics for such advice is wasted. "We can get you a major credit card—even if you've been through bankruptcy!" What you are not told is that you will have to "secure" the card first. Most credit cards are unsecured; that is, you are not pledging any of your assets as collateral for any credit you may use. A card is secured when a consumer puts a deposit in the bank and gets a bankcard with a credit limit based on a percentage of that deposit. While a secured card can be an excellent tool for rebuilding credit, why should you pay the credit clinic just to provide an application and deposit slip? Often for-profit or non-credential counseling organizations make promises that they cannot or do not keep. Be especially careful when asked for a large sum of money in advance.
* * * * A Final Word: Don't lose hope, even if you despair of ever recovering financially. You can regain financial health if you act. The options presented here can put you on the road to financial recovery. Professional financial guidance can get you off to the right start. Recommended Books
Government and Non-Profit AgenciesThe following agencies are responsible for enforcing federal laws that govern credit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.
The Federal Trade Commission does not handle individual complaints, but reporting failure to deliver, late delivery, unordered merchandise, misrepresentation or fraud helps uncover widespread abuses that the FTC might take action to stop.
The Federal Communications Commission will handle requests for action on suspected violations of the Telephone Consumer Protection Act, such as persistent sales calls after the seller is told to stop.
Mail and Telephone Preference Services should be contacted if you wish to have your name removed from mail or telephone lists of many companies. You may also contact the Direct Marketing Association.
Low-Cost Credit Cards: Bankcard Holders of America lists banks charging no fees and low interest rates for their conventional credit cards. To obtain a copy of the list, write to:
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