Q: Because I was out of work for nearly a year, I have so much credit card debt that I can never repay it. What's better -- credit counseling, debt negotiation or bankruptcy?
A: It's important to know the difference between these alternatives and choose the one that best solves your problem and has the least impact on your future ability to borrow. And it's important to get competent help you can trust to guide you through this decision.
There are many rip-offs out there, promising help and charging steep fees. That can only add to your woes. But it's even worse to ignore the situation and hope the debt collectors will give up on finding you.
America does not have debtors' prisons, but many lenders and collection agencies are going to court to get warrants to arrest borrowers who default on loans and ignore court orders.
Debt collection agencies have stepped up their collection lawsuits, and many states, including Illinois, are taking action to make sure that debtors have been properly notified.
There are a range of options for dealing with your debt before jumping into bankruptcy.
The place to start is with an agency affiliated with the National Foundation for Consumer Credit (NFCC.org). There are more than 800 such offices in every state, staffed by certified consumer credit counselors. You will be automatically connected with the nearest office by calling (800) 388-2227.
These nonprofit agencies either offer free counseling or charge only a nominal fee. Although you can receive counseling over the telephone, it's better to gather all your bills, collection notices and other financial information, and schedule a meeting (which does not go on your credit report).
The agencies can also set you up with a debt-repayment program. They notify all your creditors, and typically get interest charges and penalties waived or reduced. Then you make one monthly payment to the agency, and they send out reduced payments to each creditor who agrees to this setup.
Most creditors are happy to cooperate because they'd rather receive a lower payment than none at all. This type of payout arrangement does negatively impact your credit report, but at least it shows that you are dealing with your debt.
Let me wave a big red flag here. There's nothing wrong with trying to negotiate a lower payoff with your creditors, or getting an agency to help you do it. But you can't negotiate if you have no money to offer.
The whole idea of debt negotiation is that you -- or an agent -- offer the lender an immediate settlement in cash to fully settle your outstanding debt. (And be sure you get a written confirmation of the deal.) But first you need the cash to make the offer.
Many of these debt negotiation companies direct you to stop paying your bills, and instead accumulate the money so you can negotiate in the future. That has the effect of worsening your situation, and exposing you to collection agencies and judgments. Plus, they take a big cut of any money they ultimately save you.
In 2010, more than 1.6 million Americans filed for bankruptcy. This year, the numbers are down slightly, though more than 1 million people will file. But before jumping into the hands of a bankruptcy attorney, you need to understand the two forms of personal bankruptcy: Chapter 7, where you surrender almost all your assets, and Chapter 13, where you may keep your mortgaged house and car, in exchange for an agreement to pay off a reduced amount of debt in the coming years.
(Remember, bankruptcy does not wipe out student loan debt, alimony, child support or most back taxes.)
There are so many intricacies to the bankruptcy laws that you do need a professional to guide you through the process. Go to NFCC.org and check out the section on bankruptcy. Then make an appointment to talk, even if by telephone. The counselors can help you evaluate the alternatives, and even refer you to a bankruptcy attorney.
Don't panic over huge bills. And don't hide. That's when you need to take a deep breath and make a call to the NFCC. Facing your situation and getting trusted advice is the first step to starting your new life. And that's The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.
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Terry Savage is a nationally known expert on personal finance and a regular television commentator on CNN, CNBC, PBS, and NBC on issues related to investing and financial markets.
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