DEEP IN DEBT?
YOUR FINANCIAL SITUATION DOESN’T HAVE TO GET WORSE...
QUESTION: Are you 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?
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.
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.
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. Next, list your fixed expenses that are the same each month such
as your mortgage payments, rent, car payments, or insurance premiums. Next, list
any 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. Finally, 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.
Locate Information: 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’sdifficult
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.
If you aren’t disciplined enough to create a workable budget and stick
to it, cant work out a repayment plan with your creditors, or cant 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
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.
Most mortgage 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 there 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.
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.
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 is involved,
or help you through what can be 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. However, legitimate creditors neverguarantee
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.
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Information provided by this website is general and is not a substitute for professional
advice. Please consult your investment advisor and/or attorney before entering
into any transaction.