Dealing with debt
- By Milt x_Zall
- May 17, 2002
Are you having trouble paying your bills? Are you 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
it often can be overcome, and 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 option 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 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. It helps identify the
expenses that are necessary and helps you to 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 nonprofit financial counseling programs.
{bold} 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.
{bold} 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.
Credit Counseling
If you aren't disciplined enough to create a workable budget and stick
to it, you can't work out a repayment plan with your creditors, or you 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 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.
Although 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. And 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, 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. 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. However, these
loans require your home as collateral. If you can't make the payments, 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 1 percent
of the amount you borrow. Still, these loans may provide certain tax advantages.
Next Week:
The basics about bankruptcy
Zall, Bureaucratus columnist and a retired federal employee, is a freelance
writer based in Silver Spring, Md. He specializes in taxes, investing, business
and government workplace issues. He is a certified internal auditor and
a registered investment adviser. He can be reached at [email protected].