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, as a last resort, personal bankruptcy. How do you know which solution will work best for you? It depends on your level of debt, your level of discipline, and your prospects for the future.
Develop a Budget: Take control of your financial situation. Start by doing 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.. Make sure you can make ends meet on the basics: housing, food, health care, insurance, and education. Next prioritize things like clothing, entertainment, recreation, etc.
Check your public library for information about how to get out of debt, 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 with your bank or consumer protection office for information about nonprofit counseling programs.
Contacting Your Creditors: Contact your creditors immediately if you are having trouble making payments on time. 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.
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. Tell debt collectors how you plan to get out of debt, they must honor a written request from you to cease further contact.
Credit Counseling: If you aren't disciplined enough to work out a repayment plan with your creditors, or 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 a debt repayment plan with a reputable organization.
A successful get out of debt 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.
A get out of debt debt repayment plan does not erase your credit history. Under the Fair Credit Reporting Act, 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. A demonstrated pattern of timely payments will help you obtain 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.
If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Explain how you are making efforts to get out of debt. 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 term.
Debt Consolidation: In your efforts to get out of debt, 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.
Bankruptcy: Personal bankruptcy generally is considered the get out of debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get life insurance, or sometimes get a job. However, it is a legal procedure that offers a fresh start for people who can't satisfy their debts. Individuals who follow the bankruptcy rules receive a discharge-a court order that says they do not have to repay certain debts.
Damage Control: Turning to a business that offers to help you get out of debt 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.
Companies coast to coast appeal to consumers with poor credit histories, promising to clean up credit reports for a fee. They can't do anything for you that you can't do for yourself. Only time and a conscientious effort to get out of debt by repaying your loans will improve your credit report.
If you're thinking about getting help to stabilize your financial situation, be cautious.
*Find out what services the business provides and what it costs.
*Don't rely on oral promises. Get everything in writing.
*Check out any company with your local consumer protection office and the Better Business Bureau in the company's location. They may be able to tell you whether other consumers have registered complaints about the business.