|
|
Knee Deep
in Debt? A Debt Consolidation Self Help Guide
courtesy FTC
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 carefully.
For more information, see
Fiscal Fitness: Choosing a Credit Counselor, at
ftc.gov/credit.
|
