Many people face financial crises at some point in their lives. Whether the situation is due to personal or family illness, job loss or overspending, financial concerns can be challenging, but they can be overcome.
If you or someone you know is dealing with a difficult financial situation, consider options that work best for you depending on your level of debt, discipline and prospects for the future.
Develop a budget
The first step toward taking control of your financial situation is to do a realistic assessment of how much money you take in and how much money you spend. List the following:
Income from all sources
Fixed expenses — those that are the same each month (mortgage payments or rent, car payments and insurance premiums, etc.)
Expenses that vary, 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 expenses and prioritize the rest.
The goal is to make sure you can make ends meet on the basics: housing, food, healthcare, insurance and education.
Your public library and computer programs can be useful tools for developing and maintaining a budget, balancing your checkbook and creating plans to save money and pay down your debt.
Contacting creditors
Contact your creditors immediately if you need help making ends meet. Tell them why it’s difficult for you and try to work out a modified payment plan that reduces your payments to a more manageable level. Don’t wait until your accounts have been turned over to a debt collector. At that point, the 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 at work if the collector knows that your employer doesn’t approve of the calls.
Collectors may not harass you, make false statements or use unfair practices when they try to collect a debt. Debt collectors must honor a written request from you to cease further contact.
Types of debt
Your debts can be unsecured or secured. Secured debts usually are tied to an asset:
Car for a car loan
House for a mortgage
Lenders can repossess your car or foreclose on your house if you stop making payments.
Unsecured debts are not tied to any asset and include:
Most credit card debt
Bills for medical care
Signature loans
Debts for other types of services
Managing auto loans
Most automobile financing agreements allow a creditor to repossess your car whenever you default. No notice is required. If your vehicle 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 car.
If you see default approaching, you may be better off selling the car and paying off the debt. You’ll avoid the added costs of repossession and a negative entry on your credit report.
Managing home loans
If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders will work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time.
When you resume regular payments, you may have to pay an additional amount toward the past-due total. Other lenders may agree to change the mortgage terms by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.
Contact a housing counseling agency if you and your lender cannot work out a plan. Some agencies limit their counseling services to homeowners with Federal Housing Administration (FHA) mortgages, but many offer free help to any homeowner having trouble making mortgage 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 finding a legitimate housing counseling agency near you.
Credit counseling
Many nonprofit credit counseling organizations work with you to solve your financial problems. But be aware that just because an organization says it is “nonprofit,” there is no guarantee that its services are free, affordable or even legitimate. Some credit counseling organizations charge high fees, which may be hidden, or urge consumers to make “voluntary” contributions that can cause more debt.
If possible, find an organization that offers in-person counseling. Here are some good places to start:
Universities
Military base
Credit unions
Housing authorities
Branches of the U.S. Cooperative Extension Service
Your financial institution
Local consumer protection agency
Referrals from friends and family
Reputable credit counseling organizations can:
Advise you on managing your money and debts
Help you develop a budget
Offer free educational materials and workshops
Certified and trained counselors can help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.
Debt management plans
If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). You should sign up for one of these plans only after a certified credit counselor has thoroughly reviewed your financial situation and offered customized advice on managing your money.
In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts on a payment schedule, including:
Credit card bills
Student loans
Medical bills
Your creditors may agree to lower your interest rates or waive specific fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful 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 complete the plan. You may have to agree not to apply for additional credit while participating in the program.
Protect yourself
Be wary of credit counseling organizations that:
Charge high upfront or monthly fees for enrolling in credit counseling or a DMP
Pressure you to make “voluntary contributions” (another name for fees)
Only send you free information about the services they provide if you require you to provide personal financial information, such as credit card account numbers and balances
Try to enroll you in a DMP without spending time reviewing your financial situation
Offer to enroll you in a DMP without teaching you budgeting and money management skills
Demand that you make payments into a DMP before your creditors have accepted you into the program
Debt consolidation
You may lower your credit cost by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require 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 home.
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. Still, these loans may provide certain tax advantages that are unavailable with other kinds of credit.
Bankruptcy
Personal bankruptcy is generally 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) stays on your credit report for 10 years and can make it difficult to obtain credit, buy a home, get life insurance or sometimes get a job. Still, bankruptcy is a legal procedure that offers a fresh start for people with financial 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 the federal bankruptcy court.
Debt negotiation programs
Debt negotiation differs significantly from credit counseling and DMPs. It can be very risky and negatively impact your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and their services. Contact your state Attorney General for more information.
Source: Federal Trade Commission