If you or someone you know is in financial trouble, consider these options: realistic budgeting,
credit counseling, debt
consolidation from a reputable debt consolidation service, 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.
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.
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.
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.
Debt Consolidation Loans
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 debt consolidation 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.
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.
There are 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.
Chapter 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 debts.
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.
Both types 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.
