If the "buy now-pay later" way of life has left you facing a mounting pile of bills each month, you're not alone. Today, millions of Americans are having difficulty paying their debts. Most of those in financial distress are middle-income families who want to pay off what they owe.
If you are having financial problems, it is important for you to act now before those problems get worse. Doing nothing can lead to much larger problems in the future -- even bigger debts; the loss of assets, such as your house; and a bad credit record.
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The good news is that there are ways to help improve your relationships with creditors, reduce your debts and help you manage your money. In brief, these solutions can help give you a new, fresh start. First, let's see how bad your problems are.
Financial Fitness Checklist
To find out just what kind of financial shape you're in, answer the questions in the following Financial Fitness Checklist.1 If you're married, print this out and take it home so that you and your spouse can work together to answer the questions. Make a note of how many questions you answer yes to.
- Are you using more and more of your income to pay your debts?
- Do you make only the minimum payments due on your loans and credit cards each month?
- Are you near, at or over the credit limit on your credit cards?
- Are you paying your bills with money intended for other things?
- Are you borrowing money or using credit cards to pay for things you used to buy with cash?
- Do you often pay your bills late?
- Are you dipping into your savings to pay current bills?
- Do you put off visits to the doctor or dentist because you can't afford them?
- Has a collection agency called recently about overdue bills?
- Are you working overtime or holding a second job to make ends meet?
- If you or your spouse lost your job, would you be in financial trouble right away?
- Do you worry about money a lot?
If you answered "no" to all questions on the financial fitness checklist, you're the picture of financial health.
One or two "yes" answers, while not necessarily a sign of impending doom, can be a warning sign of potential problems. Before things get any worse, take time now to draw up a realistic budget (including a savings plan) or to revise your spending plan. Cut back on your use of credit cards, and watch closely for other signs of financial trouble.
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Three to five "yes" answers could mean that you're heading for financial trouble. It's imperative that you get your spending under control right away. If you don't have a monthly budget, devise one and follow it. Put away your credit cards and cut out all unnecessary spending until you can answer "no" to all the questions on the financial fitness checklist.
If you answered "yes" to more than five of the questions on the financial fitness checklist, you may already be in serious financial trouble. But don't despair. Financial counseling can start you on the road to financial recovery.
Road to Financial Recovery
If the financial fitness checklist indicates you are heading for financial trouble or already in it, immediate action is in order. Eight organizations concerned with consumer and credit issues worked together to develop the following guidance for people like you.2 Free or low-cost personalized counseling is available through your employee assistance program or a private nonprofit organization in your area.
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What You Can Do for Yourself
Here are some suggestions:
Review your specific obligations that creditors claim you owe to make certain you really owe them.
If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the validity of the debt or the collection practices, contact your state or local consumer protection office or state attorney general.
Contact your creditors to let them know you're having difficulty making your payments.
Ideally, this should be done before a payment is late or missed. Tell them why you're having trouble -- perhaps it's because you or a spouse recently lost a job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness. Many have "hardship programs" that provide for adjustment of payments for a period of time.
The Fair Debt Collection Practices Law prohibits a debt collector from showing what you owe to anyone but your attorney, harassing or threatening you, using false statements, giving false information about you to anyone, and misrepresenting the legal status of your debts. Remember that under other federal laws to collect debts, creditors cannot seize most government assistance and can only garnish a portion of wages to collect debts.
Budget your expenses.
Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Start a savings plan so that funds are available for unforeseen but essential expenditures. Stick to the plan.
Try to reduce your expenses.
Cut out any unnecessary spending, such as eating out and purchasing expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Consider substituting a debit card for your credit cards.
Use your savings and other assets to pay down debts.
Withdrawing savings from low-interest accounts to settle high-rate loans usually makes sense. Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.
Look for additional resources from governmental and private sources for which you may be eligible.
Government assistance includes unemployment compensation, Aid to Families with Dependent Children (AFDC), food stamps, low-income energy assistance, Medicaid and Social Security, including disability. Other resources may be available from churches and community groups. These sources often are online.
"Looking closely at our options helped us realize that we still needed to try self-budgeting before taking more extreme measures. We think that perhaps we were giving up too soon." -- Alicia A.
What Others Can Do for You
Credit counseling
If you are unable to make satisfactory arrangements with your creditors, there are organizations that can help. Consider calling a Consumer Credit Counseling Service (CCCS) agency. These local, nonprofit organizations affiliated with the National Foundation for Credit Counseling (NFCC) provide education and counseling to families and individuals.
For consumers who want individual help, CCCS counselors with professional backgrounds in money management and counseling can provide support. To promote high standards, the NFCC has developed a certification program for these counselors. A counselor will work with you to develop a budget to maintain your basic living expenses and outline options for addressing your total financial situation.
If creditors are pressing you, a CCCS counselor can also negotiate with these creditors to repay your debts through a financial management plan. Under this plan, creditors often agree to reduce payments, lower or drop interest and finance charges, and waive late fees and over-the-limit fees.
According to the NFCC, about 35% of those counseled help themselves after budget counseling sessions; 30% require a debt repayment program, 7% are referred to legal assistance and 28% are referred to other resources (e.g., programs for treating compulsive behavior, such as alcohol, drug or gambling problems) or decide not to participate at that time. About 65%-70% of the individuals who start the debt repayment plan complete it successfully.3
After starting the debt repayment plan, you will deposit money with CCCS each month to cover these new negotiated payment amounts. Then CCCS will distribute this money to your creditors to repay your debts. With more than 1,100 locations nationwide, CCCS agencies are available to nearly all consumers. Supported mainly by contributions from community organizations, financial institutions and merchants, CCCS provides services free or at a low cost to individuals seeking help. Call 1 (800) 388-2227, 24 hours a day, for a CCCS office near you.
"I cannot tell you how happy I am to finally be able to control my finances now that I have followed a budget. So far, so good. I actually have a balance in my savings account!" -- Rodney O.
Personal bankruptcy
Bankruptcy is a legal procedure that can give people who cannot pay their bills a fresh start. A decision to file for bankruptcy is a serious step. You should make it only if it is the best way to deal with financial problems.
There are two types of bankruptcy available to most individuals. Chapter 13, or "reorganization," allows debtors to keep property that they might otherwise lose, such as a mortgaged house or car. Reorganizations may allow debtors to pay off or cure a default over a period of 3-5 years, rather than surrender property.
Chapter 7, or "straight bankruptcy," involves liquidation of all assets that are not exempt in your state. The exempt property may include items such as work-related tools and basic household furnishings, among others. Some of your property may be sold by a court-appointed official or turned over to your creditors. You can file for Chapter 7 only once every six years.
Both types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property) and stop foreclosures, repossessions, garnishments, utility shut-offs and debt-collection activities. Both types also provide exemptions that permit most individual debtors to keep most of their assets, though these "exemption" amounts vary greatly from state to state.
Bankruptcy cannot clean up a bad credit record and will be part of this record for up to 10 years. It can, for example, make it more difficult to get a mortgage to buy a house. It usually does not wipe out child support, alimony, fines, taxes and some student-loan obligations. Also, 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 the creditor has an unpaid mortgage or lien on it.
Bankruptcy cases must be filed in federal court. The filing fee is $160, which sometimes may be paid in installments. This fee does not include the fees of your bankruptcy lawyer.
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Choosing a bankruptcy lawyer may be difficult. Some of the least reputable lawyers make easy money by handling hundreds of bankruptcy cases without adequately considering individual needs. Recommendations from those you know and trust, and from employee assistance programs, are most useful.
Some publicly funded legal services programs handle bankruptcy cases without charging attorney fees. Or these programs may provide referrals to private bankruptcy lawyers. Keep in mind that the fees of these attorneys may vary widely.
"Our bills have been a source of worry to us. After bringing our problem to credit counselors, we have begun to feel there is a way to cope with it. We are feeling more confident now." -- Nelson M.
Possible Pitfalls
You may encounter credit counselors who aren't helpful.
For-profit or non-credentialed counseling organizations often make promises that they cannot or do not keep. Be especially careful when asked for a large sum of money in advance. To check the organization's reputation, contact your state attorney general, consumer protection agency or Better Business Bureau.
"Credit repair" clinics and "credit doctors" have been frequently criticized for promising that they can remove negative information from your credit report. Accurate information cannot be changed. If information is old or inaccurate, you can contact a credit bureau yourself and ask that it be removed.
Risky refinancing options
When already in financial trouble, second mortgages greatly increase the risk that you may lose your home. Be wary of any loan consolidations or other refinancing that actually increase interest owed or require payments of points or large fees.
A final word: Don't lose hope, even if you despair of ever recovering financially. You can regain financial health if you act. Pursuing the options presented in this pamphlet can put you on the road to financial recovery.
"It feels great to be getting my life [and credit] in order!" -- Robyn H.
Security Concerns
An individual who is financially overextended is at risk of engaging in illegal acts to generate funds.
The amount of debt determines, in part, how stressed and desperate a person is as a result of financial problems. However, what caused the debts and how one deals with these financial obligations tells more than the amount of debt about a person's reliability, trustworthiness and judgment.
If a person is not at fault for the financial problems and is dealing with them in a reasonable manner, the security concern is substantially alleviated. On the other hand, debts caused by irresponsible or impulsive behavior or by gambling, alcohol abuse or drug abuse are a serious concern. A person who is irresponsible in fulfilling financial obligations may be irresponsible in fulfilling other obligations, such as following the rules for protecting classified information.
Financial stress is common among a large segment of the population. Many immature young persons go through a period of difficulty adjusting to the temptations of easy credit. Most people with financial difficulties do not view crime as an appropriate means of solving their problems, but the few who do are a serious concern. Of recent spies who betrayed their country for money, about half were motivated by some real or perceived urgent financial need, and about half by personal greed.4 Greedy individuals often have a compulsive need for money or goods as a measure of success or as a source of self-esteem, influence, power or control.
Sources for More Information
Lots of information is available, as this is such a common problem. As usual, your local counseling service or employee assistance program is the first place to go for helpful information.
The Consumer Information Center of the U.S. General Services Administration offers free or minimal-cost brochures on many topics of consumer interest, including money, credit and financial planning. Available brochures include "66 Ways to Save Money," "Choosing and Using Credit Cards" and "About Bankruptcy." You may order a free catalog of available information by writing to the Consumer Information Center, P.O. Box 100, Pueblo, CO 81002; phoning (719) 948-4000; or go to www.pueblo.gsa.gov.
A number of internet sites deal with these issues. For information on Debtors Anonymous support groups, go to www.yahoo.com, then click on health, mental health, addiction and recovery, and debt addiction. For sites dealing with credit counseling, go to finances, then consumer credit.
Relevant books at your library or bookstore will probably be filed under personal finance, recovery, self-help or psychology. The book "When Money Is the Drug: The Compulsion for Credit, Cash and Chronic Debt" offers a good understanding of how and why many people behave irrationally with respect to money. It provides a non-technical description of compulsive spending, compulsive debting, compulsive greed, compulsive hoarding and compulsive deprivation. It was published in 1993 by Harper Collins. Other relevant books included:
- "Overcoming Overspending: A Winning Plan for Spenders and their Partners," by Olivia Mellan. Walker & Co., 1997.
- "The Money Drunk: 90 Days to Financial Freedom," by Mark Bryon & Julie Cameron. Ballantine Books, 1993. Outlines different forms of compulsive debts, as well as a recovery program that is compatible with Debtors Anonymous principles.
Related topics:
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References
1. This checklist and its interpretation are from the brochure, "In Debt Over Your Head?" This brochure is published by the Consumer Credit Counseling Service of Greater Washington Inc., which granted permission to use the checklist in this program.
2. This section is mainly quoted from the brochure "Managing Your Debts: How to Regain Financial Health," distributed by the Consumer Information Center of the U.S. General Services Administration.
3. Documentation provided by K. Scott, director of public relations, National Foundation for Consumer Credit, to R. J. Heuer, PERSEREC, in February 1996.
4. Declassified extract from a 1993 study of the behavioral and psychological attributes of Americans convicted of espionage.
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