Financial counseling

If your employer offers financial counseling as part of your employee benefits package, this is a good place to start looking for help and information. This service is often offered as part of an employer’s work-life or employee assistance program (EAP). Check with your Human Resources department to see if financial counseling is available to you.

Non-profit credit counseling services are available in most communities. Check your local Yellow Pages telephone directory under “Credit Counseling Services.” Look only for non-profit services. Credit counseling is also available online through organizations such as Myvesta and Genus.

Support groups

Debtors Anonymous
General Service Office
P.O. Box 920888
Needham, MA 02492-0009
781-453-2743
www.debtorsanonymous.org

For a meeting list or help in forming a chapter in your area, send a stamped, self-addressed envelope. See page 37 for a description of this organization.

Publications and written information

Federal Trade Commission
Bureau of Consumer Protection
Office of Consumer and Business Education
877-FTC-HELP
www.ftc.gov

Offers helpful articles on managing money and dealing with debt problems and information on avoiding frauds and illegal credit help services.

If you stick with your spending plan and keep applying the money you save to reducing your debt, there will come a time when you have no debt. The emotional burden that’s been weighing you down will be lifted. When you have no debt or low levels of debt, you can really start making your money work for you instead of against you. Instead of working to reduce your debt, you’ll be working to build your net worth.

Some of these steps are for the future, but some can be part of your money plan even if you’re just starting to work on your debt.

Start a savings account

Building a savings account for emergencies is the first place to start. If you look back at the commitment you made on page 14, you’ll see that only half of the money you found in your spending plan is going toward bigger payments on your debt. The other half goes to build an emergency savings reserve. Set up an arrangement with your bank to have this amount deducted from your paycheck and added to a savings account. It’s important to move it out of your checking account and into a savings account so that you aren’t tempted to dip into it for regular monthly expenses.

As this account grows over time, you can use it as a reserve for those big unexpected expenses that would otherwise push you back into debt—car and home repairs, dental bills, taxes, and other surprises. And it will be your protection from financial disaster if your income is ever interrupted. Make it a goal to build an emergency fund that’s equal to three months of your current monthly expenses if you’re in a two-earner household, or six months of expenses if you’re the only wage-earner.

Once you’ve built a comfortable emergency fund, shift the monthly savings amount back to debt reduction. Until you’ve eliminated your high-interest debt, it doesn’t make sense to put too much money in a lower-interest savings account.

Start a retirement account

After your emergency savings account, retirement savings should probably be your next priority. You may be able to get started on this, too, while you’re still working down your debt. Tax laws are designed to encourage retirement savings.

If you’re not investing in an Individual Retirement Account (IRA) on your own or a 401(k) retirement account through your employer, you’re missing out on one of the best deals going. You put money into a retirement account before income taxes are taken out of it, so a bigger chunk of your earnings goes into your account to earn interest for your retirement. If you start investing when you’re young, even modest contributions can turn into significant savings. If you put $100 a month into a retirement account that earns interest or grows in value at a rate of 9 percent a year, you’ll end up with roughly $20,000 in ten years, $65,000 in 20 years, and $185,000 in 30 years. Because the money is taken out of your paycheck before you get it, and because there are penalties for early withdrawal, retirement accounts turn out to be the one savings method that really works for most people.

Save for your next big purchase instead of relying on debt spending

Before making a big purchase (a car or a major household appliance), figure out what you can afford in monthly payments. Try making those payments into your savings account for a few months before you buy. You’ll find out if you can handle the monthly expense, and you’ll have a big down payment toward the purchase. Better yet, delay your purchase for a few more months and pay in cash.

Buy insurance to protect your family’s finances

Insurance should be an important part of your financial plan. Without it, you run the risk of facing huge expenses that could wipe out all of the gains you’ve so patiently made. And you could leave yourself or those who depend on you in financial ruin if something unforeseen were to happen. Here are some things to consider when looking at insurance:

* Health care is extremely expensive and is the cause of many bankruptcies for those without adequate insurance. Be sure you have health insurance that covers unforeseen physical and mental health needs for you and your dependents.

* Life insurance protects your family from the loss of your income if you were to die. Look for term life insurance (which is far less expensive than whole life insurance) and buy enough coverage to pay for your funeral and to cover your survivors’ living expenses for three to five years.

* Buy disability insurance. Statistically, we are more likely to become disabled during our working careers than we are to die before we retire. And a disability can be very costly to you and your family. Not only is your income reduced, but you may incur higher medical and living costs, as well. Consider the percent of your income (60 or 70 percent) that the policy will cover. But also look at how it defines a disability. Some policies make it very difficult for a person to qualify as disabled.

* Buy automobile, homeowner’s, and umbrella liability insurance appropriate to your family’s situation ($100,000 per injury, $300,000 per accident, and $50,000 in property damage is the minimum automobile coverage most people should consider). Don’t assume that the minimum required by your state or the most basic policy offered will be enough for you.

Buy your own home

Buying your own home turns housing from an expense into an asset. Instead of being at the mercy of rent increases over time, your costs will stay flat or decrease as you pay down your mortgage. Mortgage interest and property taxes are tax deductible, which makes the cost of home ownership more affordable. And if property values increase, you’ll own a growing asset.

You’ve probably seen ads for credit repair services and may have received their fliers in the mail. As you look for legitimate credit counseling help, you may come across their listings in the phone book. Credit repair services push an almost magical solution: “We’ll wipe away your bad credit history and let you start over with a clean slate. We’ll give you a new identity and let you step away from your old one. We’ll remove bankruptcies, judgments, and bad loans from your credit file forever!”

Stay away from them. They’ll take money—hundreds or even thousands of dollars—that you desperately need to work your way out of debt. And they can’t deliver. By the time you realize you’ve been taken, your money will be gone. And, in many cases, so will the credit repair service.

Many of these services engage in illegal practices and come and go under different names until they are finally caught and shut down. Here’s what they usually do:

* Require you to pay up front, before any services are provided

* Hide important facts from you, such as your legal rights and what you can do yourself—for free—to correct mistakes in your credit record

* Suggest that you try to create a new identity for yourself by applying for an Employee Identification Number to use instead of your Social Security number on credit applications

* Get you to dispute all negative information in your credit report, even information you know is true

You can be charged and prosecuted along with the service for the part you play in any illegal actions they’ve suggested.

It’s a federal crime to make false statements on a loan or credit application, to misrepresent your Social Security number, or to obtain an Employer Identification Number from the Internal Revenue Service under false pretenses.

If you’ve fallen behind in your payments, that information is probably being reported in your credit record.

What is a credit record? And why should you care?

Whenever you apply for a loan or a charge card, and many times when you apply for an apartment or a job, someone will check your credit record to see if you have a history of paying your bills on time. Your credit record shows all of the loans and credit accounts you’ve had for the past seven years, and records every late payment. Bankruptcy is included as part of your credit record for ten years, as are other legal judgments against you. When you apply for a job that pays more than $75,000 or for a loan or life insurance policy of more than $150,000, there’s
no time restriction on your record—the employer, lender, or insurer can get a report on your credit history for your entire life. So a bad credit record can keep you from getting a loan, an apartment, or a job for a very long time.

A good credit record can make you look impressive to a potential employer or lender. A bad credit record can make you look irresponsible and untrustworthy.

If you’ve been denied credit or insurance or been turned down for a job within the last 60 days because of something on your credit record, you can request a free copy to check for accuracy. (The company that turned you down for a loan, insurance, or a job is required to give you the name, address, and telephone number of the bureau that supplied the information.) If you haven’t had any problems, you can request a copy of your record for a low fee. Residents of some states are entitled to a free report once a year.

The three largest credit bureaus supply most credit reports. If you’ve had credit problems in the past few years, it’s a good idea to request a report of your record from each of them. Call or visit their Web sites to get ordering instructions.

Equifax Credit Information Services
P.O. Box 740241
Atlanta, GA 30374-0241
Telephone: 800-685-1111
www.equifax.com

Experian
P.O. Box 2104
Allen, TX 75013-2104
Telephone: 888-397-3742
www.experian.com

Trans Union Corporation
Consumer Relations Center
P.O. Box 1000
Chester, PA 19022
Telephone: 800-916-8800
www.tuc.com

When you get your reports, look them over carefully. If there’s anything you don’t understand, call the credit bureau for an explanation. The reports include a lot of information and you may need some help interpreting them the first time you see them. Federal law requires that the bureaus make this help available to you.

If you find a mistake in any of the reports, you have the right to dispute it and try to have it corrected. Ask the credit bureau for a dispute form or send a letter with the correction you are suggesting. Attach copies of any supporting documentation (not original documents). Clearly identify each item in the report that you think is mistaken and explain why you think it is wrong. The bureau will respond in writing in about four weeks. It is the credit bureau’s responsibility to prove that the information is correct, not yours to prove that it is wrong.

If the bureau investigates and finds that a mistake has been made on your record, the bureau will correct it. You can then ask the bureau to send a corrected version to anyone who has received your report within the past six months—and to any employer who requested a copy of your report as part of a job application process in the past two years. You can also ask the bureau to identify the source of the mistaken information, and you should send a letter explaining the mistake to that source, too.

If you’re having problems with debt and have fallen behind on payments to any of your creditors, it’s probably not mistakes on your credit record that will be your problem. It will be the detailed evidence of your late and missed payments. The only remedy for this is to improve your payment record, starting now.

You are entitled to insert a statement of up to 100 words in your credit record explaining any late payment or credit problems. You might use this right to explain a stretch of money problems that were the result of a job loss, illness, divorce, or some other setback. You might also use it to explain that a particular bill wasn’t paid because service wasn’t completed or the merchandise was defective. You might also use the statement to explain that you recognized a debt problem at a certain date, and have committed yourself since then to improving your credit record. If the credit record shows an end to late-payment problems at that time, this statement and the evidence of your commitment to solving your debt problems will go a long way toward repairing your record.

Beyond the fact that it doesn’t solve most people’s debt spending problems, bankruptcy brings with it some other penalties.

* For the next ten years, your bankruptcy will be reported as part of your credit record when you apply for a loan, rent an apartment, or apply for a job.

* Your bankruptcy will be reported as part of your credit record forever when you apply for a job that pays more than $20,000 a year or for a loan of more than $50,000.

* When you look for a job, an employer may see your bankruptcy as a reflection on your character. It may be the deciding factor against you when you are compared to another candidate.

* When you look for an apartment, a landlord may see your bankruptcy as a warning that you’ll fall behind in your rent, and can use that information when deciding to rent to someone else.

You will find it very difficult to re-establish credit, at least for the next few years. You might be able to get a credit card with a low spending limit—but with a requirement that you keep at least that much on deposit at the bank that issues the card. You might be able to lease a car—if you are able to pay 70 percent of the total value of the lease up front.

* The Internal Revenue Service gets a report of the bankruptcy settlement and considers as income any debt from which you are released. You will owe income tax on that amount.

Bankruptcy has its place. For people who have gotten into financial difficulties that really are beyond their ability to resolve, it offers a way to make a fresh start on sound footing. But for many—perhaps most—of the people who now use it, bankruptcy simply extends money problems into a lifetime of juggling and worry.

Bankruptcy is relatively easy. Over a million people file for personal bankruptcy every year. (In 2001, the number was over one and a half million.) For some people, it’s the sensible option. If a medical crisis kept you out of work or left you with extraordinarily high medical bills; if an accident or disease has left you with a disability that reduces your ability to earn an income; or if a divorce has left you with high debts, child care responsibilities, and a reduced income, your debts may be beyond your ability to repay.

But a large and growing number of people who file for bankruptcy are doing it for the second time. For people who’ve arrived at bankruptcy as a result of careless spending and a casual reliance on credit, bankruptcy can be seen as a quick fix that will solve a chronic debt problem. It’s not. Bankruptcy doesn’t get at the underlying root of a debt problem. Only you can do that. If debt spending is your problem, the only way to solve it is through a long-term commitment to debt reduction. It’s your money behavior that needs to change.

Bankruptcy is the option of last resort for people with overwhelming debt problems. When you file for bankruptcy, you are asking a bankruptcy judge to approve a plan that divides whatever assets you have among your creditors (the people and businesses you owe money). You may also be asking the court to discharge or cancel your debts if you do not have enough money or property to pay the debt. In return for a very visible and long-lasting black mark on your credit record, bankruptcy allows you to pay what you can to your creditors and walk away from your debts.

It’s actually fairly simple. Working with an attorney, you file for bankruptcy in federal court. The filing fees aren’t very expensive. Attorney’s fees vary widely.

You choose between two personal bankruptcy options: Chapter 7 and Chapter 13. The court reviews your finances and decides whether to allow you to file for bankruptcy, and which of the two bankruptcy options is right for you.

Chapter 7 and Chapter 13 bankruptcy

Chapter 7, known as straight bankruptcy or liquidation, is the more drastic step and historically has been the more common choice. (Recent legislation has made it more difficult to gain a court’s approval to file for Chapter 7 bankruptcy, and courts are steering more people to Chapter 13 bankruptcy.) Here’s what happens in a Chapter 7 bankruptcy:

* If the court grants your bankruptcy petition, a court trustee decides which of your assets you can keep. These are called exempt assets. Different states have different rules about what you can keep in order to move on with your life. A federal code applies in all states, and you can choose whether to have your assets reviewed under the state or federal guidelines. Under the federal code, exempt assets include

- a portion of the equity you have in your home (up to $17,425 in 2003) if you commit to keeping up with mortgage payments

- your car, truck, or motor vehicle (up to $2,775 in value in 2003) or a small amount of equity in your car if you commit to keeping up with loan payments

- jewelry (up to $1,150 in 2003)

This is not a complete list, just a sample to show some of the more commonly used exemptions. Basic household furnishings and work-related tools are also exempt in most states, for example. The dollar amounts are for an individual. If a married couple is filing together, the exemptions will be double. And the amounts are subject to change.

* Other high-value assets that do not qualify for exemption are turned over to the court trustee, who may then sell these assets at public auction and divide up the proceeds among your creditors.

* You are still responsible for certain debts and obligations: student loans, overdue taxes, alimony, child support, and fraudulent loans. (A loan is considered fraudulent if you slightly exaggerated your income on the application or took any steps to hide a bad credit record.) These debts and obligations are still yours to pay even after the bankruptcy is final.

Chapter 13, a more limited form of bankruptcy also known as reorganization, allows you to keep all of your property while you repay your bills. It is similar in many ways to the process of working with a credit counseling service, only the court provides you with full legal protection from your creditors. You qualify for Chapter 13 bankruptcy by showing that you are employed and have enough income to pay reduced living expenses and repay your debts over time.

* If your petition is accepted, you submit a detailed budget to the court.

* The court reviews your budget, revises it, and turns it into a monthly debt payment plan.

* You are ordered to make debt payments directly to the court, and the court pays your creditors.

* If you fall behind in your payments to the court, you will be found in contempt of court and your case dismissed. You’ll no longer be protected from your creditors. If you have no other options, you might then file for Chapter 7 bankruptcy (under which your non-exempt assets are turned over to the court and sold, with the proceeds going to your creditors).

If you’ve been getting notices or telephone calls about overdue payments, take the initiative to call those creditors. That may be a frightening prospect. If you’re far enough behind in your payments that you’ve been getting collections calls, you probably want to avoid conversations with your creditors. When accounts get to the telephone collection stage, creditors tend not to be kind and soft-spoken.

But you’ll find that by making this call yourself, rather than waiting for the next collection call, you can transform a relationship where you are on the defensive into one where you and your creditor are working together to solve the problem.

When you call, tell your creditor that you’ve entered a program to get your debt under control, and that you’d like to work out a payment plan. As a start, ask for a 30-day moratorium on your payments. That will allow you time to pull your records together and come up with a plan for paying down all of your debts. If your credit hasn’t already been shut down, suggest yourself that further borrowing be blocked. That gives another signal that you are serious about repaying the debt.

Creditors worry most about people who are ignoring their debts or who are actually being dishonest and trying to escape their obligations. By calling and telling the creditor that you’re working on a debt repayment plan, you put yourself in the “good” camp of honest customers who are making a genuine effort to pay what they owe.

If you can’t negotiate a 30-day break from the payments, find out what amount will satisfy the creditor. Pay that amount promptly. Your goal is to get back to a trusting relationship with the creditor, where the creditor knows you will honor your commitments.

Before the 30 days are up, and after you’ve had a chance to go through the rest of the steps in this booklet, call back and work out a repayment plan. At that point, you’ll know how much you can pay every month without creating problems with other creditors.

Here are some guidelines for making these conversations productive:

* Be honest. Explain that you’re trying to get your debt under control and be open about where you are in the process. If you haven’t finished tracking your spending and adding up the numbers, tell the creditor that you’ve realized your budget is out of balance and you’re doing the work now of coming up with a new spending and debt repayment plan.

* Be prepared. Have the information you’ll need in front of you when you call. Make sure you know exactly how much you owe and when the payments are due. Be ready to offer a payment plan if you won’t be able to pay the amount that’s due by the date on the bill.

* Put the conversation on an equal footing. If a creditor calls you, don’t get into a conversation right away. Politely ask them to hold on for a minute while you get out your records. When you get your copy of the bill and any notices you’ve been sent, get a paper and a pencil, too. When you get back on the phone, let the caller know that you’re ready to talk now and that you’ll be taking notes on the conversation. Start by asking them to give their name again and the name of the company they represent. Write the information down. Ask for the caller’s telephone number and address and write that down, too. By doing this, you put the call on more of an equal footing. The caller knows who you are and has details of what you owe. Now you know who the caller is and you have the information at hand that you’ll need to discuss a payment plan.

* Be businesslike. Remember that debts and their repayment are strictly business. A collection agent may try to make you anxious or put you on the defensive as a way to get you to agree to a payment plan. If you make it clear at the start of the conversation that you’re ready to work out a reasonable payment plan—one that’s acceptable to your creditor and within your means to follow—you can keep the conversation at a businesslike tone and keep it from becoming emotional. If the creditor yells on the phone or speaks in a rude or hostile manner, end the conversation and suggest trying another time when both of you can talk in a reasonable tone. If this happens more than once, ask to speak with the collector’s manager and request another contact at the company.

* Don’t agree to more than you can manage. If a creditor is pressuring you to pay more or repay a debt more quickly, you may be tempted to agree to higher payments than you can really afford as a way to get out of an uncomfortable conversation. Don’t do it. You’ll just fall behind again, and you’ll have lost the trust of the creditor. It’s far better to be honest and agree to pay only what you know you can afford.

* Follow up with a letter. If you and the creditor or collection agent agree to a repayment plan that includes reduced or missed payments while you get your finances back in order, follow up with a letter to confirm the agreement. An agreement like this usually includes the suspension of your credit privileges, so you may be sending your credit card with your letter as confirmation that you won’t try to use it. Use a proper business letter format when you write. Keep one copy for yourself and send two to the creditor, asking them to sign and return one to you. Send your letter by certified mail, return receipt requested. When the signed receipt card comes back to you, keep it until you receive the signed copy of the agreement. Send a copy of the letter with each payment you make—and be sure to make those payments on time.

Debtors Anonymous is a volunteer-run organization with chapters all over the country. Anyone can go to a meeting. There are no membership fees. And there’s no obligation to return if you find it’s not for you. At meetings, members help each other come to terms with and take responsibility for their debts. They also offer practical advice and strategies for repaying debts. Aside from the valuable practical information and advice that’s shared at meetings, Debtors Anonymous provides a social support network that helps people see that they aren’t alone with their debt problems. That social network, combined with a schedule of regular meetings, really does help people stay on track.

* Financial planners help people save and invest for the future, but they can also help you with a debt problem. A financial planner may be a good option for you if you’re carrying a high level of debt but also have significant assets, such as a retirement account, investments, or a large amount of equity in your home. When looking for a financial planner, look for someone who charges a fee for the consulting services (a “fee-only” financial planner) and doesn’t charge commissions for any investments or transactions he or she recommends. And make sure you understand what that fee will be before you begin to work with a financial planner. To find a financial planner, look in your local Yellow Pages telephone directory under “Financial Planning.”

* Credit counselors help people who are having trouble with credit card debt. The services of non-profit credit counselors are generally free to low-income customers and very reasonably priced for others—in the range of $25 per month. But be sure to ask about fees and find out whether the service is non-profit before you begin working with a counselor. For-profit credit counseling services can be much more expensive. Credit counselors help their customers develop personal debt reduction plans. They can also step in as middlemen between you and your creditors to negotiate a repayment plan that you can afford. Credit counselors often take over the entire responsibility of working with your creditors. When this happens, you will be asked to make a monthly payment to the credit counseling service, and it in turn will make the payments to your creditors. You will be asked to sign a statement committing yourself to taking on no new debt. Depending on how serious your problem is, the credit counselor may also ask you to turn in and destroy all of your credit cards. To find a credit counseling service, look in your local Yellow Pages telephone directory under “Credit Counseling Services.” Look only for non-profit services. For-profit services can be very expensive and are of uneven quality.

* Your employer or union may offer financial counseling at no charge to you as part of an employee assistance program (EAP) or work-life program. Check with your human resources department or a union representative to see if this service is available to you.