Ways to Get Out of Debt

There's no easy way to get out of debt.  Short of obtaining a windfall of cash, it takes a little work and some action on your part.  But it can be done!

Having stress paying your debts? Getting warning notices from creditors? Are your bills being turned over to debt collectors? Are you disturbed about losing your house or your automobile?

You’re not alone. Many people face a debt problems some time in their lives. Whether the issues is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But oft, it can be conquered. Your money situation doesn’t have to go from bad to worse.

If you or someone you know is in debt distress, consult these choices: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. Debt negotiation is yet another choice. How do you know which will work best for you? It depends on your level of debt, your amount of bailiwick, and your prospects for the future.

The following is a simple method to generally determine your current financial status.  With some facts to get find the right way to get out of debt.

Contacting Your Creditors:

Contact your creditors immediately if you’re having difficulty making ends meet. Tell them why it’s hard for you, and try to work out a modified payment plan that cuts your payments to a more manageable grade. Don’t wait until your bills have been turned over to a debt collector. At that stage, 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 hassle you, lie, or use unfair practices when they try to collect a debt. And they must honor a written petition 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 auto for a auto loan, or your house for a mortgage. If you stop making payments, lenders can reclaim your car or foreclose on your house. Unsecured debts are not tied to any asset, and include most credit card debt, debts for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess your automobile any time you’re in default. No notice is required. If your auto 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 automobile. If you see default imminent, 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 house payment, contact your lender at once to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the state of affairs 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 extra amount toward the past due total. Other lenders may agree to change the terms of the home payment by extending the repayment period to reduce the monthly debt. Ask whether over-and-above 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 company. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who’s having stress making home payment 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 authority near you.

Help yourself

Developing a Budget: The first step toward taking control of your money 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 house payment payments or rent, car payments, and insurance payments. Next, list the payments that change — 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 disbursements, 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 local library and bookstores have info about budgeting and money management techniques. In addition, computer software programs can be useful instruments for developing and sticking with a budget, balancing your checkbook, and following plans to save money and pay down your debt.

Credit Counseling and Debt Management Plans

Debt Management Plans:

If your debt troubles root word from too much debt or your inability to repay your debts, a credit counseling bureau may recommend that you join 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 money state of affairs, and has provided you custom advice on managing your money. Even if a DMP is appropriate for you, a honest credit counseling organization still can help you create a budget and teach you money management techniques.

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 debts, student loans, and medical bills, according to a payment schedule the counselor makes 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 make available the deal that a credit counseling organization describes to you. A reputable 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 accomplish the plan. You may have to agree not to apply for — or use — any additional credit while you’re participating in the plan.

Credit Counseling:

If you’re not knowlegable 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 groups are nonprofit and work with you to solve your debt worries. 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 companies charge high fees, which may be hidden, or urge people to make “voluntary” contributions that can cause more debt.

Most credit counselors offer help through local offices, the Internet, or on the phone. If possible, find an organization that offers in-person counseling. Many schools, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your money institution, state consumer protection authority, and friends and family also may be good sources of information and advise.

Reputable credit counseling groups 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 debt situation with you, and help you develop a personalized plan to solve your money issues. An initial counseling session typically lasts an hour, with an make available of follow-up sessions.

Protect Yourself

Be leery of credit counseling organizations that:

charge high up-front or monthly fees for enrolling in credit counseling or a DMP.

strongly suggest you to make “voluntary contributions,” another name for fees.

won’t send you free information about the advise they provide without requiring you to provide personal debt information, such as credit card account numbers, and balances.

try to join you in a DMP without spending time reviewing your fiscal situation.

make available to enroll you in a DMP without teaching you budgeting and money management techniques.

require that you make payments into a DMP before your creditors have accepted you into the program.

Bankruptcy

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far reaching. People who follow the bankruptcy rules receive a discharge — a court order that says they don’t have to repay certain debts. However, bankruptcy information (both the date of your filing and the later date of discharge) stay on your credit report for 10 years, and can make it hard to obtain credit, buy a house, get life insurance, or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people who have gotten into money difficulty and can’t satisfy their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. As of April 2006, the filing fees run about $274 for Chapter 13 and $299 for Chapter 7. Lawyer fees are added and can vary.

Effective October 2005, Congress made significant changes to the bankruptcy laws. The basic effect of these changes is to give customers more motivation to seek bankruptcy protection under Chapter 13 rather than Chapter 7. Chapter 13 permits people with a reliable income to keep property, like a mortgaged house or a car, that they might otherwise lose becuase of the bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to use your future income to pay off your debts during a three-to-five-year period, rather than give up any property. After you have made all the payments under the plan, you are given a release of your debts.

Chapter 7 is known as straight bankruptcy, and involves taking of all assets that are not exempt. Exempt property may include autos, work-related tools, and basic household furniture. Some of your property may be sold by a court-appointed official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the time period during which you can receive a discharge through Chapter 7. You now have to wait 8 years after getting a discharge in Chapter 7 before you can file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two years between filings.

Both types of bankruptcy may get_rid_of unsecured debts and halt foreclosures, repossessions, garnishments and utility shut-offs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts change by state. Note that personal bankruptcy usually does not wipe out 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 permit you to keep property when your creditor has an unpaid home payment or security lien on it.
Another major alteration to the bankruptcy laws affect certain hurdles that a consumer must open prior to filing for bankruptcy, no matter what the chapter. You are required to get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can get a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization within the U.S. Department of Justice that oversees bankruptcy cases and trustees. Also, before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is provided by the U.S. Trustee Program at www.usdoj.gov/ust.

Debt Consolidation

You may be able to lower your cost of credit by consolidating your debt through a second home payment or a residence equity line of credit. Remember that these loans ask 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 residence.

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. However, these loans may provide additional tax advantages that are not provided by with other kinds of credit.

Debt Negotiation Programs

Debt negotiation varies greatly from credit counseling and DMPs. It can be very risky, and have a long term negative effect 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 advise they offer. Contact your state Attorney General for more information.

The Claims

Debt negotiation firms may say they’re nonprofit. They also may claim that they can get for your unsecured debt — generally credit card debt — to be paid off for anyplace from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation company may say it can arrange for you to pay it off with a reduced amount, say $4,000.
The companies often delivery their help as an alternative to bankruptcy. They may advertise that using their advise will have little or no negative impact on your ability to get credit in the future, or that any unfavorable information can be removed from your credit report when you finish their debt negotiation program. The firms commonly tell you to halt making payments to your creditors, and instead, send payments to the debt negotiation company. The company may promise to hold your funds in a particular account and pay your creditors for you.

The Truth

Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the help they provide are legal. 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 commonly are added to the debt each month. If you go over your credit limit, added fees and charges also can be added. This can cause your original debt to multiply. What’s more, most debt negotiation companies charge customers high fees for their services, including a fee to set up 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 of money a consumer owes, they have a legal obligation to provide precise 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 some situations, creditors may have the right to sue you to regain the money you owe. In some cases, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your residence. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.

Damage Control

Turning to a company that offers help in solving debt issues may seem like a reasonable solution when your bills become unwieldy. But before you do business with any organization, check it out with your state Attorney General, city consumer protection authority, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re thinking of 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 companies that provide to help you with your debt worries may charge high fees and fail to follow through on the advise they provide. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or tell you that you’re signing over your residence as collateral. Companies advertising voluntary debt reorganization plans may not explain that the plan is a bankruptcy filing, tell you all that’s involved, or help you through what can be a hanker and complicated process.

In addition, some organizations 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 not be legal. It is true that many legitimate creditors provide extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors do not guarantee that the consumer will get the loan — or even tell you that a loan is plausible. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high likelihood of your acquiring 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 people with second-rate credit histories, promising to clear up credit reports for a fee. But you already have the right to have any inexact information in your file fixed. And a credit repair clinic cannot have accurate information removed from your credit report, despite their claims. You also should know that federal and some state laws prohibit these companies from charging you for their advise until the help are fully completed. Only time and a responsible effort to repay your debts will improve your credit report.

All the best to you!