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Credit Card Debt
Consolidation
Having trouble paying your bills? Getting 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.
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 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 budget and spending
plans 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 nonprofit
counseling programs.
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.
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
cease further contact.
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 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
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 credit history. Under
the Fair Credit Reporting Act, 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
may have been late or missed altogether, or that there are write-offs
or other concessions. A demonstrated pattern of timely payments
will help you obtain 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 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 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
option 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.
Chapter 13 allows persons with a steady income to keep property,
like a mortgaged house or a car, that they otherwise might lose.
In Chapter 13, the court approves a repayment plan that allows you
to use your future income to pay off a default during a three-to-five-year
period, rather than surrender any property. After you have made
all payments under the plan, you receive a discharge of your debts.
Known as straight bankruptcy, Chapter 7 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 can receive a discharge of your
debts through 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
people to keep certain assets, although exemption amounts vary.
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 lien on it.
Damage Control
Turning to a business that offers help in solving debt problems
may seem like a reasonable solution when your bills become unmanageable.
Be cautious. Before you do business with any company, check it out
with your local consumer protection agency or the Better Business
Bureau in the company's location.
Some businesses that offer debt counseling and reorganization plans
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 either to explain certain costs or to mention that
you're signing over your home as collateral. Businesses advertising
voluntary debt reorganization plans may not explain that the plan
is a Chapter 13 bankruptcy, tell you everything that's involved,
or help you through what can be a complex and lengthy legal 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 advance-fee loan guarantees.
They may be illegal. 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 your getting a
loan or some other extension of credit may not ask for or receive
payment until you've received the loan.
You should also avoid credit repair clinics. Companies coast to
coast appeal to consumers with poor credit histories, promising
to clean up credit reports for a fee. They don't deliver. What's
more, they can't deliver: They can't do anything for you that you
can't do for yourself. After you pay them hundreds-or even thousands-of
dollars in up-front fees, they can do nothing to improve your credit
report. Indeed, many simply vanish with your money. 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, be cautious.
- Find out what services the business provides
and what it costs.
- Don't rely on oral promises. Get everything
in writing.
- Check out any company with your local consumer
protection office and the Better Business Bureau in the company's
location. They may be able to tell you whether other consumers
have registered complaints about the business.
For other credit and credit card related
articles, please visit our library
of articles.
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