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 financial crises at some time in their lives.
Whether the crisis is caused by personal or family illness, the loss of a job, or
simple overspending, it can seem overwhelming. But often, it can be overcome. The
fact is that 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. 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.
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.
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.
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.
Auto and Home Loans
Your debts can be secured or unsecured. 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.
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. 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.
The consequences of bankruptcy are significant and require careful consideration.
Other factors to think about: 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 you, if you have a steady income, to keep property, such as a mortgaged
house or car, that you might otherwise lose. 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, known as straight bankruptcy, involves the sale of all assets that are
not exempt. Exempt property may include cars, 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 eight 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, utility shut-offs, and debt collection activities. Both also provide
exemptions that allow you to keep certain assets, although exemption amounts vary
by state. Personal bankruptcy usually does not erase child support, alimony, fines,
taxes, and some student loan obligations. Also, 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 you 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 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 usdoj.gov/ust.