(PRWEB) January 7, 2004
Mounting debt-related issues can overwhelm and dominate people?s lives. Causes for seemingly insurmountable personal debt are often unrelated to spending habits: loss of employment; uninsured medical bills; litigation; divorce; and catastrophic loss. The consequences of cascading creditor demands can drastically impact the family environment and are certainly crafted to impart severe stress on the delinquent party. So before you toss bills in a drawer, it may be time to adjust your debt strategies and consider credit counseling. In 2002, more than two million Americans sought assistance from credit-counseling agencies, according to a Georgetown University survey.
When do you need help?
How should you determine whether you need help? Credit counselors say there are several symptoms which indicate that someone needs a ?debt doctor.? They include:
Not being able to make more than the minimum payment on credit cards.
Using credit to pay for items you previously purchased with cash such as food and gas.
Satisfying credit card minimums by charging them to other cards.
Being vulnerable to financial emergencies, such as car repairs, that could be devastating.
Never seeing an improvement in your finances year after year.
Worrying about money.
The experts agree that the determinant is not how much you owe, but how the debt affects you. Your debt load could be $ 1,000, and that could feel pretty severe. Essentially, you should seek help when you start feeling distressed.
Where do you turn?
When you?ve decided to seek help, there are plenty of places to turn to. If you can?t afford hourly fees to hire a certified financial planner, the most highly recommended services are nonprofit debt counseling agencies.
Nonprofits generate most of their money through voluntary contributions from clients, small fees and funding from creditors, which enable these organizations to provide assistance to thousands of people each year at little or no cost to the clients. The nonprofits? relationship with the debt community has an added benefit: They can often negotiate better rates with those same creditors on your behalf. Lenders support the agencies because they are helping them get their money back. Some creditors will reduce or waive finance charges and stop charging late fees to customers who sign up for a debt management program with a nonprofit credit counselor.
Debt management plans are generally for people whose bills can be wiped out in four years or less. The National Foundation for Consumer Credit (NFCC), a nonprofit counseling agency, says its average client is 36 years old, makes $ 32,000 a year and has $ 23,000 in unsecured debt. However, there are people whose situations are so dire that they are turned away from counseling agencies. For instance, if you just got out of college, are unemployed and have $ 85,000 in credit card debt, the NFCC would probably advise you to seek legal services.
That?s where for-profit companies often come in. They negotiate settlements with creditors for people who are on the brink of bankruptcy or have been sued. Their average client is $ 30,000 to $ 40,000 in debt and has been turned down by counseling services because they can?t meet the minimum payment requirements.
For-profit companies work on contingency fees, meaning the client pays only if a settlement can be reached. The advantages: you get out of debt much quicker, usually within a year or two; and you avoid bankruptcy. The disadvantages: you may have to liquidate a valuable asset such as your home or retirement savings; and a quick fix might not change bad habits like a long-term payoff plan would.
Implications for bankruptcy alternatives
Presently, there is legislation going through Congress to revise the bankruptcy code that will make it harder for people to file for Chapter 7 or 13 by requiring them to undergo debt counseling first. Because bankruptcies have risen dramatically, the banking industry, particularly credit card companies, have pushed heavily for this new legislation. President Bush is expected to sign the bill into law if it ever reaches his desk. Here are the highlights:
To encourage debt counseling over filing for bankruptcy, those thinking about filing must obtain a briefing about credit counseling services not more than 180 days before filing.
Debtors who earn more than the median income earned in their state must pass a means test in order to file Chapter 7 bankruptcy. Currently, the national median income for a family of four is $ 60,000. Secured debt and necessities (alimony, child support, living expenses, etc.) are subtracted from the debtor?s monthly income to determine what is left over for repayment of unsecured debt. If it is determined that a debtor can pay the lesser of $ 10,000 over a 60 month period, or 25 percent of his debt (which must be at least $ 6,000), then he must file Chapter 13 bankruptcy. If the debtor does not pass the means test, he can file Chapter 7 just as with the old law and have much of his unsecured debt erased.
If the debtor?s income is greater than the median in his state, then he must submit to a means test to determine if he must file under Chapter 13 or Chapter 7. The means test is done by subtracting mortgage and auto payments; alimony, child support, other secured debt and reasonable living expenses (food, utilities, etc.) from monthly income. Unsecured debt, such as credit card payments, is not subtracted.
The amount that is left over each month after paying debts and living expenses is used to determine if one must file under Chapter 7 or Chapter 13. If he files under Chapter 13, the bankruptcy court will set up a budget for him so that he can repay his debt over a five-year period. If the debtor doesn?t pay according to the plan, the court can dismiss the case and his creditors can once again resume collection efforts.
If a debtor can?t pay according to the plan because of unemployment, a change in income, illness, etc., then he can petition the court for a revised plan or even have his debts discharged completely. If the debtor?s income drops below that used in the means test above, the bankruptcy can be converted from a Chapter 13 to a Chapter 7.
Regardless of whether one files Chapter 7 or Chapter 13, there is a requirement to take a financial management course given by a debt counseling service in order to discharge the bankruptcy.
How do you choose a counselor?
Search carefully before you pick a firm. There are no federal regulations governing credit-counseling agencies, and few states have laws for licensing, bonding or regulating debt-counseling firms. That means that anyone can start a credit counseling or debt consolidation firm.
Another point to remember is that most debt-counseling companies are set up as non-profit corporations. Debt-counseling firms will tell you that their company is not-for-profit because they only want to help consumers. But don?t let that fool you into thinking you are getting an advocate fighting solely for your financial freedom. One reason credit-counseling companies choose this tax status is because it allows them to avoid the expense of posting a bond in a state that would otherwise require them to ensure that consumers funds are secured.
Ask if the organization belongs to any professional groups such as the NFCC or the Association of Independent Consumer Credit Counseling Agencies, both of which establish professional and training standards. Have them explain how they?re audited and if your funds are protected. Ask for references and check for consumer complaints filed with your state?s Attorney General?s office and/or the Better Business Bureau.
Before enrolling, it?s best to find out upfront exactly what services you?ll receive. Credit counseling organizations usually have a variety of programs and resources ? from online chat rooms, self-help publications and community seminars to one-on-one counseling, long-term debt management programs and budgeting advice. The more services they offer you, the better help you?ll get. It?s good to have them put it all in writing and send you the information before you proceed.
Keep in mind that any agency offering you a debt-management plan in less than 20 minutes hasn?t spent enough time looking at your finances. An effective counseling session, whether on the phone or in person, takes a significant amount of time.
Avoid so-called credit repair services that say you can erase negative credit report information or obtain new credit by using a newly obtained federal tax ID number versus your Social Security number. This is simply illegal.
Privacy is usually not an issue, but it?s wise to check that the agency?s policy is not to sell your information to for-profit groups.
How much will you pay?
It is extremely important that you nail down the fees, if any, that the agency charges. The Association of Independent Consumer Credit Counseling Agencies tells members that services must be available to the public regardless of ability to pay.
Generally, there may be a fee to set up a debt-management plan and a monthly fee or ?requested donation? to maintain the plan. The Association of Independent Consumer Credit Counseling Agencies requires its member agencies to limit to $ 75 the fees to set up a debt management plan. It states that the maximum fees, or requested donations, for monthly maintenance of a plan shouldn?t exceed $ 50.
In 2001, the average cost to provide budget-counseling sessions was $ 14. The average enrollment fee for a debt-management plan was $ 19, and the average fee for monthly debt management plan services was $ 12.
Avoid programs that charge 100 percent of the first month?s payment. Some even add on a monthly charge for each account included in the debt-management program. If your monthly payment is $ 350 and you have eight credit-card accounts, this can add up to more than $ 1,000 in the first year.
Some agencies will tell you that their fees are voluntary, but then will pressure you to pay the fees in full. If that happens to you, go somewhere else. Don?t be pressured to pay up. If the agency is vague or reluctant to talk about specific fees, walk away.
How do you develop a debt management plan?
Once you?ve found a service you trust, the next step is to organize all of your bills before talking to a credit counselor. The counselor will figure out what you owe and work with you to determine how much you can pay each month. Then, instead of writing checks to each creditor, you?ll write one to the service, which will then distribute the money. The goal is to develop a plan that allows you to afford the necessities of life and whittle away at the balances you owe at the same time.
Once you?re in a program, the much-dreaded phone calls from creditors should stop. Creditors do have a right to call you and talk to you about your debt but if you arrange acceptable payment programs, they?re usually not going to waste their time.
After you?ve set up a payment schedule, the counselor will talk to creditors and try to get them to reduce your interest rates and waive late fees to shorten your time in debt. The counselor may also coax creditors to ?re-age? your account, which means reporting past due amounts as current. Once they accept your debt-management proposal and receive three months of payments on time, creditors are more willing to accept those terms.
How do you learn how to manage your money?
Once you?re on your way to paying off your old debt, you?ll need to set up a budget. Credit counselors can help with that as well. Most people don?t know how much they spend each day ? you may remember about the big-ticket items, the rent and the utility bills, but you may lose track of how much you spend on extras like restaurants, dry cleaners and video rentals.
Counselors can help you track your spending. They?ll teach you to record what you pay right down to the newspaper and bagel you grab on your way to work. Many counseling services can show you how your spending habits stack up to those of a ?typical? American with your income. They?re trained to walk debtors through every category and come up with an acceptable budget. Then counselors will check in with clients for several months to see how well they?re sticking to their spending plan.
What are the disadvantages of debt counseling?
If you?ve managed to keep your credit report clean as your debts have spiraled, there can be a downside to contacting a credit counselor. Not every creditor looks upon your involvement with one as a good thing. While many creditors think it?s great because it increases their chances of getting paid, others might issue an alert on your credit report. That could affect your chances of getting credit down the road.
Some mortgage lenders say that getting involved in debt management programs can harm prospective homebuyers? credit reports. This happens when the individual signs up and makes a monthly payment to the credit counselor, who then sends the payment a month later, or worse, keeps it as the initial ?voluntary contribution.? That causes the creditors to report a ?late-payment status? on each account involved ? something mortgage lenders frown on. Also, consumers need to know that the words ?Managed by Credit Counseling Company? will appear under each account on their credit report enrolled in a debt management program.
Regardless of the method you choose to beat the bills, there is no guarantee that your credit rating can be saved. But advisers agree that a person in debt should not focus on that. Good credit is what gets a lot of people in trouble in the first place, and oftentimes they?ll have to sacrifice that in order to get the job done.
What happens next?
Fear sometimes propels people to fall for fix-it scams such as credit repair, title or payday loans, and advance-fee loans. The only sure and solid way to repair a credit history is over time, by paying bills when they are due and making sure your credit report contains correct information. It?s best to seek help sooner rather than later. There is no need to feel embarrassed or ashamed. Everybody has credit card debt, but you can take a brave step forward to learn how you can manage it better for the rest of your life.
About Credit.Com
Credit.Com, headquartered in San Francisco, was co-founded in 1995 by Adam Levin, a former director of the New Jersey Division of Consumer Affairs, to give consumers access to accurate, trustworthy credit resources. The Credit.Com network provides consumers with vital products and services to help them build, protect, and maintain healthy credit. Credit.Com offers a full suite of loan, mortgage, credit, debt, tax, and other financial resources. Credit.Com can be reached at toll-free at 877-273-4273 or via its website at http://www.credit.com. (http://www.credit.com)
?2003 Credit.Com, Inc. All rights reserved
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