Getting Out of Debt

Is paying your bills becoming difficult? Are creditors sending you threatening letters? Are debt collectors taking hold of your accounts? Do you think the ownership of your car or home might be in jeopardy? Getting out of debt is a difficult process, but it’s not impossible. If you want help paying off your debt, read this comprehensive debt guide.

Your problems are common. Lots of people experience financial hardships at some point; regardless of whether they’re caused by overspending, job loss or personal or family medical bills, overcoming it can seem monumental. Usually, however you can turn your financial crisis around before it gets even worse.

If financial hardships are affecting you or an acquaintance, think about these options: reasonable budgeting, reliable credit counseling, debt consolidation or bankruptcy; debt negotiation is another way to go. How do you know which method will best suit your needs? Your level of debt, amount of discipline and future prospects are all determining factors.

Making a Budget

The first thing you need to do in order to get out of a financial crisis is to realistically take account of how much money you earn and the cost of your expenditures. Begin by listing all the income you take in, then write down your “fixed” expenses – those that do not change monthly – such as insurance premiums, car payments, rent or mortgage payments. Then, write down the expenses that change – such as clothing, recreation and entertainment; keeping track of all your expenses, including the ones that seem inconsequential, is a helpful way to keep track of how much you spend, identify the things that are necessary, and then prioritize the others. The goal is to make sure you have enough money to cover the essentials: education, insurance, health care, food and housing.

Your bookstores and public library have reading material about money management tips and budgeting – also, computer software programs can be helpful tools in making and sticking to a budget, balancing your checkbook, and making plans to pay off your debt and save money.

Getting in Touch with Your Creditors:

Don’t hesitate to tell your creditors if you’re having financial trouble – explain why you’re having difficulty, and then work with them to make an altered payment plan that reduces your payments to something you can afford. Don’t hesitate until a debt collector has taken over your accounts; by then, your creditors will have lost faith in your ability to pay.

Dealing with Debt Collectors

The federal law that sets the guidelines for how and when a debt collector may call you is the Fair Debt Collection Practices Act – a debt collector is only allowed to call you between 8 a.m. and 9 p.m., and can’t call you while you’re at work if the collector is aware that your employer disapproves of the calls. Collectors are prohibited from lying, harassment or use of unfair methods when they attempt to collect a debt, and they have to honor the request to cease further contact if you send them a written notice.

Managing Your Auto and Home Loans

Your debts are either unsecured or secured – secured debts are typically connected to an asset such as your car loan or car, or your home mortgage. If you stop paying back a secured loan, lenders can foreclose your house or repossess your car. Unsecured debts are not connected to any asset, and include the majority of credit card debt, medical bills, signature loans, and debts for other types of services.

The majority of vehicle financing contracts permit creditors to repossess your car whenever you don’t make your payments – they can do so without giving notice. When your car is repossessed, you might have to pay the remaining balance on the loan, in addition to towing and storage costs, to retrieve it. If you’re unable to do this, the creditor might sell the car; if you think you might default, it might be more beneficial to sell the car yourself in order to repay the debt. You’ll get out of the additional costs of repossession and avoid damage to your credit score.

Don’t hesitate to tell your lender if you are going to make a late mortgage payment; most of them are happy to compromise if they think you’re being responsible and will remedy the situation. A few lenders might lower or suspend your payments for a short while, although when you resume regular payments, an additional amount toward the past due total might be required. Other lenders might reduce the monthly debt by agreeing to alter the terms of the mortgage by lengthening the repayment period. Find out whether additional fees would be added for these changes, and figure out what the long term cost would be.

Get in touch with a housing counseling agency if you and your lender can’t determine a compromise; some agencies only give counseling to homeowners with FHA mortgages, although many give free assistance to any homeowner who is having difficulty with mortgage payments. Get in touch with your local office of the Department of Housing and Urban Development or the housing authority in your state, city or county for assistance in locating a trustworthy housing counseling agency nearby.

Credit Counseling

If you’re not responsible enough to make a reasonable budget and abide by it, are unable to negotiate a repayment plan with your creditors, or can’t organize your pile of bills, think about finding a credit counseling organization. Lots of credit counseling organizations nonprofit and work with you to fix your financial troubles. However, realize that simply because an organization claims to be “nonprofit,” they still might charge high prices and might not even be legitimate. Actually, some credit counseling services charge expensive fees, which may be hidden, or coax consumers to make “voluntary” payments that add debt.

The majority of credit counselors offer services through the Internet, local offices or the telephone; if you can, locate an organization that provides in-person counseling.

You can find counseling at many credit unions, military bases, universities, and branches of housing authorities throughout the United States. Cooperative Extension Service provides nonprofit credit counseling opportunities. Friends and family, your local consumer protection agency and your financial institution may be beneficial sources of information and referrals as well.

Trustworthy credit counseling organizations can offer insight about how to manage debts and money, assist you in developing a budget, and provide workshop and educational materials at no charge. Their counselors are trained and certified in the areas of budgeting, money and debt management, and consumer credit. Counselors will talk about your whole financial situation with you, and assist you in creating a personalized plan to solve your financial difficulties. The first counseling session usually takes an hour, with the possibility of follow-up meetings.

Debt Management Plans

If your financial troubles are a result of too much debt or the inability to repay it, a credit counseling agency might tell you to start a debt management plan (DMP). DMPs are not for every situation, and a DMP alone is not credit counseling. Only enroll in one of these plans after a certified credit counselor has spent time assessing your financial situation, and has offered you personalized advice on money management. A trustworthy credit counseling organization can still assist you in developing a budget and teaching you money management skills even if a DMP is right for you.

In a DMP, you pay money each month to the credit counseling organization, which then uses this money to pay your unsecured debts, such as your medical bills, student loans and credit card bills, according to a payment plan the counselor makes with you and your creditors. Your creditors might waive certain fees or lower your interest rates, but make sure your creditors really offer the allowances the credit counseling organization explains to you by checking with them. A successful DMP could last for 48 months or more, and requires you to make regular payments on time. Find out from your credit counselor how long it will take for you to finish the plan you might have to agree not to apply for – or utilize – any further credit while you’re taking part in the plan.

Debt Consolidation

It might be possible for you to lower your cost of credit by consolidating your debt through a home equity line of credit or a second mortgage; keep in mind that these loans require you to offer your home as collateral. If you’re unable to make the payments – or if the payments are not made on time – your home could be foreclosed.

Moreover, the costs of consolidation can be costly; beyond the interest on the loans, you might have to pay “points,” with one point equal to the one percent of the borrowed amount. However, these loans can offer beneficial tax incentives that are not provided with other types of credit.

Bankruptcy

Personal bankruptcy usually is thought to be the debt management option or last resort since the results are devastating for a long time; people who adhere to the bankruptcy rules get a discharge – a court order that says they are not responsible for some debts. On the downside, bankruptcy information (both the date of your discharge and the date you filed for it) remain on your credit report for 10 years, and can make it hard to get a job, life insurance, credit or purchase a home. However, bankruptcy is a legal process that provides a new beginning for people who find themselves in financial straits and can’t pay off their debts.

There are two main varieties of personal bankruptcy: Chapter 7 and Chapter 13 — each must be filed in federal bankruptcy court; beginning April 2006, the filing fees cost approximately $274 for Chapter 13 and $299 for Chapter 7; attorney fees are extra and can be different in each case.

Starting October 2005, Congress drastically altered bankruptcy laws; this was to provide customers more incentive to seek bankruptcy assistance under Chapter 13 instead of Chapter 7. Chapter 13 lets people with a reliable income to maintain ownership of property, such as a car or mortgaged house or car, that they possibly otherwise would lose through the bankruptcy process. In Chapter 13, the court approves a repayment method that lets you use the income you’ll make in the future to pay off your debts during a period of three to five years, instead of giving up any property. Once you’ve completed making all the payments in the plan, you get a discharge of your debts.

Chapter 7 is regarded as straight bankruptcy, and requires liquidation of all assets that are not exempt; exempt property might consist of basic household furnishings, work-related tools, and automobiles. A portion of your property might be sold by a court-appointed official – a trustee – or given to your creditors. Revised bankruptcy laws have altered the time period during which you can get a discharge through Chapter 7. Before filing again under that chapter, you now have to wait 8 years after receiving a discharge in Chapter 7; the Chapter 13 waiting period is not as long and can be as little as two years before you file again.

Both varieties of bankruptcy might get rid of unsecured debts and halt garnishments, foreclosures, repossessions, utility shut-offs and debt collection activities. Both allow exemptions that let people keep certain assets, although the amount of the exemptions differ by state. Realize that personal bankruptcy typically does not get you out of paying some student loan obligations, taxes, fines, alimony or child support. Additionally, unless you have a proper plan to repay your debt under Chapter 13, bankruptcy typically does not let you retain property when your creditor has a mortgage or security lien on it that has not been paid. Another big alteration to bankruptcy laws pertains to certain obstacles that a consumer must overcome before even filing for bankruptcy, regardless of the chapter. Before you file for any bankruptcy assistance, you need to get credit counseling from a government-approved organization within six months. Government-approved organizations are listed state-by-state at www.usdoj.gov/ust. It’s the official website of the U.S. Trustee Program. It’s an organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Additionally, you have to meet a “means test.” You have to prove that your income is not higher than a specific amount. The amount differs by state and is available to the public by the U.S. Trustee Program at www.usdoj.gov/ust.

Debt Negotiation Programs

Debt negotiation is a lot different than credit counseling and DMPs. It involves a high risk, and may negatively influence your credit report for a long time and, therefore, whether or not you can get credit. This is why lots of states implemented laws to regulate debt negotiation companies and the services they provide. Get in touch with your state Attorney General for additional information.

Debt negotiation firms might tell you they’re nonprofit; additionally, they might say they can arrange for your unsecured debt – usually credit card debt – to be repayed for any rate from 10 to 50 percent of the balance you owe. For instance, if you owe a credit card company $10,000, a debt negotiation firm might tell you it can negotiate a payment plan for you with a lesser amount such as $4,000. It’s not unusual for firms to market their services as an alternative to bankruptcy; they might say any derogatory information can be taken off your credit report when you finish their debt negotiation program, or that utilizing their services will have little to no negative influence on whether or not you can get credit later on. Typically, the firms advise you to cease making payments to your creditors, and alternately, send payments directly to the debt negotiation company; the firm might swear it will keep your funds in a special account and take care of your creditor’s payments for you.

You can’t be certain that your debt negotiation company is legitimate just because they claim to be a “nonprofit” organization. You also can’t be sure that a creditor doesn’t want payment in full on a legitimate debt; actually, if you cease making payments on a credit card, interest and late fees typically accrue monthly. Extra charges and fees can also be added if you go beyond your credit limit. This can make your principal debt double or triple; beyond that, most debt negotiation companies charge clientele hefty fees for their services, including a monthly service fee, a fee to establish the account with the debt negotiator, and a final fee of a percentage of the money you’ve allegedly saved. Although creditors don’t necessarily have to agree to compromise on the amount a consumer owes, they do have a legal responsibility to provide correct information to the credit reporting agencies, including if you skip monthly payments. A negative entry on your credit report can ensue — and in some circumstances, creditors might be able to sue you in order to get back the money you owe them. In come cases, when creditors win a lawsuit, they can put a lien on your home or garnish your wages; finally, the Internal Revenue Service might want to tax as income any amount of forgiven debt.

Damage Control: Help with Debt

When your bills are beyond your budget, looking to a business that offers assistance in solving debt worries might seem like a good bet. Before you conduct business with any company, research them by contacting your state Attorney General, the Better Business Bureau and local consumer protection agency. They can inform you if any consumer complaints are on file about the firm you are considering to use to help you. Find out from your Attorney General if the company needs to be licensed to work in your state, and so, if the company has one.

Some businesses that provide help with your debt troubles might charge high fees and then neglect to follow through on what they claim offer. Others might give you a false interpretation of the terms of a debt consolidation loan, failing to inform you of some costs or mention that you’re giving up your home as collateral. Businesses promoting voluntary debt reorganization methods might not inform you that the plan is a bankruptcy filing, help you what can be a lengthy and frustrating process, or tell you everything that it entails.

Also, some companies promise you a loan if you pay a fee before receiving their services. It can cost from $100 to a couple hundred dollars. Don’t give in to the temptation to follow up on these advance-fee loan promises. They might be illicit. It’s a fact that lots of legitimate creditors have extensions of credit available via telemarketing, and ask for an application or appraisal fee beforehand. However, worthy creditors never promise that the consumer will receive the loan – or even make it seem like it’s a possibility. The federal Telemarketing Sales Rule states that a seller or tele-marketer who guarantees or makes it seem like you have a good chance of your getting a loan or another extension of credit is not allowed to ask for or take payment until you have acquired the loan.

You need to be wary of claims from supposed credit repair clinics. Lots of companies attract consumers with bad credit histories by claiming they will clean up their credit reports for compensation. However, you have the right to have any incorrect information in your file remedied as it stands. Also, a credit repair clinic isn’t able to have accurate information taken off your credit report, in spite of what they say. You also need to keep in mind that federal and a few state laws disallow these companies from making you pay for their services until they’re fully delivered. Your credit report will improve only if you dedicate time and a concerted effort into repaying your debts.

Do some research if you’re considering help to balance your financial situation. Don’t be confident on verbal claims, and learn what services a business provides and what they cost. Read your contracts meticulously, and make sure you have written copies of your agreements. Getting out of debt will take work, but with the right strategy and persistence, it can be done.

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