Steps To Dealing With Debt
Are you having trouble paying your bills? Are you
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 can be
overcome. The fact of the matter 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.
1. Developing a Budget
The first step toward taking control of your
financial situation is to do a realistic assessment of
how much money comes 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—such as your mortgage payments or
your rent, car payments, or insurance premiums. Next,
list the expenses that vary, such as entertainment,
recreation, or clothing. Writing down all your
expenses—even those that seem insignificant—is a
helpful way to track your spending patterns, identify
the expenses that are necessary, 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 has
information about budgeting and money management
techniques. Low cost budget counseling services that can
help you analyze your income and expenses and develop a
budget and spending plan also are available in most
communities. Check your Yellow Pages or contact your
local bank or consumer protection office for information
about them. In addition, many universities, military
bases, credit unions, and housing authorities operate
non-profit financial counseling programs.
2. Contacting Your Creditors
Contact your
creditors immediately if you are 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, the creditors have given up on you.
3. 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 at work if the collector knows that your
employer doesn’t approve of the calls. Collectors may
not harass you, make false statements, or use unfair
practices when they try to collect a debt. Debt
collectors must honor a written request from you to stop
further contact.
Debt Consolidation
Options
Credit Counseling
If you aren’t 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 service. Your creditors may be willing to
accept reduced payments if you enter into a debt
repayment plan with a reputable organization. In these
plans, you deposit money each month with the credit
counseling service. Your deposits are used to pay your
creditors according to a payment schedule developed by
the counselor. As part of the repayment plan, you may
have to agree not to apply for—or use—any additional
credit while you’re participating in the program.
A successful repayment
plan requires you to make regular, timely payments, and
could take 48 months or longer to complete. Ask the
credit counseling service for an estimate of the time it
will take you to complete the plan. Some credit
counseling services charge little or nothing for
managing the plan; others charge a monthly fee that
could add up to a significant charge over time. Some
credit counseling services are funded, in part, by
contributions from creditors.
While a debt repayment
plan can eliminate much of the stress that comes from
dealing with creditors and overdue bills, it does not
mean you can forget about your debts. You still are
responsible for paying any creditors whose debts are not
included in the plan. You are responsible for reviewing
monthly statements from your creditors to make sure your
payments have been received. If your repayment plan
depends on your creditors agreeing to lower or eliminate
interest and finance charges, or waive late fees, you
are responsible for making sure these concessions are
reflected on your statements.
A debt repayment plan
does not erase your negative credit history. Accurate
information about your accounts can stay on your credit
report for up to seven years. In addition, your
creditors will continue to report information about
accounts that are handled through a debt repayment plan.
For example, creditors may report that an account is in
financial counseling, that payments have been late or
missed altogether, or that there are write-offs or other
concessions. A demonstrated pattern of timely payments,
however, will help you get credit in the future.
Auto and Home Loans
Debt repayment
plans usually cover unsecured debt. Your auto and home
loan, which are considered secured debt, may not be
included. You must continue to make payments to these
creditors directly.
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 full 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 would 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 run.
If you and your lender
cannot work out a plan, contact a housing counseling
agency. Some agencies limit their counseling service 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 (HUD) or the housing
authority in your state, city, or county for help in
finding a 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. Think carefully before
taking this on. These loans require your home as
collateral. If you can’t make the payments—or if the
payments are late—you could lose your home.
The costs of these
consolidation loans can add up. In addition to interest
on the loan, you pay “points.” Typically, one
point is 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 tool of last resort because the results
are long-lasting and far-reaching. A bankruptcy stays on
your credit report for 10 years, making it difficult to
acquire credit, buy a home, get life insurance, or
sometimes get a job. However, it is a legal procedure
that offers a fresh start for people who can’t satisfy
their debts. Individuals who follow the bankruptcy rules
receive a discharge—a court order that says they do
not 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 current fees for seeking bankruptcy relief are $160:
a filing fee of $130 and an administrative fee of $30.
Attorney fees are additional and can vary widely. The
consequences of bankruptcy are significant and require
careful consideration.
Chapter 13
allows you, if you have a regular income and limited
debt, to keep property, such as a mortgaged house or
car, that you otherwise might lose. In Chapter 13, the
court approves a repayment plan that allows you to pay
off a default during a period of three to five years,
rather than surrender any property.
Chapter 7,
known as straight bankruptcy, involves liquidating all
assets that are not exempt. Exempt property may include
cars, work-related tools and basic household
furnishings. Some property may be sold by a
court-appointed official—a trustee—or turned over to
creditors. You can receive a discharge of your debts
under 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 you to keep certain assets, although exemption
amounts vary. 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 lien on it.
Debt Consolidation
Loan
Debt consolidation is the number one reason for
refinancing a mortgage. Consolidating serves one of two
purposes: save money every month or pay off your
mortgage and other debt faster.
If you are under financial pressure every month, need a
little more breathing room or would like to use your
monthly income for something other than debt, you are
interested in saving money every month. Lenders will
consider the benefit of this savings to your overall
financial condition to help them make a decision on the
loan – the more you save the better able you are to
repay them.
If you are comfortable with the amount you pay, but feel
you are not obtaining the maximum benefit or buying
power with you payments, you are interested in paying
off your mortgage and other debt faster. Consolidating
some small loans, credit cards and other debt creates a
margin in your monthly payments. That margin can then be
applied to you mortgage to pay it off faster. A shorter
term or period of repayment on your loan generally
translates to a better interest rate.
There are many loan programs designed for debt
consolidation. You must consider why you are
consolidating, how much you would like to save every
month, how quickly you would like to pay off your
mortgage, your long term plans (retirement, selling your
home, etc.) and which debts are best included in a
mortgage refinance. You may choose to do a first or
second mortgage – depending on what you want to
accomplish over time. Lenders will be looking at your
credit, income, assets, property and the benefit of
refinancing to your overall financial well-being.
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