Debt can be eluded
SECOND OF TWO PARTS
There are a sea of legitimate options available to the growing number of consumers who have seen their financial situations deteriorate over the past year.
According to a Myvesta.org internal survey of clients in financial crisis, the average amount of credit card and unsecured debt has risen almost 50 percent this year, and mortgage debt is up almost 25 percent over the same period.
But it's not just credit card spending that's getting people in trouble, said Steve Rhode, president and co-founder of Myvesta, a nonprofit financial crisis center.
Credit counseling can hurt, too
Protect yourself from deceptive credit counseling practices:>> Determine if the organization can help you manage your finances better than education or counseling.
>> Check the organization's record with state agencies and your local Better Business Bureau.
>> Beware of high fees or required contributions that may add to your debt and defeat efforts to pay bills.
>> View promises to get you out of debt easily or other exaggerations as a red flag.
>> Make sure your creditors are willing to work with the agency you have chosen, and regularly follow up to make sure your debt is being paid.
SOURCE: CONSUMER AFFAIRS
"We're seeing more and more people push their finances to the edge with bigger mortgages and other types of debt than ever before," Rhode said. Among Myvesta clients, the average credit card and unsecured debt rose from $52,210 in 2002 to $77,036 in 2003, and mortgage debt rose from an average of $168,129 in 2002 to $207,958 in 2003, he said.
"It hasn't been a great financial year for many American families," Rhode said. "Low interest rates have tempted many people into mortgages too large for them to handle. Individuals have been turning to credit cards as a way to make ends meet in this lousy economy."
Personal responsibility and realistic planning are key to avoiding financial problems, Rhode said. But for those with the most severe financial problems, nonprofit credit counseling, debt consolidation and bankruptcy are choices that can help these consumers stay afloat financially by lessening their debt load.
Rhode, who is also a money coach, said it is not uncommon for clients with well more than $100,000 in credit card debt to turn to him for help.
"Over the past few years, I have seen clients' average credit card debt get larger and larger," Rhode said. "In one case I was working with a client who had over $1 million in credit card debt spread out over 78 different cards."
Most people are significantly less in debt than that client, but if their financial burden is uncomfortable, they should either tighten the budget or seek legitimate credit counseling.
"It's a fairly simple formula," said Jim Tharp, of Aloha Credit Counseling. "Consumers need help when they can't pay all their bills as they come in."
Most -- about 60 percent -- of the clients seen at Consumer Credit Counseling of Hawaii just need to be educated about how to use credit and develop a budget and can be sent on their way, said Wendy Burkholder, credit counselor.
About 30 percent of Burkholder's clients will need to be put on some sort of debt management plan, where a reputable nonprofit agency communicates with creditors to ask them to forgive past due payments and to reduce interest so they begin making payments that will get them out of debt, she said.
The last 10 percent of Burkholder's clients are bankrupt and must file legal proceedings to relieve them of repaying their debts.
"Bankruptcy is the only legitimate means of not repaying debt. Anything short of that smacks of being unethical," she said. "It's protection when you are in a hopeless situation."
Consumers who are having trouble paying bills should consider several options before filing bankruptcy. Debt relief possibilities include developing a workable budget and sticking to it, talking with creditors to develop a debt repayment plan, or taking out a second mortgage or line of credit to consolidate debt.
If none of these options is available, bankruptcy may be the best way to get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shut-offs and debt collection activities, Burkholder said.
Self-help
Developing a realistic budget is necessary for consumers who want to take financial control of their life."We ask clients to do a realistic assessment of how much money they take in and how much they spend," Burkholder said.
People often dream of buying a new home, traveling to an exotic place, sending kids to a great college or retiring early. Unfortunately, the reality of financing those dreams often prevents them from living them out, which may explain, in part, why so many people hate financial planning.
But it doesn't have to be that way, says Randy Schuldt, a vice president of ihatefinancialplanning.com, a Web site. With some patience, planning and discipline, consumers can achieve their dreams and feel better about themselves and money, he said.
Ihatefinancialplanning.com offers many tips and calculators for those who need help designing a budget. The public library and bookstores also have information about financial planning.
Regardless of what is in an individual's budget, financial experts say the overall goal is to make ends meet on the basics -- housing, food, health care, insurance and education -- Tharp said.
Credit counseling
A credit counseling agency may arrange a debt repayment plan, a creditor-approved arrangement that allows you to repay your unsecured debts at reduced interest rates. Usually, consumers deposit money each month with the counseling agency, and the deposits are used to pay creditors according to a negotiated payment schedule. As a condition of the repayment plan, most consumers may have to agree not to apply for or use additional credit while they are participating in the program.Some credit counseling agencies charge little or nothing for managing the plan; others charge steep fees, so consumers should ask what the costs will be upfront, the Better Business Bureau advises.
Anne Deschene, president of the Better Business Bureau Hawaii, advises people who want to work with a credit counseling agency to do some research. Most credit counseling agencies offer services through local offices, the Internet or the telephone. Consumers may want to use their financial institutions, the state Office of Consumer Protection or referrals from friends and family members to choose a reputable agency, Deschene said.
"Any reputable credit counseling agency should send you free information about itself and the services it provides without requiring you to provide any details about your situation," Deschene said. "If not, consider that a red flag and go elsewhere for help."
The Better Business Bureau recommends asking the following questions before choosing a credit counseling agency: Are the agency's services confidential? Will they devise a plan tailored to fit your needs? Are the counselors certified and the agency accredited? Are budget and credit education opportunities offered? Will funds be protected?
The FTC recently issued two consumer education publications with tips on how to choose a credit counselor, take control of one's finances and avoid scams. The publications -- "Knee Deep in Debt" and "Fiscal Fitness: Choosing a Credit Counselor" -- are available at www.ftc.gov/bcp/online/pubs/credit/kneedeep.htm and www.ftc.gov/bcp/ online/pubs/credit/fiscal.htm.
Bankruptcy
Bankruptcy is the debt management plan of last resort, Burkholder said, because the results are lingering. A bankruptcy stays on a person's credit report for 10 years and can make it difficult for people to get credit, buy homes, get insurance or obtain a job.There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court, where filing fees are charged.
Chapter 13 allows debtors who have regular income and limited debt to keep property, such as a mortgaged house or car, that they otherwise might lose. The court approves a payment plan that allows them to pay off a default over a period of three to five years, rather than surrendering the property.
Chapter 7, known as straight bankruptcy, involves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and household furnishings. The property may be sold by a court-appointed trustee or turned over to creditors.
Personal bankruptcy usually does not erase child support, alimony, fines, taxes or student loans. Also, unless debtors have acceptable debt repayment plans under Chapter 13, bankruptcy proceedings usually will preclude them from keeping property that has unpaid mortgages or liens.
