MONEY MANAGEMENT 8

What to Do When Things Go Wrong

Even with the best-laid plans and intentions, you can experience financial problems. Perhaps you, or someone close to you, has been laid-off from a job, is undergoing expensive medical treatment, had a marriage or relationship end, or closed a business. These issues, as well as many others, can lead to financial problems.

What are some of the warning signs that you are headed for serious financial trouble?

• Your credit card balances are growing each month.
• You are taking cash advances on one credit card to pay another.
• You are getting calls or letters notifying you that your payments are past due.
• You are hiding the mail or have stopped opening your statements because you fear the balances on them.

What should you do if you find yourself in any of these situations? You first need to face the situation head on, so that you can determine the underlying cause of the problem. A rising credit card balance is not the real problem, though it is a symptom of one.

Perhaps you’ve experienced a lay-off, are going through a divorce, have incurred serious medical expenses, or you could be spending more money than you are bringing in. It can be difficult to think about the root of your financial problems, but now is the time to be honest with yourself. Not only do you need to ask yourself what is causing your financial problems, but you also need to consider what you’re willing to do in order to make it through this period of time.

Next, take an inventory of where you are. Open any and all unopened statements and mail, and make a complete and detailed list of all your debts. You can get started by filling out the form that follows.

Once you’ve acknowledged the cause of your financial difficulty and have made a detailed list of all your outstanding debt, you need to review your budget. What is your current income? What are your current living expenses? Review the budget form in Chapter 2.

As you look at your expenses, ask yourself the following questions:

• What areas can I cut?
• Can I reduce my spending so that I will have money to pay my debts?
• Do I have any assets I can sell?
• With a little cooperation from my creditors, would I be able to get myself back on track?

Your creditors will often be willing to work with you if you call them and explain the situation. Let them know what you can pay and when you can pay it. When you make such arrangements, make sure that you follow through with what you say. Creditors are less likely to work with you in the future if you have made promises in the past and not lived up to them.

You may want to consider taking out a consolidation loan to help you get back on your feet. However, before you borrow money to consolidate debt and pay-off credit cards, you should consider what action you are going to take to make sure that the problem does not occur again. Unfortunately, many people who consolidate credit card debt find themselves in the same situation four or five years later because they fail to change their spending habits. If you are going to use a consolidation loan to pay off credit card debt, destroy all but one or two of your cards so you don’t find yourself in this situation again.

You may also have the option of tapping into the equity in your home to pay off debt; but again, this decision requires careful consideration. If you are reasonably certain that you can make the monthly payment on a home equity loan, then it may be a good option for you. However, if you do not or cannot make your home equity loan payment, you could end up losing your home.

If you find yourself strapped for cash, think carefully before going to a payday loan company, check cashing establishment, or title loan company to solve your money problems. In most cases, these loans will only compound your problem. It can sound so easy, “Get quick cash with no credit check.” Keep in mind, however, that this quick cash comes at a steep cost. The average interest rate on a payday loan is 200% to 400%. The problem with these kinds of loans is that the term is typically so short that it may be difficult to repay the loan when it comes due.

You may find that you’re unable to resolve the situation you’re facing, by reworking your budget and making the appropriate changes. Or perhaps you just feel overwhelmed. This is the time you should visit a professional credit counselor employed by a non-profit credit counseling agency.

Look for a credit counseling organization that will take the time to review your finances and provide you with various options to improve your situation. After an analysis of your finances, your credit counselor may suggest that you use a debt management or debt consolidation program. Through this kind of program, a credit counseling agency can negotiate with your creditors to reduce your payments and waive or reduce fees and interest. You should not use a debt management or debt consolidation program unless you are having difficulty with your debts, as it is not a program for individuals who have good credit and are just tired of paying interest.

Like all businesses, some credit counseling agencies are better than others. You should ask the following questions before choosing a credit counseling agency.

Is the credit counseling agency accredited? The credit counseling agency should be accredited by an independent accrediting organization.

Are the counselors trained professionals? The counselors should have some form of certification, along with professional degrees.

What fees does the agency charge? The organization should provide you information regarding their fees in writing. What services does the credit counseling agency provide? The agency should provide counseling, education, and a debt management program. An appointment with a professional agency usually lasts 45 to 90 minutes and includes a thorough review and analysis of your situation. If the credit counseling agency cannot tell you in 20 minutes whether or not they can help you, you would be wise to seek out another organization.

What accounts will the credit counseling agency assist you with in a debt management program? If the counseling agency will only assist you with credit cards, again, you should go elsewhere. The credit counseling agency you choose should be able to assist you with credit cards and non-secured debts such as medical and collection bills.

As you search for an organization to assist you, be aware that a credit counseling agency and a debt negotiating company are not the same thing. Debt negotiation companies work with your creditors to cut your debts in half, but they will charge you a percentage of the money they save you, and you will have a tax consequence on the amount of money that is written off of your account. If you do not have a lump sum to send the debt negotiating company, they will let you make monthly payments but will hold all your money until they have enough to negotiate with one of your creditors. In the meantime, your creditors are not being paid, your accounts go delinquent, and you incur additional fees. The delinquency is reported to the credit bureau. Furthermore, most creditors will report a settlement on your credit report, which lenders may not view favorably.

You should also be cautious about seeking advice from family or friends. Just because a person has been able to handle their own finances does not mean that he or she will know the best way to handle yours. If a well-meaning friend or relative gives you advice without knowing all the details, their advice could make your situation worse. Take what happened in Kem’s case, for example.

Kem was struggling to make his monthly car payment when a friend and co-worker who learned of his troubles suggested that he just take the car back to the dealership and stop making payments. What Kem found out the hard way was that you cannot return a car without serious consequences.

If you stop making payments and the lender takes the car back it is called repossession. If you give it to the lender, as Kem did, it is called a voluntary repossession. Both show up on your credit report as repossession and have a negative impact on your credit report and credit score. If Kem did not want the car, his best option was to sell it.

Another negative result of returning a car is that the lender will resell the vehicle, normally at an auction, leaving you without a car and possibly with a large debt. If you, for example, owe $15,000 on the car and the lender sells it for $10,000, you still owe the difference of $5,000. Depending on what you initially purchased the vehicle for, you could find yourself with a deficiency balance over $10,000 if you voluntarily return it or if it is repossessed.

If you have tried credit counseling and it isn’t resolving your problems, you may want to make an appointment with a bankruptcy attorney. The bankruptcy system in the United States was set up to provide individuals with financial difficulties a fresh start.

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Congress passed this law to ensure that bankruptcy was the option of last resort and to prevent abuse in the bankruptcy process. As of October 17, 2005, the process for filing bankruptcy changed and became more complicated.

There are four types of bankruptcy: Chapter 7, Chapter 11, Chapter 12, and Chapter 13. The two types that deal primarily with consumers and their debt are Chapter 7 and Chapter 13.

Chapter 7 is also called the liquidation bankruptcy. Assets that are not exempt are collected and sold, and the proceeds are distributed to creditors. All eligible debts are discharged.

Chapter 13 is also known as the wage earner reorganization. This is primarily used by individuals to reorganize their financial affairs and to repay a portion of their debt over a period of three to five years.

The bankruptcy system is needs based. If you are contemplating bankruptcy, you would meet with an attorney. Your attorney would conduct a means test to determine if you have the means, or ability to repay part of your debt. Your income, ability to repay your debts, and equity in your assets will influence your ability to file for bankruptcy. Keep in mind that bankruptcy does not wipe out all debts. Taxes, child support, court ordered restitution, student loans, certain debts incurred 70 days prior to filing, among others, are not dischargeable in bankruptcy.

Filing for bankruptcy does not wipe your credit report clean. As a matter of public record, a bankruptcy would be reported on your credit report. A Chapter 7 bankruptcy remains on your credit report for 10 years. A Chapter 13 bankruptcy remains on your credit report for 7 years. The intent by Congress was clear in passing the latest bankruptcy law: individuals with above average incomes must make substantial lifestyle changes to obtain bankruptcy relief. Bankruptcy is meant to be the option of last report and individuals and families should try all other methods of repayment before filing for bankruptcy.

Chapter Review

• If you are taking cash advances on one credit card to pay another, getting calls or letters that your payments are past due, are hiding the mail or have stopped opening your statements because you fear the balances on your accounts, or have a credit card balance that is growing every month, you are headed for financial trouble.
• When you find yourself in trouble:

--Determine the cause of the problem.
--Take an inventory of where you are.
--Review your budget and cut expenses.
--Call your creditors.
--See a credit counselor.

Even if you have made past mistakes and find yourself in a difficult situation, take heart in knowing that your finances are a work in progress. If you make a mistake, you can take action to correct the error. Past mistakes don’t have to mean that you’re doomed to a life without credit or that you’re stuck paying high interest credit. Though it will take some time and a commitment to change, you can work your way out of debt and out of poor credit, rebuild your credit, and build a savings account to reach your goals.