If you've gone into debt, don't take it as a personal failing. Today, given cycles of unemployment and chronic under-employment, it is more and more common for people to fall into debt. It hasn't helped that the past few generations have determined it's necessary to own a new car, a wealth of entertainment gadgets, the latest fashions, and generally live pretty high on the hog - even though they can only periodically afford it, if ever.
Debt: It's the American Way!
Our leadership has provided no bright, shining beacon in this regard, either. The nation has run up such colossal debt that, in seven more generations at the rate we're spending, all of the national budget will be going to pay off interest on the debt.
Even though it is likely that your plight is, at best, only partly due to your financial habits, the first thing to do is create a budget. How much do you presently have coming in? How much is going out? What are the sources of your debt? Where can expenses be cut? Can the debt eventually be paid down out of your income?
While you're studying your budget, it would probably be a good idea to cut up those credit cards. If you need something for making necessary purchases over the Internet, get a debit card which immediately deducts spending from your bank account.
Can you reduce your monthly credit payments? Call your creditors and see whether you can work out some deals. For the most part, they would rather get a little something from you than get nothing. This is equally true for secured debts as unsecured debts. Call you mortgage holder to avoid foreclosure. If the lender is unwilling to work with you and the loan in insured (e.g., by FHA or a private carrier), call the insurer.
Bicycles Are Cheap and Provide Good Exercise
Should you sell your car? It's a big expense, but if you commute to work, haul kids around, or use it to get groceries, you've got to keep a car. Not necessarily that car, of course. You could sell the car and buy a cheaper used car. Your monthly cost might go down, but you will certainly lose a lot of money on the sale because of new-car depreciation. You'll have to think that one over along with the idea of maybe selling your house for something cheaper.
If you have difficulty in working with figures and coming up with a budget, consider using a credit counseling agency. Be sure, however, to ask ahead about their fees. Some are quite expensive, and you don't want to take on any more debt. The agency may recommend a debt management plan through which creditors may lower interest rates or eliminate fees in return for the guarantee of a monthly payment. Repayment terms may be stretched out to four years or more.
Should you have sufficient equity in your home, and the value of it has increased since your purchase, you might re-finance it for a higher amount and use the overage to pay down your other debts. Similarly, you might obtain a second mortgage on the home to apply the proceeds to paying off the debt. Be forewarned it is risky business - you jeopardize your home if you have no intention of keeping your spending under control. Your goal should be to have no home mortgage by the time you retire.
Bankruptcy: a Whole New Ball Game
Declaring bankruptcy under Chapter 7 of the Bankruptcy Act used to allow you to wipe out your unsecured debts and get a new start every seven years. (Creditors are allowed to repossess their property or foreclose your mortgage and evict you; federal taxes owned can never be written off.) Spurred on by the credit card companies, who were, naturally enough, not too happy about that state of things, Congress changed the law in 2005. Now the period before you can again declare bankruptcy under Chapter 7 has been extended to eight years. (It can be as little as two years under Chapter 13.) You must go through a government-approved program of credit counseling, and you must now meet a means test; if your family income is over the median for a given state (less allowable personal expenses), you may not file: allowable income for a family of two ranges from $38,143 in Mississippi to a high of $62,953 in Alaska.
Debtors are encouraged to file Chapter 13 bankruptcy rather than Chapter 7. Under this procedure, the court sets up a payment schedule whereby the debtor has up to 48 months to pay what he or she is able - in the court's opinion - to pay off. So long as the payments are met, the remaining debts are discharged at the end of the court-specified period.
Two alternatives to bankruptcy, which will negatively affect your credit rating for years, are debt consolidation and debt negotiation. Both are handled by private companies for a fee. When you sign up with a debt consolidation company you are offered a lower overall monthly payment based on a lower interest rate the company has arranged with creditors. Generally, there will be at least one credit card company among the creditors, and you will be blocked from using that card during the pay-back period.
Debt negotiation, sometimes referred to as debt settlement, is for those who cannot afford the minimum payments of debt consolidation. The company settles your debts with your creditors, paying them a smaller percentage of the amount owed. You then set up a payment schedule with the debt negotiation company. The company generally requires that the creditor state for credit reporting purposes that your debt was paid-in-full.
Debt Consolidation, Renegotiation - Step Carefully
This sounds ideal, doesn't it? It's not. The Federal Trade Commission recently filed a complaint against a number of such companies, reporting that the defendants often "would not begin negotiating a consumer's debts for six months or longer, and that creditors' collection efforts not only do not stop, but often become more aggressive." Consumer accounts, unknown to them, became delinquent, with late fees, penalties, and interest accruing on their debt. Creditors were suing to collect on debts, sometimes garnishing wages. After paying these companies to negotiate payments, the debtors were not informed when some companies refused to settle a debt. When some debts were negotiated, the creditor reported "settled for less than full amount" to credit reporting agencies rather than "paid-in-full." Before using a credit negotiator or debt consolidator, the FTC advises that you check the company out with your state's Attorney General's office.
