Having trouble paying your bills? Getting collection notices
from creditors? Are your accounts being turned over to debt collectors? Are you
worried about losing your home or your car?
You are 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 does not 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
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
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 are having trouble
making ends meet. Tell them why it is difficult for you, and try to work out a
modified payment plan that reduces your payments to a more manageable level. Do
not 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
A debt collector may not call you before 8 a.m., after 9
p.m., or while you are at work if the collector knows that your employer does
not 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 are 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 cannot 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 will 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 are 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 is
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 relief services
If you are not disciplined enough to create a workable
budget and stick to it, cannot work out a repayment plan with your creditors,
or cannot 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 is “nonprofit,” there is 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
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 are participating in the plan.
Debt settlement programs
Debt settlement 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.
Debt negotiation firms may claim they are 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
company may claim it can arrange for you to pay off the debt for less, say
$4,000. Some debt settlement firms may also claim to be nonprofit.
Debt settlement 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.
There is no guarantee that the services debt settlement
companies 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. All these
fees will put you further in the hole.
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
Amendments to the FTC’s Telemarketing Sales Rule prohibit
companies that sell debt settlement 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 put money in a dedicated bank account, which will 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 when
Before you sign up for the service, the debt settlement
company must give you information about the programs:
Price and terms
A company must explain its fees and must tell you about any
conditions on its services.
A company must tell you how long it will take to get results
and how many months or years before the company will make an offer to each
A 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
If the company asks you to stop making payments to your
creditors – or if the program relies on your not making payments – the company
must tell you about the possible negative consequences of doing so.
Depending on your financial condition, the amount of any
savings you obtain from debt relief services can be considered income and
taxable. Credit card companies and others may report settled debt to the IRS,
and the IRS considers it income, unless you are “insolvent.” You are insolvent
when your total debts are more than the fair market value of your total assets.
Insolvency can be fairly complex to determine – please talk to a tax
professional if are not sure whether you qualify for this exception.
Research companies before you pay to negotiate your debt.
Consider other people’s experiences. One way to do that is to enter the company
name with the word “complaints” into a search engine. Read what others have
said. You are making a big decision that involves spending a lot of your money
that could go toward paying down your debt.
Be wary of any debt relief organization that:
any fees before it settles your debts
you to make “voluntary contributions,” another name for fees
“new government program” to bail out personal credit card debt
it can make your unsecured debt go away
to stop communicating with your creditors
it can stop all debt collection calls and lawsuits
that your unsecured debts can be paid off for just pennies on the dollar
send you free information about the services it provides without requiring you
to provide personal financial information, such as credit card account numbers,
enroll you in a debt relief program without spending time reviewing your
enroll you in a DMP without teaching you budgeting and money management skills
that you make payments into a DMP before your creditors have accepted you into
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 cannot make the payments – or if your payments are late –
you could lose your home. What is 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.
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 do not 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 cannot satisfy their debts.
There are two primary types of personal bankruptcy: Chapter
13 and Chapter 7. Each must be filed in federal bankruptcy court. Filing fees
are several hundred dollars. For more information visit www.uscourts.gov/services-forms/bankruptcy.
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 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. You 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.
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.justice.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.justice.gov/ust.
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
the Bureau of Consumer Protection and the Better Business Bureau. We can tell
you if any consumer’s complaints are on file about the firm you are considering
doing business with.
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 are 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 is
involved, or help you through what can be a long and complex process.
Advance fee loans
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
Under the federal Telemarketing Sales Rule, a seller or
telemarketer 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 have 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 are 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 do not rely on verbal promises. Get everything
in writing, and read your contracts carefully.
(Taken from the FTC fact sheet, “Coping with Debt”,