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The Laurex Process: Strategy Clarification
Knee Deep in Debt
By Federal Trade Commission
Having trouble paying your bills? Getting dunning notices
from creditors? Are your accounts being turned over to debt collectors? Are
you worried about losing your home or your car?
You're not alone. Many people face a financial crisis some time in their
lives. Whether the crisis is caused by personal or family illness, the loss
of a job, or overspending, it can seem overwhelming. But often, it can be
overcome. Your financial situation doesn't have to go from bad to worse.
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. Debt negotiation is yet another option. 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.
Self-Help
Developing a Budget: The first step toward taking control of your
financial situation is to do a realistic assessment of how much money you
take 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 — like mortgage payments or rent, car payments, and insurance
premiums. Next, list the expenses that vary — like entertainment, recreation,
and clothing. Writing down all your expenses, even those that seem
insignificant, is a helpful way to track your spending patterns, identify
necessary expenses, 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.
Your public library and bookstores have information about budgeting and money
management techniques. In addition, computer software programs can be useful
tools for developing and maintaining a budget, balancing your checkbook, and
creating plans to save money and pay down your debt.
Contacting Your Creditors: Contact your creditors immediately if
you're having trouble making ends meet. 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. At that point, your 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
while you're at work if the collector knows that your employer doesn't
approve of the calls. Collectors may not harass you, lie, or use unfair
practices when they try to collect a debt. And they must honor a written
request from you to stop further contact.
Managing Your Auto and Home Loans: Your debts can be unsecured or
secured. Secured debts usually are tied to an asset, like your car for
a car loan, or your house for a mortgage. If you stop making payments,
lenders can repossess your car or foreclose on your house. Unsecured debts
are not tied to any asset, and include most credit card debt, bills for
medical care, signature loans, and debts for other types of services.
Most automobile financing agreements allow a creditor to repossess your car
any time you're in default. No notice is required. If your car is
repossessed, you may have to pay the balance due on the loan, as well as
towing and storage costs, to get it back. If you can't do this, the creditor
may sell the car. If you see default approaching, you may be better off selling
the car yourself and paying off the debt: You'll avoid the added costs of
repossession and a negative entry on your credit report.
If you fall behind on your mortgage, contact your lender immediately to avoid
foreclosure. 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.
If you and your lender cannot work out a plan, contact a housing counseling
agency. Some agencies limit their 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 legitimate housing counseling agency near you.
Credit Counseling and Debt Management Plans
Credit Counseling: If you're not disciplined enough to create a
workable budget and stick to it, can't work out a repayment plan with your
creditors, or can't keep track of mounting bills, consider contacting a
credit counseling organization. Many credit counseling organizations are
nonprofit and work with you to solve your financial problems. But be aware
that, just because an organization says it's
"nonprofit," there's no guarantee that its services are free,
affordable, or even legitimate. In fact, some credit counseling organizations
charge high fees, which may be hidden, or urge consumers to make
"voluntary" contributions that can cause more debt.
Most credit counselors offer services through local offices, the Internet, or
on the telephone. If possible, find an organization that offers in-person
counseling. Many universities, military bases, credit unions, housing
authorities, and branches of the U.S. Cooperative Extension Service operate
nonprofit credit counseling programs. Your financial institution, local
consumer protection agency, and friends and family also may be good sources
of information and referrals.
Reputable credit counseling organizations can advise you on managing your
money and debts, help you develop a budget, and offer free educational
materials and workshops. Their counselors are certified and trained in the
areas of consumer credit, money and debt management, and budgeting.
Counselors discuss your entire financial situation with you, and help you
develop a personalized plan to solve your money problems. An initial
counseling session typically lasts an hour, with an offer of follow-up
sessions.
Debt Management Plans: If your financial problems stem from too much
debt or your inability to repay your debts, a credit counseling agency may
recommend that you enroll in a debt management plan (DMP). A DMP alone is
not credit counseling, and DMPs are not for
everyone. You should sign up for one of these plans only after a certified
credit counselor has spent time thoroughly reviewing your financial
situation, and has offered you customized advice on managing your money.
Even if a DMP is appropriate for you, a reputable credit counseling
organization still can help you create a budget and teach you money
management skills.
In a DMP, you deposit money each month with the credit counseling
organization, which uses your deposits to pay your unsecured debts, like your
credit card bills, student loans, and medical bills, according to a payment
schedule the counselor develops with you and your creditors. Your creditors
may agree to lower your interest rates or waive certain fees, but check with
all your creditors to be sure they offer the concessions that a credit
counseling organization describes to you. A successful DMP requires you to
make regular, timely payments, and could take 48 months or more to complete.
Ask the credit counselor to estimate how long it will take for you to
complete the plan. You may have to agree not to apply for — or use — any
additional credit while you're participating in the plan.
Protect Yourself
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Be
wary of credit counseling organizations that:
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charge high up-front or monthly fees for enrolling in
credit counseling or a DMP.
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pressure you to make "voluntary
contributions," another name for fees.
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won't send you free information about the services
they provide without requiring you to provide personal financial
information, such as credit card account numbers, and balances.
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try to enroll you in a DMP without spending time
reviewing your financial situation.
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offer to enroll you in a DMP without teaching you
budgeting and money management skills.
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demand that you make payments into a DMP before your
creditors have accepted you into the program.
Debt Consolidation
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. Remember that
these loans require you to put up your home as collateral. If you can't make
the payments — or if your payments are late — you could lose your home.
What's more, the costs of consolidation loans can add up. In addition to
interest on the loans, you may have to pay "points," with one point
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.
Bankruptcy
Personal bankruptcy generally is considered the 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, and can make it
difficult to obtain credit, buy a home, get life insurance, or sometimes get
a job. Still, it is a legal procedure that offers a fresh start for people
who can't satisfy their debts. People who follow the bankruptcy rules receive
a discharge — a court order that says they don't have to repay certain debts.
There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7.
Each must be filed in federal bankruptcy court. The filing fees run about
$185 for Chapter 13 and $200 for Chapter 7. Attorney fees are additional and
can vary.
Chapter 13 allows people with a steady income to keep property, like a
mortgaged house or a car that they otherwise might lose. In Chapter 13, the
court approves a repayment plan that allows you to use your future income to
pay off a default during a three-to-five-year period, rather than surrender
any property. After you have made all the payments under the plan, you
receive a discharge of your debts.
Known as straight bankruptcy, Chapter 7 involves liquidation of all assets
that are not exempt. Exempt property may include automobiles, work-related
tools, and basic household furnishings. Some of your property may be sold by
a court-appointed official — a trustee — or turned over to your creditors.
You can receive a discharge of your debts through Chapter 7 only once every
six years.
Both types of bankruptcy may get rid of unsecured debts and stop
foreclosures, repossessions, garnishments, utility shut-offs, and debt
collection activities. Both also provide exemptions that allow people to keep
certain assets, although exemption amounts vary. Note that personal
bankruptcy usually does not erase child support, alimony, fines, taxes, and
some student loan obligations. And unless you have an acceptable plan to
catch up on your debt under Chapter 13, bankruptcy usually does not allow you
to keep property when your creditor has an unpaid mortgage or lien on it.
Debt Negotiation Programs
Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative
impact on your credit report and, in turn, your ability to get credit. That's
why many states have laws regulating debt negotiation companies and the
services they offer. Contact your state Attorney General for more
information.
The Claims
Debt negotiation firms may claim they're nonprofit. They also may claim that
they can arrange for your unsecured debt — typically credit card debt — to be
paid off for anywhere from 10 to 50 percent of the balance owed. For example,
if you owe $10,000 on a credit card, a debt negotiation firm may claim it can
arrange for you to pay it off with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They
may claim that using their services will have little or no negative impact on
your ability to get credit in the future, or that any negative information
can be removed from your credit report when you complete their debt
negotiation program. The firms usually tell you to stop making payments to
your creditors, and instead, send payments to the debt negotiation company.
The firm may promise to hold your funds in a special account and pay your
creditors on your behalf.
The Truth
Just because a debt negotiation company describes itself as a
"nonprofit" organization, there's no guarantee that the services
they offer are legitimate. There also is no guarantee that a creditor will
accept partial payment of a legitimate debt. In fact, if you stop making
payments on a credit card, late fees and interest usually are added to the
debt each month. If you exceed your credit limit, additional fees and charges
also can be added. This can cause your original debt to double or triple.
What's more, most debt negotiation companies charge consumers substantial
fees for their services, including a fee to establish the account with the
debt negotiator, a monthly service fee, and a final fee of a percentage of
the money you've supposedly saved.
While creditors have no obligation to agree to negotiate the amount a
consumer owes, they have a legal obligation to provide accurate information
to the credit reporting agencies, including your failure to make monthly
payments. That can result in a negative entry on your credit report. And in
certain situations, creditors may have the right to sue you to recover the
money you owe. In some instances, when creditors win a lawsuit, they have the
right to garnish your wages or put a lien on your home. Finally, the Internal
Revenue Service may consider any amount of forgiven debt to be taxable
income.
Damage Control
Turning to a business that offers help in solving debt
problems may seem like a reasonable solution when your bills become
unmanageable. But before you do business with any company, check it out with
your state Attorney General, local consumer protection agency, and the Better
Business Bureau. They can tell you if any consumer complaints are on file
about the firm you're considering doing business with. Ask your state
Attorney General if the company is required to be licensed to work in your
state and, if so, whether it is.
Some businesses that offer to help you with your debt problems 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 to explain
certain costs or 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's involved,
or help you through what can be a long and complex 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 these advance-fee loan guarantees. They may be illegal. It is
true that many legitimate creditors offer extensions of credit through
telemarketing and require an application or appraisal fee in advance. But
legitimate creditors never guarantee that the consumer will get the loan — or
even represent that a loan is likely. Under the federal Telemarketing Sales
Rule, a seller or tele-marketer that guarantees or
represents a high likelihood of your getting a loan or some other extension
of credit may not ask for or accept payment until you've received the loan.
You should be cautious of claims from so-called credit repair clinics. Many
companies appeal to consumers with poor credit histories, promising to clean
up credit reports for a fee. But you already have the right to have any
inaccurate information in your file corrected. And a credit repair clinic
cannot have accurate information removed from your credit report, despite
their promises. You also should know that federal and some state laws
prohibit these companies from charging you for their services until the
services are fully performed. Only time and a conscientious effort to repay
your debts will improve your credit report.
If you're thinking about getting help to stabilize your financial situation,
do some homework first. Find out what services a business provides and what
it costs, and don't rely on verbal promises. Get everything in writing, and
read your contracts carefully.
Article Provided by:
Federal
Trade Commission
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