Is Your Debt Out of Control?

Are you having difficulty paying your bills?  Are you getting calls and letters from creditor?  Has any of your accounts been turned over to debt collectors?  Are you worried about losing your home or car?

You are not alone; many people face a financial crisis at some point in their lives whether it be caused by personal or family illness, loss of a job, or overspending.  Although it feels overwhelming, it often can be overcome and your financial situation does not have to go from bad to worse.  If you are in financial distress, consider the following options: realistic budgeting, credit counseling from a reputable organization, debt consolidation, debt settlement or bankruptcy.  What option is the best for you depends on the severity of your debt, your level of discipline, and your prospects for the future.


Developing a Budget

  1. The first step toward regaining control of your finances is to perform a realistic assessment of how much money you take in and how much you spend.  Begin by listing all sources of your income.
  2. Next, list your “fixed” expenses (the ones that are the same each month) like mortgage payments, rent, car payments, and insurance premiums.
  3. Then, you are going to write down ALL of your expenses even those that may seem insignificant.  This is a helpful way to track your spending patterns, identify necessary expenses, and prioritize the rest.

The goal is to ensure that you can pay for the necessities: housing, food, health care, insurance, and education.  Consider reading books on money management techniques or installing computer software that can help you develop and maintain a budget, balance your checkbook, and create plans to save money and begin to pay off your debt.

Contacting Your Creditors
Contact your creditors immediately if you are having financial difficulties.  Explain to them the cause of the financial distress and try to work out a modified payment plan that reduces your payments to an affordable level.  Do not wait until after your accounts have been sold off to a debt collection agency.   By then your creditors have given up on you.

Dealing with Debt Collectors
The Fair Debt Collection Practices Act is a federal law dictating how and when a debt collector may contact you.  They may only call between the hours of 8 a.m. – 9 p.m. or while you are at work if the debt collector is aware that your employer does not approve of the calls.  Collectors are not allowed to harass you, lie, or use unfair practices in their attempt to collect a debt.  If you write them requesting for them to stop contacting you, they must comply and stop all contact.

Managing Your Auto and Home Loans
Debts are either secured or unsecured.  Secured debts are tied to an asset like your car in the case of a car loan, or  your house for a mortgage.  If you no longer are making payments, the lender can repossess your car and foreclose on your home.  Unsecured debts are not tied to any asset, and most credit card debt, medical bills, signature loans, and debts for other services, are unsecured.

Most automobile financing agreements enable your creditor to repossess your car at any tine in which you are in default and notice is not required.  If your car is repossessed, you will likely have to pay the past-due balance on the loan, as well as towing and storage costs, before you can get it back.  If you cannot afford this, the creditor can sell your car.  If you are aware that default is approaching, you may benefit from selling the car yourself to pay off the debt because in this case you will avoid the added costs of repossession and the negative effect on your credit report.

If you are behind on your mortgage, contact your lender immediately to avoid foreclosure.  Most lenders will work with you if they see you acting in good faith and believe the situation is temporary.  Some lender will reduce or even suspend your payments for a period of time.  However, when you resume regular payments, you may pay an amount that exceeds the past due total.  Other lender may choose to change the terms of the mortgage loan by extending the repayment period to reduce the monthly payments.  Be sure to ask whether or not additional fees will be added and if applicable, calculate how much they will cost long-term.

If you and lender cannot agree on a plan, contact a housing counseling agency.  Some agency’s limit their counseling to homeowners with a FHA mortgage but many will offer free help to any homeowner in financial distress who is having difficulty making their monthly payments.  Call your local office of the Department of Housing and Urban Development or the housing authority in your local area to find a legitimate housing counseling agency near you.

Debt Relief Services
Credit counseling:  If you are not disciplined enough to create a budget and stick to it, can’t work out a repayment plan with your creditors, or cannot keep track of your mounting bills, you should consider contacting a credit counseling organization.  Many are non-profit and will work with you to solve your financial problem but be aware that non-profit does not always mean free, affordable, or legitimate.  Some charge high fees which may be hidden, or urge consumers to make “voluntary” contributions causing them more debt.

Most credit counselors offer services either in local offices, online, or over the phone and if you can, find an in-person counseling agency.  Universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling.  Your financial institution, local consumer protection agency, and friends and family may also be good sources of information and referrals.

Reputable credit counseling organizations will advise you on how to manage your money and debt, help you to develop a budget, and offer you free educational materials and workshops.  These counselors are certified and trained in consumer credit, money and debt management, and budgeting and can be a very valuable resource for you.  The counselors will discuss your financial situation with you and help you develop an individualized plan to get back on track.

Debt Management Plans
If your financial distress is caused by too much debt or inability to repay your debt, a credit counseling agency may recommend you enroll in a debt management plan (DMP).  A DMP by itself is not credit counseling and DMPs are not for everyone.  You should enroll only after a certified credit counselor has thoroughly reviewed your financial situation and has offered you customized advice to manage your finances.  Even if a DMP is appropriate for your situation  a reputable credit counseling organization can still offer additional support to aid you in creating a budget and teaching you essential money management skills.

In a DMP, you will deposit money monthly with the credit counseling organization who then uses your deposits to pay your unsecured debts including cred card bills, student loans, and medical bills.  You will be put on a payment schedule developed together with your counselor and creditors.  Your creditors may agree to lower your interest rates or waive certain fees, but check with all of your creditors to be certain they offer the concessions that the credit counseling organization describes to you.  A successful DMP will allow you to make regular, timely payments, and can take 48 months or more to finish.  Ask the credit counselor to estimate the time you will be on the plan.  One aspect of the DMP may that you agree to not apply for or use any additional credit will participating in the plan.

Debt Settlement Programs
Debt settlement is vastly different from credit counseling and DMPs.  It can be very risky and the negative impact on your credit report can be long lasting.

The Claims
Debt settlement firms claim they will negotiate with your creditors to reduce the amount you owe.  Some companies claim they can arrange for your debt to be paid off at anywhere from 30-70% of your balance.  They may also claim to be non-profit.

These firms often present their service as an alternative to bankruptcy and claim that their services will have little or no negative impact on your ability to get credit in the future, or that any negative information already on your credit report will be removed when you complete the debt negotiation program.  The firm will likely advise you to stop making payments to your creditors and instead, send payments to the debt negotiation company where they may promise to hold your money is a special account and to pay your creditors on your behalf.

The Truth
There is no guarantee that such services are legitimate or that the creditor will accept partial payment of a legitimate debt.  If you stop making payments for your credit card, late fees and interest will be added to your balance each month.  If you exceed your credit limit, more fees and charges will be added.  This can cause your original debt to grow to two or three times the original size which puts your finances in further distress.

While creditors are not obligated to negotiate the amount a customer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments which can result in a negative entry on your credit report.  In some situations, creditors have the right to sue you to recover the money you owe them.  In some cases in which creditors win the lawsuit, they can garnish your wages or place a lien on your home.  Additionally, the Internal Revenue Service (IRS) may also consider any amount of debt that was forgiven to be taxable income.

Amendments placed on the FTC’s Telemarketing Sales Rule prohibit companies that sell debt settlements and other debt relief services on the phone from charging a fee before they settle or reduce your debt.

If you do business with a debt settlement company, you may be required to place money in a dedicated bank account to be administered by an independent third party.  The account administrator may charge you a reasonable fee and is responsible for transferring funds from your account to pay your creditors and the debt settlement company after the settlements occur.

Disclosure Requirements
Before you sign up, debt settlement companies are required to give you the following information about their program:

  • Price and terms.  The company must explain their fees and tell you about any conditions on its services.
  • Results.  The company must tell you how long it will take to see changes in how many months or years before the company will make an offer to each creditor.
  • Offers.  The company must tell you how much money or what percentage of each outstanding debt you must save before it will make an offer to each creditor.
  • Non-payment.  If the company tells you to stop paying your creditors or if the program relies on you not making payments, the company must provide you with information about the possible negative consequences that result from doing so.

Tax Consequences
Depending on your financial situation, the amount you save from debt relief services may be considered income and therefore taxable.  Credit card companies and others may report settled debt to the IRS, who considers it income unless you are “insolvent”.  You are insolvent when your total debts exceed the fair market value of your total assets.  Insolvency can be complex to determine- talk to a tax professional if you unsure whether or not you qualify.

Researching Companies
If you decide to utilize a company to negotiate your debt, do research and do not settle with the first one to contact you.  Consider the experiences of other people. Type the company’s name with the word “complaints” into an internet search engine and read what others have said.  This is a big and important decision that involves spending a lot of your money that you could be using to pay down your debt.

Protect Yourself
Be wary of any organization that:

  • charges any fees before it settles your debt
  • pressures you to make “voluntary contributions”, another name for fees
  • touts a “new government program” to bail out personal credit card debt
  • guarantees it can make your unsecured debt disappear
  • tells you to stop communicating with your creditors
  • tells you they can stop all debt collection calls and lawsuits
  • guarantees your unsecured debts can be paid off for pennies on the dollar
  • refuse to send you free information about the services they provide without requiring you to first divulge personal financial information, like credit card account numbers and balances.
  • tries to enroll you in a debt relief program without spending time to review your financial situation
  • offers to enroll you in a DMP without teaching you budgeting and money management skills
  • demands 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 debt by consolidating it through a second mortgage or home equity line of credit.  Remember, these loans require that you place your hone as collateral so if you can’t make payments or they are late, you can lose your home.

The cost of consolidation can add up.  In addition to the interest on the loans, you may have to pay “points” with one point equal to one percent of the amount you borrow. These loans may provide certain tax advantages not available with other kinds of credit.

This is generally considered the last resort of debt management because the results are long-lasting and far reaching.  People who follow bankruptcy rules typically receive a discharge- a court order saying they do not have to repay certain debts.  However, bankruptcy information (both the filing date and discharge date) stays on your credit report for 10 years and makes it very difficult to obtain credit, buy a home, get life insurance, or even get a job.  Yet, it is a legal procedure that offers a fresh start for people in financial difficulty who cannot satisfy their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7 and each must be filed in federal bankruptcy court with filing fees that are several hundred dollars.

Chapter 13 allows those with a steady income to keep property, including a mortgaged home or car, that they may otherwise lose through bankruptcy.  The court approves a repayment plan that allows you to put your future income to pay off your debts in a 3-5 year period, rather than surrender property.  After all payments are made under the plan, you receive a discharge of your debts.

Chapter 7, known as straight bankruptcy, involves liquidation of all assets that are not exempt.  Exempt property includes automobiles, work-related tools, and basic household furnishings.  Some of your property may be sold off by a trustee or given to your creditors.  You must wait 8 years after you receive 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 type of bankruptcy get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs, and debt collection activities   They both provide exemptions to allow individuals to keep certain assets although the exemption amount varies by state.  Personal bankruptcy typically does not erase child support, alimony, fines, taxes, and some student loan obligations and unless you have a solid plan to catch up on debt in Chapter 13, bankruptcy usually does not allow you to keep your property if there is an unpaid mortgage or security lien on it.

You should receive credit counseling from a government-approved organization within six months before you file for any bankruptcy relief.

Damage Control
Although it may seem like a reasonable solution to turn to a business that offers help in solving debt when your bills become unmanageable  be sure before doing business with any company check with your state Attorney General, local consumer protection agency, and the Better Business Bureau.  They will be able to tell you if there are any consumer complaints on file with that business.  Ask your state Attorney General if the company is required to be licensed to work in your state and if so, if they are.

Some businesses that offer to help may charge high fees and fail to follow through with the services they promise.  Others misrepresent the terms in a debt consolidation loan and fail to explain certain costs or mention that you are signing your home over as collateral.  Businesses that advertise voluntary debt reorganization plans may not explain that it is actually a bankruptcy filing, tell you what it all entails, or help you through the long and complex process.

Additionally, some companies guarantee you a loan if you pay a fee in advance that can range from $100 to several hundred dollars.  Resist this temptation; 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 it is likely.  Under the federal Telemarketing Sales Rule, a seller or telemarketer who guarantees or represents a high likelihood of getting you a loan or other extension of credit cannot ask for or accept payment until you have received the loan.

You should be cautious of “repair clinics” who appeal to consumers with poor credit history promising to clean up their reports for a fee.  You already have the right to remove any inaccurate information in your file and have it corrected and despite their promises, a credit repair clinic cannot remove accurate information from your credit report.  You should know that federal and some state laws prohibit such companies from charging you for their services until the service is completed.  The only way to improve your credit report is time and a conscientious effort to repay your debts.

If you are thinking about getting help with your finances, do your research first.  Find out what services a business can actually provide, what it costs, and don’t rely on verbal agreements.  Get everything in writing and read all contracts carefully.

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