Job loss, divorce, serious illness, or poor financial management can threaten your economic security and ability to pay your bills. And while you may be able to juggle creditors for a time, sooner or later you’re apt to find yourself in dire straits. But if you have problems with debt, you’re not alone. There are a number of workable ways to resolve the problem, often known as restructuring debt.
The National Foundation for Credit Counseling is a non–profit organization with offices in all 50 states. A counselor can help you arrange repayment plans and evaluate your use of credit. You can call 800-388-2227 for information about the closest member agency. Or check their website at www.nfcc.org.
You can ask your creditors to rewrite your loans to extend the time you have to pay and to reduce your current payments so that you can afford to make them. The extensions will increase your overall cost because the creditors will charge you interest over a longer period. But a chance to resolve your problems may be worth the added cost.
Non-profit credit counseling agencies are available in virtually every city. For modest fees, counselors go through your debts, analyze your income, and help you work out ways to handle your debts. However, you may have to wait for an appointment if an office is busy, and you should be sure you understand what the counseling will cost you and how it will help you resolve your problems. And you’ll want to check with your local Better Business Bureau to see if there are any complaints against a counseling service you are considering working with. Some are more reputable than others.
Loan consolidators are private businesses that lend you money to pay off all your debts. You then owe only one creditor — them. The good news is that you pay only one check a month, you can repay over a long term, and you can make low monthly payments. The bad news is that the interest they charge may be very high, and you may also be hit with stiff fees for paying off the consolidated loan ahead of schedule.
PAYING THE CONSEQUENCES
Some of the consequences of failing to repay your debts:
- You could be assigned a bad credit rating and be unable to borrow again
- Your wages may be garnished: A court may order your employer to pay up to 10% of your salary each pay period to people you owe
- Lenders may sell property you put up as security
- You could be sued and, if you lose, required to pay the legal costs of your creditors as well
Credit cards can be lifesavers, most users agree. But many people who find themselves at sea financially are threatened by short-term debt, often credit card debt. According to the Federal Reserve Board, consumers on average owe more than 20% of their income, not counting what they owe in mortgages and home equity loans.
Continuing to charge can help to pull you under if you’re in debt, since the interest you pay on your outstanding balances is usually higher than on most other types of loans. Credit counselors often suggest getting rid of your credit cards, which forces you to limit what you spend. Even if you hang on to one card for emergency use, you’ll find that it’s probably smarter to pay most of your bills with cash.
TIME TO REPAY
It takes time to repay accumulated debts, especially if you postpone confronting the problem. The National Foundation for Credit Counseling estimates that three to four years is typical for the people who come to their offices.
HERE ARE SOME ISSUES TO WEIGH WHEN CONSIDERING BANKRUPTCY:
- Provides legal protection from creditors
- Helps stave off financial ruin
- Resolves most debts
- May prevent loss of your home
- Provides chance to start again
- Loss of privacy
- Serious harm to credit history
- Some debts remain outstanding
- Involvement with courts
- Loss of assets
HOW BANKRUPTCY WORKS
Bankruptcy is the solution of last resort — a harsh but legal remedy for preventing financial disaster.
In general, bankruptcy is a three-step process:
- You file a petition in federal or state court saying you’re insolvent, which means you have no assets to pay your debts.
- You work out a repayment plan with your creditors and the court.
- You discharge, or settle, your debts, so that your creditors receive at least some money.
TYPES OF BANKRUPTCY
It’s always smart to consult a lawyer before filing for bankruptcy, and in some cases it’s required. There are two standard ways for individuals to file for bankruptcy, each named for the section of the legal code that governs it.
With Chapter 7, or straight bankruptcy, you ask to be released from all your debts, after selling all your assets to pay creditors. Some assets, like your home, may be exempt from sale in some states. Some debts, like taxes, fines, alimony, and student loans must still be paid. You can file for straight bankruptcy only once within a six-year period, and you should work with an attorney to do it. However, stringent new rules introduced in 2005 make it more difficult to use this type of bankruptcy.
There are people who may call themselves credit doctors, and claim they can resurrect your credit. But be very careful, since they are not only expensive but are often involved in fraudulent schemes. One tip-off is someone who offers to fix your credit report for you but doesn’t suggest a major change in spending habits.
A lawyer is required if you want to file for Chapter 13 bankruptcy. The purpose of Chapter 13 is to allow people to retain their property and to avoid the stigma usually associated with the term bankruptcy.
A court approves a plan to pay out creditors over three to five years using your wages. Payment is not necessarily in full. The plan is supervised by a court-appointed person, called a trustee. Some income, like child support, is excluded from the payment plan and must be paid in full.