Part 1: The Debtor's Dilemma If you are in debt, you are not alone. Many Americans are struggling to stay solvent. As of 2004, Americans were almost $2.4 trillion dollars in debt, according to the Federal Reserve, $50 billion more than the year before. Not surprisingly, bankruptcy cases have been on the rise. Bankruptcy can make it hard to get new credit and loans, so many people choose debt management instead. There are several steps you can take: Get your credit report
Additionally you can buy your credit report at any time from one of the three major credit reporting agencies: Equifax, Experian and Trans-Union. They usually charge a small fee of about $8. It is worth getting all three because each agency may report slightly different things. Their contact information, as well as links to other helpful information, is on our links page. Your credit report shows exactly what your creditors see when you apply for charge cards, a mortgage, a car loan or employment that requires a credit check. Correcting your credit report If your report is found inaccurate, the credit agency contacted must notify all other agencies nationwide so they too can correct your information. You can also contact creditors yourself to try to negotiate a lower interest rate or payments. This is not reserved exclusively for credit counseling services. But credit counselors have more experience and may be more successful. More information Part 2: Where to Get Help Not all credit counseling services are the same. Some are for-profit. Others are nonprofit. For-profit counseling services usually charge higher fees than nonprofits and usually for the same services. The for-profits may have a lighter workload and pay a little more attention to your account. There are still many nonprofit counseling services that are excellent. Words of warning Hearts & Minds called several
nonprofits in Avoiding scammers NFCC works as a parent company for smaller locally-based companies. The Consumer Credit Counseling Service is one of the more popular companies that work under the NFCC. It is also a good idea to check each company out with your local Better Business Bureau, even ones with an NFCC affiliation. See our Credit Links page for the BBB website and contact info. You can look up your local BBB on the website or in your local phone book. The FTC urges you to be skeptical of any "credit clinic" that says it can erase your debt by applying for a new Employer Identification Number or Social Security Number. This is an illegal practice and you may regret trusting such a company. Part 3: Debt Settlement vs. Credit Counseling Debt settlement and credit counseling are two different things and should not be confused. A debt settlement company will contact creditors on your behalf and propose a plan in which you will pay back only part of your debt. If the creditors accept, a note is made of this on your credit report and it remains there for 7 years. A credit counseling company looks at your debt and earnings. It then works out a debt management plan with you, a process that requires you to meet with a counselor. Next, the company contacts creditors for you to negotiate lower interest rates. It sets up a schedule of payments that you make directly to it. It disburses the funds to your creditors. Most credit counseling companies do not report anything to credit bureaus. Creditors may choose to do so, but that does not mean they view a settlement negatively. In fact, it may be seen as a positive. You are making a goodwill effort to pay back your debt. As soon as your debt is repaid you can request to have the creditors' comments about credit counseling removed from your report. Credit counselors tend to focus on the unsecured debt, such as credit cards and personal loans. But you can also include secured debts, including mortgages and automobile loans. Part 4: How Much is Too Much Debt If more than half the total available credit on all your credit cards is used up, you probably have too much debt, says Dave Guzek, a counselor at Greenpath Debt Solutions, Inc. Greenpath is a Michigan-based NFCC member. Though you may be able to pay the minimum balance for each credit card even if they are maxed out, Consumer Credit Counseling Services still suggests that you are in trouble. For example, paying the $60 minimum payment on a $5,000 credit card balance at 8% interest would take a little over ten years to pay off and cost $2,322.65 in interest. By paying an additional $50 a month the debt would be erased in four and a half years, saving $1,346 in interest. Many people pay rates far higher than 8%, so the savings can be much greater. If you are interested in finding out how long it would take to erase your debt, you can go to www.buccs.com and use its confidential on-line debt calculators. Be aware that the only way a credit counseling company can work with you is if it can determine that you still have enough income to meet your basic needs and have money left over to pay off your debts. In more extreme situations, bankruptcy may be the best option. Check our debt links page for help determining your situation. Part 5: The Last Resort - Bankruptcy Bankruptcy should only be considered as a last resort. Yet cases have spiked over the last two decades. Declaring bankruptcy can cut you off from receiving credit or loans for up to ten years. The agencies that keep track of your credit history place a mark in your file warning credit companies and banks that you are bankrupt and probably unable to pay your debts. You should consider other options besides bankruptcy, unless you have no income and no savings, or if you have been injured and lost your ability to work. Two types of personal bankruptcy Chapter 7 is known as straight bankruptcy. It requires the liquidation, or selling off, of all your property that is not exempt. Things such as your home, cars, work-related tools and basic household furnishings may be exempt. That has to be determined in court. A court appointed official may sell off some property and some may be turned over to creditors. You can only file for Chapter 7 once every six years. A new federal bankruptcy law that is in effect as of fall 2005 makes it tougher to get Chapter 7 protection and put more stringent conditions on those who file under Chapter 13, including requirements to undergo credit counseling. You should be aware that usually neither type of bankruptcy gets rid of alimony, child support, taxes or most student loans. Creditors may be able to take your home or car if they hold an unpaid mortgage or lien on it. Bankruptcy is not free. You have to pay a filing fee and an administrative fee that add up to about $160. On top of that you have to pay for an attorney to represent you in court. Attorney fees vary. But a final bill can amount to more than $1,000. More Self-Help Articles and Info This entire article series by Raúl Hernández, Hearts &
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