T u r n i n g p o i n T s n
Avoiding Bankruptcy
Turning Points 2 Avoiding Bankruptcy
Being deep in debt can feel a lot like
drowning. Just when you think you finally
can keep your head above water, something
happens to pull you back under. All it takes
for hope to disappear is another unexpected
car repair, a new medical bill, or an increase
in gas prices. At such a time, it may be
tempting to throw in the towel—to ignore
the situation and hope it resolves itself, or to
file bankruptcy.
While the mantra “I’ll think about that
tomorrow” helped “Gone with the Wind’s”
Scarlett O’Hara make it through another
day, avoidance and procrastination are
never wise strategies when it comes to
dealing with debt. Neither is taking action—
particularly as drastic an action as filing for
bankruptcy—without considering all the
consequences.
The Federal Trade Commission (FTC),
the nation’s consumer protection
agency, Washington, D.C., describes the
repercussions of bankruptcy as “long-lasting
and far-reaching.” Bankruptcy can make
it difficult to obtain credit at reasonable
rates, rent a house, get insurance, or
qualify for a particular job or promotion.
And since many filers find themselves still
dealing with the fallout many years down
the road—bankruptcy stays on your credit
report for 10 years—it can hardly be touted
as a “fresh start.” Bankruptcy should be
considered only after all other options have
been exhausted.
And you do have options. There are many
steps toward recovery you can take on your
own, and many others you can take with the
help of your creditor, a counselor, or a credit
union adviser. Exactly which routes will be
available to you will depend on factors such
as your financial situation, your creditors’
policies, and your goals. In any case, the
sooner you ask for help with your debt, the
more options you’ll have.
Questions:n How can my credit union help me avoid bankruptcy?
n What options besides bankruptcy do I have if I’m having trouble paying my bills?
n I have enough income to make partial bill payments. Should I file for Chapter 13 bankruptcy, or try to repay my debts on my own?
n How can I avoid getting to the point where bankruptcy seems like my only option?
n I’m having trouble paying my bills. Should I file for bankruptcy?
Understand All Your Options for Dealing With Debt
by Monica SteiniSch
MEDICAL BILLS CUT DEEP As reported in the New York Times in June 2009, high medical bills cause almost two-thirds of bankruptcies, according to a study published by The American Journal of Medicine. Medical problems contributed to 62.1% of all bankruptcies in 2007. That number probably has increased during the current recession, which began in December 2007. The report also noted that, between 2001 and 2007, the percentage of all bankruptcies attributable to medical problems surged by 50%. Among families bankrupted by medical problems, those with private insurance had average medical bills of $17,749, compared with average costs of $26,971 for those without insurance. “The U.S. health care financing system is broken, and not only for the poor and uninsured,” wrote the study’s authors. “Middle-class families frequently collapse under the strain of a health-care system that treats physical wounds, but often inflicts fiscal ones.”
Turning Points 3 Avoiding Bankruptcy
How can my credit union help me avoid bankruptcy?The people at your credit union strive to
maintain a lifelong relationship with you—
through all of life’s financial ups and downs.
When you belong to a credit union you’re
more than just a customer, you’re a member.
Other financial institutions expect customers
to just come and go.
Lately, the U.S. economy has given us
more “downs” than “ups.” Foreclosures,
layoffs, and a stock market free fall seem
to have left no family untouched. Times
are tough. But things will get better. And
when they do, you’ll be relieved to have
avoided bankruptcy and its long-lasting
consequences. Here are some ways the
people at your credit union can help you do
that.
If you’re having trouble paying your bills,
and your debts include credit union
accounts, contact a credit union represen-
tative to discuss the possibility of modifying
your loans or credit card terms to make
payments more affordable. Modification
could mean, for example, lowering the
interest rate or extending the loan term.
Other concessions that could help might
include waived fees, a “payment holiday,” or
“re-aging” the account to bring you current
after you’ve missed a payment.
If you have non-credit union debt
you’ve fallen behind on, a credit union
representative can refer you to a credit
union counselor or to a reputable nonprofit
credit counseling agency for help. A
credit counselor can look at your financial
picture—income, expenses, and debt—and
present possible actions, one of which might
be participation in a debt-management plan
(DMP).
In a DMP, you repay all or some of your
debts by sending a single payment to the
credit counseling agency, which distributes
it among your creditors. Many creditors
who participate agree to lower payments,
reduce interest rates, waive fees, and re-age
accounts. Counseling is free or low cost.
There is a DMP fee of $20 to $50 per month,
though a reputable agency shouldn’t deny
you services if you can’t afford to pay. (See
How to Find a Reputable Credit Counseling
Agency in this publication.)
If you need to borrow to make ends meet
until things improve, a credit union loan
officer can help with credit cards, mortgages,
home equity loans and lines of credit, and
other products generally at lower interest
rates and better repayment terms than you
can find elsewhere. This makes credit more
affordable for you. It also protects you from
lenders who prey on borrowers who believe
they have no other options.
As times get better, your credit union can
help you establish or strengthen a direct
deposit savings plan to help you build an
adequate emergency fund. Being prepared
for the worst is the best way to avoid money
troubles and bankruptcy. “Emergency
savings is hugely important, especially
in uncertain times,” says Todd Mark, vice
president of education for Consumer Credit
Counseling Service of Greater Dallas. “It’s
the life raft that keeps you afloat.”
Mike Schenk, an economist at the Credit
Union National Association (CUNA), says it’s
never too late to ask for help at your credit
union, though the earlier you do it, the more
options you’ll have. “As a member-owned
not-for-profit institution, your credit union
really is looking out for your best interest.”
What options besides bankruptcy do I have if I’m having trouble paying my bills?There are many options besides bankruptcy
for dealing with debt, particularly if you’re
willing and able to make some changes.
“Your money troubles may be insurmount-
able under current circumstances, but there
are things you can do that make it more
feasible to repay your debt,” says Mark. “No
matter how desperate your situation may
seem, taking positive steps now has value.”
To determine what changes you’ll need to
make, you first have to find out just how
much you’re running short each month.
There are many tools available on the
Internet for calculating your income, living
expenses, and debt payments; look for the
Budget Blueprint calculator on this Web site.
Enter your numbers, print the results, and
then do one or more of the following to close
the gap.
n Increase income. Pick up overtime hours
if they’re available, find an additional job,
or start a small side business offering a
service you’re qualified to provide, such as
babysitting, gardening, senior assistance,
music lessons, sewing, or repairs. If you
have an extra room or an unneeded garage,
Turning Points 4 Avoiding Bankruptcy
consider renting it out. Think about selling
some of your assets, such as an RV, a second
car, jewelry, or collectibles—you could lose
them if you had to file bankruptcy. If you
normally get a tax refund when you file,
consider changing your withholding to have
less money taken out of each paycheck.
(The IRS provides tips and a worksheet to
calculate the correct amount.)
What not to do: Wait until you need the
money immediately, making a pawn shop
your only option. A pawnbroker will give you
a fraction of the value of your possessions—
much, much less than you would get if you
had time to sell them on your own terms.
n Reduce expenses. Where you can make
cuts and how much you can save will depend
on your spending habits. Many consumers
find there’s “wiggle room” in the categories
of transportation, food away from home, and
entertainment. But don’t limit your efforts to
these areas. Scrutinize every expense. You’ll
find many ways to save money throughout
this credit union Web site and in these lists:
“66 Ways to Save Money,” available from
the Federal Citizen Information Center
“Practical Ways to Save Money,” in One Credit Union's fnancial eduation library.
Kiplinger’s “Save Money on Practically
Everything”
AARP’s “25 Ways to Cut Costs on Just About
Everything”
What not to do: Cut costs by not paying
insurance premiums. Rather than let
your policies lapse, talk to your
insurance agent about a
payment plan, consider
reducing coverage if you’re
overinsured, or shop
around for better rates for
comparable coverage. But
don’t choose an insurance
policy based on price alone.
Check the issuing company’s
financial strength and stability online
at Moody’s, Standard and Poor’s, A.M.
Best, or J.D. Power. Research the company’s
complaint record with the National
Association of Insurance Commissioners and
your state insurance department.
n Tap your home equity. If your home is
worth more than you owe on it, and if your
credit score is still in decent shape, consider
refinancing your mortgage or opening a
home equity line of credit. Talk to your credit
union lender about home loans that fit your
needs.
What not to do: Turn unsecured debt—such
as credit card debt—into debt secured by
your home unless you’re absolutely sure
you can make the payments for the long
term. (Otherwise, if you get behind on your
mortgage payments, you could put your
home at risk of foreclosure.) Keep in
mind that by doing this, you will
pay more over the long haul
because you’re taking short-
term debt and financing it
for as long as 30 years.
n Consider borrowing from
a friend or family member.
To protect the relationship,
pay a competitive interest rate
and make consistent payments. (See
Borrowing from family and friends)
What not to do: Take out a payday loan. At
interest rates of 300% per year or more, this
short-term solution almost always leads to a
long-term debt disaster. Check the Consumer
Federation of America’s (CFA) Web site to
see what a payday loan could cost you.
Ask at your credit union about payday loan
alternatives offered there.
n Work with your creditors. Contact your
creditors when you realize you won’t be
able to make your full payment on time.
Your lender could offer remedies such as
reducing the monthly payment, lowering
the interest rate, waiving late and overlimit
fees, or tacking missed payments on to the
end of the loan. What any creditor is willing
and able to do depends on many factors,
including that creditor’s policies, the reason
for your delinquency, and your payment
history. See Tips for Working with Your
Creditors in this publication.
What not to do: Tap your retirement
accounts. If you’re not of retirement age,
you’ll pay a 10% early withdrawal penalty
plus income taxes on the amount you
withdraw. And, the money won’t be there
when you need it.
Pawn it or sell it?When you bring an item to the pawnshop, the pawnbroker holds it as collateral and lends you an amount that usually represents a fraction of the item’s actual value. To get your item back, you repay the loan plus fees, usually within 30 days. If you don’t repay, the pawnbroker keeps the item.
While using a pawnbroker can seem like a quick way to get cash, about one-third of pawned items are never redeemed. As a result, the owner gives up the item for much less than it’s worth. Even when items are redeemed, the cost of the loan usually is the equivalent of paying an interest rate of more than 100%.
If you’re willing to give up the item, it’s best to sell it outright to avoid fees and get its full value. If you’re not willing to give it up, look for other loan sources, such as a short-term personal loan from your credit union.
Turning Points 5 Avoiding Bankruptcy
n Seek credit counseling. A professional
credit counselor can review your
situation and offer possible solutions.
If you participate in a credit counseling-
administered debt management plan
(DMP), the agency will send a proposal to
your creditors requesting that they reduce
payments, reduce or waive interest charges
and fees, and bring your account current.
Not all creditors offer all concessions. You
send one payment to the agency, which
disburses it to your creditors on the plan.
You most likely will
pay a monthly DMP
fee of $20 to $50. The
counseling typically
is free or low cost.
See How to Find a
Reputable Credit
Counseling Agency in
this publication.
What not to do:
Pay high fees for
debt negotiation
(also known as
debt settlement)
services. This is very
different from credit
counseling. Besides
being expensive, debt
negotiation could
create a tax bill for
you for the forgiven portion of your debt—
because it will be considered income—and
your credit score could suffer.
n Seek housing counseling. If you’re having
trouble making your mortgage payments,
talk to a housing counselor. He or she will
be able to narrow your options based on
your equity, financial situation, and goals.
Find a housing counseling agency through
the U.S. Department of Housing and Urban
Development (HUD) (800-569-4287) or the
Homeowner’s HOPE™ Hotline (888-995-
HOPE). According to Mark, lenders are much
more committed now than they may have
Borrowing from family and friendsIdeally, a loan between friends or family would be a win-win situation: You, as the borrower, would get credit that might not have been available from a traditional source. The lender would earn a competitive interest rate on your money while also helping someone out.
Here are some of the terms and conditions you should agree on before money changes hands:
n Loan amount.
n Interest rate. You might think the interest rate you charge for the use of your money is entirely up to you. In fact, the Internal Revenue Service (IRS) has some say in the matter. Check the IRS Web site for information about monetary “gifts” and the Applicable Federal Rate.
n Payment schedule. Are payments to be made monthly? By what date each month? When is the loan to be repaid in full?
n Payment amount. Use an online calculator to calculate the amount of each payment, or the accrued interest at the end of the term if the loan amount will be paid in one lump sum.
n Payment method. By check? Direct deposit or automated transfer? If so, to what account?
n Late payment penalties. Will you charge a late payment fee or take a specific action if a payment isn’t made on time?
n Security interest. Will the loan be secured by any personal property?
n Recourse for default. Would you take legal measures, such as filing a lawsuit? Or repossessing a car used as collateral? Or would you simply never lend the borrower money in the future? Spell out exactly what recourse you would take for nonpayment.
Source: Loans Among Friends and Family: Win-Win, or Sure Loss? Home & Family Finance Resource Center; search for the complete article on this Web site.
(continued on p. 8)
Turning Points 6 Avoiding Bankruptcy
Tips for Working with Your CreditorsHow do some borrowers avoid severe consequences—a lawsuit, foreclosure, or repossession—despite missing one or more credit payments? The key is in how they approach the situation. Here are some tips that will greatly increase your chances of successfully working with your creditors.
n Be proactive. Call your creditor as soon as you determine that missing a payment is unavoidable. By contacting the creditor first, rather than forcing the creditor to track you down, you convey that you are concerned, committed, and responsible.
Some experts recommend making a “good faith” token payment. Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas, suggests first asking the creditor if it will help. He says that if money is very tight, and a token payment won’t help you avoid a late fee or a “ding” to your credit report, you may want to keep the extra dollars to pay for necessities. Mark also says that communicating with your creditor and making a real effort to get back
on track could, at the very least, encourage your creditor to hold off on reporting you delinquent to the credit reporting agencies.
n Be polite. It’s easy to get anxious or frustrated when dealing with debt issues, but courtesy and respect will get you further. “Remember, [your creditor is] not the enemy,” says Mark. “Treat them that way, and you give them less incentive to work with you.”
n Explain the situation. Creditors want to know that there is a good reason—something beyond your control, such as a job loss—for the delinquency. Let the creditor know how your financial situation has changed and why you can’t make a full, or any, payment. Be prepared to provide specifics about your income, expenses, and other debts.
n Give a prognosis. What changes do you see in the near future that would enable you to get back on track? Starting a new job soon, making your last car payment, moving to lower-cost housing—these all are things that could make it easier to pay your bills, so let your
creditor know. Provide concrete dates whenever possible.
n Propose a solution. Tell your creditor exactly what would help you most: a lower interest rate,
a reduced payment for six months, a larger credit
line, or any other concession. Do this only after doing the math and figuring out exactly what you could afford to
pay and when. Never agree to a payment
amount or schedule unless you’re absolutely sure you can afford it and will be able to keep the commitment.
n Keep a log. Keep track of all communications, including the date, who contacted whom and how (letter, e-mail, or phone call), the name of the creditor representative, the key points discussed and any agreement reached, and follow-up needed.
n Follow through. Notify the creditor of any snag that will make it impossible to fulfill your new agreement.
Creditors always maintain the right to report you delinquent, sell your account to a collection agency, repossess or foreclose on your property, or sue you. Your sincere effort at communicating with the creditor and repaying your debt, however, may buy you enough time to recover and avoid serious repercussions.
Source: Steer Clear of Credit Counseling Bad Guys; Home & Family Finance Resource Center
MAxED oUT? SEEk hELP fRoM:n Your credit union—Ask if someone there provides one-on-one credit counseling to help get your finances in order.
n The National Foundation for Credit Counseling (NFCC)—The NFCC, Silver Spring, Md., has nonprofit Consumer Credit Counseling Service (CCCS) affiliates around the country ready to help you get back on track from financial difficulty. To locate the nearest CCCS office, call 800-388-2227 (en Español, 800-682-9832), or visit nfcc.org.
Turning Points 7 Avoiding Bankruptcy
How to find a reputable credit counseling agency What are your options when the gap between your income and your bill payments has become so big you’ve given up hope of them ever meeting again? One of them is to consult a credit counselor.
While finding a credit-counseling agency may be easy, finding a reputable one that has your best interest at heart isn’t always so. Start by asking at your credit union for a referral. You also can search for an agency at nfcc.org (National Foundation for Credit Counseling) or aiccca.org (Association of Independent Consumer Credit Counseling Agencies).
When considering agencies, here are some ways to separate the good from the bad.
Is the organization an accredited nonprofit? Think twice about working with an agency that isn’t accredited by an organization such as the Council on Accreditation (COA).
Does the agency provide substantive counseling and education services? The counseling session, whether face to face or by phone, should last 30 minutes to 90 minutes and cover your income, expenses, debt, the reason for your current financial issues, and your goals. You should receive a customized action plan, and your options should be explained clearly. A debt management plan (DMP), where
the agency negotiates interest and payment concessions with your creditors and then disburses your monthly payment among those participating in the plan, should be established only if it is in your interest, and it should include all your unsecured creditors,
even if they do not make a “fair share” contribution to the agency. Money management classes and educational materials should be available.
What are the fees? There are excellent agencies that provide counseling free, do not charge more than $50 to set up a DMP, and limit monthly fees to $50 or the amount allowable by state law. Never work with an agency that keeps your entire first month’s consolidated DMP payment.
“A company that asks you to pay a lot of money in exchange for getting you out of debt is probably helping only its own bottom line, not yours,” points out Alice Saker Hrdy,
assistant director of the Federal Trade Commission’s (FTC) division of financial practices.
Is there full disclosure? The agency should provide a written agreement that clearly states fees, main source of funding (typically creditors), creditor concessions, amount to be disbursed, how long the DMP will last (not be more than 48 months), and the possible impact of a DMP on credit reports.
What kind of customer service does the agency provide? Live assistance should be available during hours of operation, including some evening and weekend hours, and the wait for an appointment should not exceed two days. As tough times continue, and agencies are busier than normal, you may have to book an appointment a week out for some agencies. You should receive monthly DMP account statements, and payments should arrive to your creditors by the due date.
What is the agency’s complaint record? Check the agency’s record of complaints with the U.S. Council of Better Business Bureaus and the state attorney general. Ask about the agency’s internal complaint resolution process.
“Any agency you choose should be consumer-focused, low-cost, and aspire to high standards [of service],” advises Jessica Cecere, the president of Consumer Credit Counseling Service of Palm Beach County/Treasure Coast of Florida.
Source: Adapted from Steer Clear of Credit Counseling Bad Guys; Home & Family Finance Resource Center
Turning Points 8 Avoiding Bankruptcy
seemed in recent years to helping you stay
in your home.
What not to do: Fall prey to scammers who
promise to stave off foreclosure and lower
your mortgage payments in exchange for a
fee that typically runs into the thousands of
dollars. You can achieve the same results—
free—on your own or with the help of a
housing counselor. (The FTC offers information
about how to avoid foreclosure rescue scams.)
n Do nothing. For some people with certain
types of debts—unsecured credit debt and
medical bills, for example—and limited
income and assets, bankruptcy is overkill:
The negative repercussions far outweigh
the advantages. If this is your situation,
your creditor will have few or no options for
collecting on your debt unless and until your
circumstances change for the better. At that
time, you may be able to afford to repay the
debt, and you will have avoided the cost and
repercussions of bankruptcy, though your
credit rating will have been damaged by the
unpaid debt. See The High Cost of Filing for
Bankruptcy in this publication.
What not to do: Assume your creditors have
no recourse. Being wrong could result in
your being sued and your wages or bank
accounts being garnished. Talk to a credit
counselor or other professional to find out
how your creditors could and could not
collect from you.
I have enough income to make partial bill payments. Should I file for Chapter 13 bankruptcy or try to repay my debts on my own?There are some significant differences
between paying your debts in a Chapter 13
bankruptcy and paying them on your own. To
make the best choice, you need to consider
the advantages and disadvantages of each
option.
Budget for Infrequent Expenses
Use a grid with infrequent expenses listed on the left side and columns for annual and monthly budget goal amounts across the top to help develop your spending plan.
Estimated annual cost* Monthly savings goal
Car repair $1,000 $84
New tires for car 360 30
Car replacement unknown 200
Dental care 360 30
Vision care 300 25
Television 480 40
Other electronics $1,200 $100
Total $ 3,700 $509
This sample grid is for a 24-year-old woman named Amy living on her own in a rented apartment. Amy owns a five-year-old car with 103,000 miles. She believes she can use it for two more years, as long as she buys new tires next year. In the meantime, she’s saving for her next car.
Save what you can until you build a stronger backup fund to meet these and other now-and-then expenses. One effective strategy: As soon as you pay off a loan, divert that monthly payment to your savings or money market account.
*All amounts are estimates only; check actual costs in your area when setting your budget
The high cost of filing for bankruptcyIn a June 2008 report, the U.S. Government Accountability Office (GAO) estimated the total average cost of filing for Chapter 7 to be $1,477 ($1,078 for attorney’s fees, $299 for court fees, and $100 for mandatory credit counseling and debtor education fees). Many estimates put attorney fees at closer to $1,500 to $2,000 to file for Chapter 7, and more for Chapter 13.
Turning Points 9 Avoiding Bankruptcy
Chapter 13 bankruptcy (court-administered
payment plan)—This type of bankruptcy
offers certain legal protections for debtors.
One of the most important of these is the
ability to shelter your home from foreclosure
and force the lender to accept a repayment
plan to make up delinquent mortgage
payments over three to five years. If a
Chapter 13 bankruptcy is, in fact, the only
way to protect your home, it may be the best
option to pursue.
Before making that determination, contact
your lender or a HUD-approved housing
counseling agency to explore ways to keep
your home without filing for bankruptcy.
(Find one through HUD, 800-569-4287,
or the Homeowner’s HOPE™ Hotline,
888-995-HOPE). Today, lenders are more
willing than ever to make loan modifications
that could help you get current and make
future mortgage payments more affordable.
These modifications could include reducing
the interest rate, adding missed payments
to the end of the loan, extending the loan
term, and reducing the monthly payment
so it doesn’t exceed a certain percentage of
income.
Independent or credit counseling-
administered payment plan—If you do not
need the protections provided by Chapter 13,
paying your debts on your own or through
a credit counseling agency-administered
DMP allows you to avoid the stigma,
consequences, and cost of bankruptcy. A
credit union representative can help you
evaluate your options, and refer you to a
credit counseling agency it already has a
relationship with if you decide that is the
way to go. See How to Find a Reputable
Credit Counseling Agency in this publication.
Some consumers fear that participating in a
DMP will lower their credit score. According
to Fair Isaac Corporation, creator of the
widely used FICO® score, credit counseling
and DMP participation themselves should
not affect your credit standing. However,
the creditors you pay through the plan
could report your account as not being
paid as promised if they have reduced your
payments or interest, or if your payments are
arriving after the due date. Credit counselors
point out that these “dings” to your credit
score are less damaging than a bankruptcy
or a string of missed payments.
It’s always a good idea to know where
you stand. Order your credit report before
beginning a DMP or pursuing any other
resolution. You’ll see your total debt, a listing
of creditors, and how your account is being
reported (“satisfied,” “paid as agreed,” or
“charge-off,” for example). See Obtaining
Your Credit Report in this publication.
How can I avoid getting to the point where bankruptcy seems like my only option?Generally speaking, bankruptcy, foreclosure,
repossession, and wage garnishment come
only after at least a few missed payments
and many unsuccessful attempts by the
creditor to contact you and discuss a
resolution. So, you’ll have more options than
just bankruptcy if, at the very first sign of
problems, you take action.
n Communicate with your creditor. Contact
your creditor, and respond to your creditor’s
attempts to contact you. Being unresponsive
suggests you don’t intend to pay your debt
and eliminates any motivation the creditor has
to postpone legal action. See Tips for Working
with Your Creditors in this publication.
Obtaining your credit reportBefore you make any major decisions about how to handle your debt, order a copy of your credit report. The report will tell you whom you owe, how much you owe, the status of your account, and whom to contact regarding the debt. (A creditor may have sold or assigned the debt to a collection agency.) Only creditors who report to the credit reporting agencies will be listed.
You are entitled to a free copy of your credit report from each of the three major credit-reporting agencies—Equifax, Experian, and TransUnion—every 12 months. (Order one from each credit bureau every four months both to monitor your credit standing and to be on the lookout for identity theft.) Order your free reports online, at AnnualCreditReport.com, or by phone, at 877-322-8228. Your free report will not include your credit score.
If you notice any inaccuracies (debts that aren’t yours, debts that have been paid off, or old debts that should have aged off the report), follow the instructions that come with the report to file a dispute. The credit reporting agency must verify the information with the creditor that provided it. If it can’t verify the item, it must remove it.
Turning Points 10 Avoiding Bankruptcy
n Talk to a professional credit counselor.
He or she will analyze your financial
situation, set priorities with your expenses,
present your options, and offer guidance
based on your goals. The sooner you make
the appointment, the more options will
be available to you. See How to Find a
Reputable Credit Counseling Agency in this
publication.
n Make damage control your goal. Make
a tough decision sooner rather than later
if it will enable you to avoid the worst-case
scenario. For example, if you know you
will not be able to keep up with your car
payments for the long term, sell the car,
refinance the loan, or give the car back to
the lender rather than wait for the inevitable
repossession. Repossession doesn’t just
mean you lose the vehicle. The lender could
get a deficiency judgment against you,
meaning you would owe the difference
between the outstanding loan balance, plus
repossession fees, and what the lender
was able to get for the vehicle. If the lender
forgives any of your debt, you could end
up with a tax bill for the “income.” And
your credit score will be damaged by the
repossession.
When it comes to
financial challenges,
it’s better to be
proactive than
reactive. That means
not only addressing
financial problems
head-on when they
arise, but also making
choices that are
less likely to create
financial problems in
the first place.
n Live beneath your
means. Don’t buy a
car you can’t easily
afford. Save rather
than spend raises,
bonuses, gifts, and tax refunds. And save up
for special treats such as vacations rather
than finance them on credit.
n Use credit responsibly. Make it a goal
to reduce or eliminate short-term debt
whenever you’re able.
n Anticipate expenses. Save monthly for
expected but infrequent large bills, such
as insurance premiums, the replacement
of an old refrigerator, and car tune-ups
and repairs. Talk to the professionals at
your credit union about setting up a direct
deposit savings account for these expenses.
n Build an adequate emergency fund.
Three to six months of expenses is a savings
guideline. If this is too big a goal to start
with, begin by saving one month’s living
expenses, then work up to the equivalent of
three to six months worth of ongoing costs.
If your household has only one breadwinner,
you might want to set aside as many as eight
months’ expenses. Only tap this fund in
times of dire need.
n have a plan for the worst-case scenario.
Know what you would do if you lost your job
next week.
n Ask for help. Your credit union offers
financial planning services that will help you
prepare for the future, or can refer you to
those resources.
I’m having trouble paying my bills. Should I file for bankruptcy?Only as your very last resort. Bankruptcy—a
legal process that results in either the
discharge of debts (Chapter 7) or the
repayment of debts under a court-approved
payment plan (Chapter 13)—is an option
for some consumers, and not for others.
Whether filing for either type of bankruptcy
is an option for you depends on various
factors, both legal and personal.
first, federal law restricts who can file
The higher your FICO® credit score, the lower your payments
Interest rates accurate as of Aug. 11, 2009:
n 30-year fixed-rate mortgage
FICO® score APR Monthly payment
760-850 5.109% $1,631
700-759 5.331% $1,672
680-699 5.508% $1,705
660-679 5.722% $1,745
640-659 6.152% $1,828
620-639 6.698% $1,935
Source: myFico.com
Turning Points 11 Avoiding Bankruptcy
for bankruptcy. To file for Chapter 7, your
income must be below your state’s median
income for a family of the same size. If
it’s not, you must take a “means” test,
which determines if you have the financial
resources to repay at least something
toward your debts. If you can repay at least
part of your debt, you only will be allowed to
file for Chapter 13, not Chapter 7. There are
other legal requirements as well.
Second, even if bankruptcy is an option for
you legally, it may not be something you’re
willing to consider for personal reasons.
Dave Ramsey, radio and television show host
and author of “The Total Money Makeover:
A Proven Plan for Financial Fitness,” calls
bankruptcy one of the “top five life-altering
negative events that we can go through.”
If you can’t reconcile bankruptcy with
your values, or if bankruptcy could make
it difficult or impossible to achieve your
goals—such as getting a particular job or
promotion, or obtaining credit to start a
business—or if your filing would leave a
co-signer “holding the bag” for one of your
debts, you may not see bankruptcy as a
choice worth contemplating.
Assuming you’re able to file for bankruptcy
under the law—in other words, you meet all
legal requirements—you must ask yourself
two questions:
1. Is filing for bankruptcy the best way to
deal with my money troubles? Make any
decision to file for bankruptcy with a clear
understanding of what it can and can’t do
for you.
For example, many debts—including spousal
and child support, most tax debts, most
student loans, secured debts, restitution,
and criminal fines—are not dischargeable in
a Chapter 7 bankruptcy. For consumers with
these types of debt, bankruptcy offers little
relief but carries a large, long-term cost.
If you have specific objectives, such as
keeping collectors from harassing you or
protecting your home from foreclosure,
there may be ways other than bankruptcy
to achieve them. For example, federal and
state laws prohibit creditors from harassing
borrowers. See What Debt Collectors
Dealing with the stress of debtThe stress that comes with debt can have an impact on your closest relationships, your performance at work, and your outlook on life. Experts say there also is research to support that the stress debt causes can, over the long-term, lead to physiological health problems as well. Successfully managing the side effects of debt offers big benefits for both your mind and your body.
One of the most important steps in any recovery process is talking about how you feel. Yet, experts say, it’s common to hear consumers overwhelmed by debt say they don’t feel like they can discuss their situation with friends or family, or that they don’t want to talk to anyone face to face. Thanks to the Internet, a support group that fits your needs is just a few keystrokes away.
There also are many blogs (Web logs) focused on personal finance and debt. Some bloggers welcome comments from visitors, creating an informal support group. Do an Internet search for “debt blog” and “personal finance blog.” When you see the long list of results, you’ll know you’re not alone.
Keep in mind, these sites feature nonprofessionals who are already
in financial trouble themselves; they may help you feel “we’re in the same boat” but may not be your best sources for sound advice. If your employer offers an employee assistance program (EAP), call its 800 number to find reliable resources you can use anonymously.
Another key step in the recovery process is taking action. Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas, says people dealing with debt can’t worry about the past, only about their actions in the weeks and months ahead. Making an appointment for credit or financial counseling is an important first step toward empowerment and self-reliance.
For financial planning assistance or a referral to a credit counselor, contact your credit union. You also can search for a credit counseling agency at nfcc.org (National Foundation for Credit Counseling) or aiccca.org (Association of Independent Consumer Credit Counseling Agencies).
For mental health counseling, look for a licensed therapist that has experience with working through money issues. Again, if your employer offers an EAP, counseling may be available free.
Turning Points 12 Avoiding Bankruptcy
Can and Can’t Do in this publication. And
you may be able to avoid foreclosure by
contacting your lender and asking for a
loan modification that would make your
payments more affordable, or a repayment
plan to make up past-due amounts.
2. Are the costs and
consequences of bankruptcy
worth the benefits it might
offer? The dollar cost of an
attorney-assisted bankruptcy
can be quite high—as much
as a few thousand dollars.
See The High Cost of Filing for
Bankruptcy in this publication.
While it’s possible to file for
bankruptcy without an attorney,
the consensus is that the
process is so complex as to make
legal assistance necessary.
In a Chapter 7 bankruptcy, also referred to
as liquidation, you must forfeit any assets
that do not qualify as exempt under state
guidelines. Forfeited assets are sold—
liquidated—to pay your creditors.
Bankruptcy stays on your credit report for
10 years, meaning you could have difficulty
obtaining credit, renting a home, getting
insurance, or qualifying for a particular job
or promotion long after your bankruptcy
case is closed.
Whether or not you should file for
bankruptcy is a question only you
can answer. As you seek advice
from various sources, you may
find that it can be difficult to find
truly unbiased input. Your best
course of action is to gather all
the information you can and then
make a decision about whether or
not to file for bankruptcy based
on the facts you’ve gathered, your
alternatives, your personal and
financial goals, and your values.
U.S. Department of Housing and Urban Development
What debt collectors can and can’t doYou don’t have to file for bankruptcy to get peace from debt collectors. The Fair Debt Collection Practices Act (FDCPA) sets guidelines for what debt collectors can and can’t do. In a nutshell, third-party collectors (collection agencies, lawyers who routinely collect debts, and companies that buy delinquent debts and then try to collect them) can’t use abusive, unfair, or deceptive practices to collect from you.
Specifically, collectors cannot:
n Contact you before 8 a.m. or after 9 p.m., unless you give permission.
n Contact you at work if you tell them you’re not allowed to receive calls.
n Contact you directly if you’ve hired an attorney and have notified the collector.
n Contact anyone other than you, your spouse, or your attorney to discuss your debt, except to find out your address, home phone number, and employer.
n Use obscene or profane language.
n Make false statements, such as claiming to be an attorney or government employee.
n Threaten to take your assets or property unless they are legally entitled to do so.
n Threaten legal action unless they intend to follow through.
n Continue to contact you if you dispute the debt in writing (unless the collector provides proof you really do owe the debt).
It makes sense to talk to a collector at least once to get key information such as the name of the creditor, the name and contact information of the collector, the amount due, and so on. If you don’t want the collector to contact you after that, you can send a letter by certified mail, return receipt requested, telling the collector not to contact you again. From that point, the collector can contact you only to confirm that there will be no further contact or to let you know that a specific action, such as filing a lawsuit, will be taken.
For more information about debt collection and related topics, visit the Federal Trade Commission (FTC) online. To report a violation of the FDCPA, contact your state attorney general’s office and the FTC.
Turning Points 13 Avoiding Bankruptcy
Useful resources
(HUD) Guide to Avoiding Foreclosure
“Mortgage Payments Sending You Reeling? Here’s What to Do,” FTC
“Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom” (11th edition), by Robin Leonard and John C. Lamb, Nolo, 2007
“Guide to Surviving Debt,” by Deanne Loonin, National Consumer Law Center, 2008
“Debt Collection FAQs: A Guide for Consumers,” FTC
“Before You File for Personal Bankruptcy: Information about Credit Counseling and Debtor Education,” FTC
“How to Get Out of Debt, Stay Out of Debt and Live Prosperously,” by Jerrold Mundis, Bantam, 2003
“Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial
Independence,” by Vicki Robin, Joe Dominguez, and Monique Tilford, Penguin, 2008
IRS Withholding Calculator, Internal Revenue Service
“Improving Your FICO® Credit Score,” Experian