T u r n i n g p o i n t s n

Avoiding Bankruptcy Understand All Your Options for Dealing With Debt

by Monica Steinisch

Being deep in debt can feel a lot like as a “fresh start.” Bankruptcy should be drowning. Just when you think you finally considered only after all other options have can keep your head above water, something been exhausted. happens to pull you back under. All it takes And you do have options. There are many for hope to disappear is another unexpected steps toward recovery you can take on your car repair, a new medical bill, or an increase own, and many others you can take with the in gas prices. At such a time, it may be help of your creditor, a counselor, or a credit tempting to throw in the towel—to ignore union adviser. Exactly which routes will be the situation and hope it resolves itself, or to available to you will depend on factors such file bankruptcy. as your financial situation, your creditors’ While the mantra “I’ll think about that policies, and your goals. In any case, the tomorrow” helped “Gone with the Wind’s” sooner you ask for help with your debt, the Scarlett O’Hara make it through another more options you’ll have. day, avoidance and procrastination are never wise strategies when it comes to dealing with debt. Neither is taking action— and far-reaching.” Bankruptcy can make particularly as drastic an action as filing for Questions: it difficult to obtain credit at reasonable bankruptcy—without considering all the rates, rent a house, get insurance, or n How can my credit union help me consequences. qualify for a particular job or promotion. avoid bankruptcy? The Federal Trade Commission (FTC), And since many filers find themselves still n What options besides bankruptcy the nation’s consumer protection dealing with the fallout many years down do I have if I’m having trouble agency, Washington, D.C., describes the the road—bankruptcy stays on your credit paying my bills? repercussions of bankruptcy as “long-lasting report for 10 years—it can hardly be touted n I have enough income to make partial bill payments. Should I file MEDICAL BILLS CUT DEEP for Chapter 13 bankruptcy, or try to repay my debts on my own? As reported in the New York Times in June 2009, high medical bills cause almost two-thirds of bankruptcies, according to a study published by The n How can I avoid getting to the American Journal of Medicine. Medical problems contributed to 62.1% of point where bankruptcy seems like all bankruptcies in 2007. That number probably has increased during the my only option? current recession, which began in December 2007. The report also noted n I’m having trouble paying my that, between 2001 and 2007, the percentage of all bankruptcies attributable bills. Should I file for bankruptcy? to medical problems surged by 50%. Among families bankrupted by medical problems, those with private insurance had average medical bills of $17,749, compared with average costs of $26,971 for those without insurance. “The U.S. health care financing system is broken, and not only for the poor and uninsured,” wrote the study’s authors. “Middle-class families frequently collapse under the strain of a health-care system that treats physical wounds, but often inflicts fiscal ones.”

Turning Points 2 Avoiding Bankruptcy How can my credit union who participate agree to lower payments, troubles and bankruptcy. “Emergency help me avoid bankruptcy? reduce interest rates, waive fees, and re-age savings is hugely important, especially accounts. Counseling is free or low cost. in uncertain times,” says Todd Mark, vice The people at your credit union strive to There is a DMP fee of $20 to $50 per month, president of education for Consumer Credit maintain a lifelong relationship with you— though a reputable agency shouldn’t deny Counseling Service of Greater Dallas. “It’s through all of life’s financial ups and downs. you services if you can’t afford to pay. (See the life raft that keeps you afloat.” When you belong to a credit union you’re How to Find a Reputable Credit Counseling Mike Schenk, an economist at the Credit more than just a customer, you’re a member. Agency in this publication.) Union National Association (CUNA), says it’s Other financial institutions expect customers If you need to borrow to make ends meet never too late to ask for help at your credit to just come and go. until things improve, a credit union loan union, though the earlier you do it, the more Lately, the U.S. economy has given us officer can help with credit cards, mortgages, options you’ll have. “As a member-owned more “downs” than “ups.” Foreclosures, home equity loans and lines of credit, and not-for-profit institution, your credit union layoffs, and a stock market free fall seem really is looking out for your best interest.” to have left no family untouched. Times are tough. But things will get better. And What options besides when they do, you’ll be relieved to have avoided bankruptcy and its long-lasting bankruptcy do I have consequences. Here are some ways the if I’m having trouble people at your credit union can help you do paying my bills? that. There are many options besides bankruptcy If you’re having trouble paying your bills, for dealing with debt, particularly if you’re and your debts include credit union willing and able to make some changes. accounts, contact a credit union represen- “Your money troubles may be insurmount- tative to discuss the possibility of modifying able under current circumstances, but there your loans or credit card terms to make are things you can do that make it more payments more affordable. Modification feasible to repay your debt,” says Mark. “No could mean, for example, lowering the matter how desperate your situation may interest rate or extending the loan term. seem, taking positive steps now has value.” Other concessions that could help might To determine what changes you’ll need to include waived fees, a “payment holiday,” or make, you first have to find out just how “re-aging” the account to bring you current much you’re running short each month. after you’ve missed a payment. There are many tools available on the If you have non-credit union debt Internet for calculating your income, living you’ve fallen behind on, a credit union expenses, and debt payments; look for the representative can refer you to a credit other products generally at lower interest Budget Blueprint calculator on this Web site. union counselor or to a reputable nonprofit rates and better repayment terms than you Enter your numbers, print the results, and credit counseling agency for help. A can find elsewhere. This makes credit more then do one or more of the following to close credit counselor can look at your financial affordable for you. It also protects you from the gap. picture—income, expenses, and debt—and lenders who prey on borrowers who believe present possible actions, one of which might they have no other options. n Increase income. Pick up overtime hours be participation in a debt-management plan if they’re available, find an additional job, As times get better, your credit union can (DMP). or start a small side business offering a help you establish or strengthen a direct service you’re qualified to provide, such as In a DMP, you repay all or some of your deposit savings plan to help you build an babysitting, gardening, senior assistance, debts by sending a single payment to the adequate emergency fund. Being prepared music lessons, sewing, or repairs. If you credit counseling agency, which distributes for the worst is the best way to avoid money have an extra room or an unneeded garage, it among your creditors. Many creditors

Turning Points 3 Avoiding Bankruptcy consider renting it out. Think about selling Kiplinger’s “Save Money on Practically What not to do: Turn unsecured debt—such some of your assets, such as an RV, a second Everything” as credit card debt—into debt secured by car, jewelry, or collectibles—you could lose your home unless you’re absolutely sure AARP’s “25 Ways to Cut Costs on Just About them if you had to file bankruptcy. If you you can make the payments for the long Everything” normally get a tax refund when you file, term. (Otherwise, if you get behind on your consider changing your withholding to have What not to do: Cut costs by not paying mortgage payments, you could put your less money taken out of each paycheck. insurance premiums. Rather than let home at risk of foreclosure.) Keep in (The IRS provides tips and a worksheet to your policies lapse, talk to your mind that by doing this, you will calculate the correct amount.) insurance agent about a pay more over the long haul payment plan, consider because you’re taking short- What not to do: Wait until you need the reducing coverage if you’re term debt and financing it money immediately, making a pawn shop overinsured, or shop for as long as 30 years. your only option. A pawnbroker will give you around for better rates for a fraction of the value of your possessions— n Consider borrowing from comparable coverage. But much, much less than you would get if you a friend or family member. don’t choose an insurance had time to sell them on your own terms. To protect the relationship, policy based on price alone. pay a competitive interest rate n Reduce expenses. Where you can make Check the issuing company’s and make consistent payments. (See cuts and how much you can save will depend financial strength and stability online Borrowing from family and friends) on your spending habits. Many consumers at Moody’s, Standard and Poor’s, A.M. find there’s “wiggle room” in the categories Best, or J.D. Power. Research the company’s What not to do: Take out a payday loan. At of transportation, food away from home, and complaint record with the National interest rates of 300% per year or more, this entertainment. But don’t limit your efforts to Association of Insurance Commissioners and short-term solution almost always leads to a these areas. Scrutinize every expense. You’ll your state insurance department. long-term debt disaster. Check the Consumer find many ways to save money throughout Federation of America’s (CFA) Web site to n Tap your home equity. If your home is this credit union Web site and in these lists: see what a payday loan could cost you. worth more than you owe on it, and if your Ask at your credit union about payday loan “66 Ways to Save Money,” available from credit score is still in decent shape, consider alternatives offered there. the Federal Citizen Information Center refinancing your mortgage or opening a home equity line of credit. Talk to your credit n Work with your creditors. Contact your “Living on Less: 20 Painless Ways to Cut union lender about home loans that fit your creditors when you realize you won’t be Costs and Save Money,” published by needs. able to make your full payment on time. Associated Content Your lender could offer remedies such as reducing the monthly payment, lowering Pawn it or sell it? the interest rate, waiving late and overlimit fees, or tacking missed payments on to the When you bring an item to the pawnshop, the pawnbroker holds it as end of the loan. What any creditor is willing collateral and lends you an amount that usually represents a fraction of the and able to do depends on many factors, item’s actual value. To get your item back, you repay the loan plus fees, including that creditor’s policies, the reason usually within 30 days. If you don’t repay, the pawnbroker keeps the item. for your delinquency, and your payment history. See Tips for Working with Your While using a pawnbroker can seem like a quick way to get cash, about Creditors in this publication. one-third of pawned items are never redeemed. As a result, the owner gives up the item for much less than it’s worth. Even when items are What not to do: Tap your retirement redeemed, the cost of the loan usually is the equivalent of paying an accounts. If you’re not of retirement age, interest rate of more than 100%. you’ll pay a 10% early withdrawal penalty plus income taxes on the amount you If you’re willing to give up the item, it’s best to sell it outright to avoid fees withdraw. And, the money won’t be there and get its full value. If you’re not willing to give it up, look for other loan when you need it. sources, such as a short-term personal loan from your credit union.

Turning Points 4 Avoiding Bankruptcy n Seek credit counseling. A professional credit counselor can review your situation and offer possible solutions. If you participate in a credit counseling- administered debt management plan (DMP), the agency will send a proposal to your creditors requesting that they reduce payments, reduce or waive interest charges and fees, and bring your account current. Borrowing from family and friends Not all creditors offer all concessions. You send one payment to the agency, which Ideally, a loan between friends or family would be a win-win situation: disburses it to your creditors on the plan. You, as the borrower, would get credit that might not have been available You most likely will from a traditional source. The lender would earn a pay a monthly DMP competitive interest rate on your money while also fee of $20 to $50. The helping someone out. counseling typically Here are some of the terms and conditions you should is free or low cost. agree on before money changes hands: See How to Find a Reputable Credit n Loan amount. Counseling Agency in n Interest rate. You might think the interest rate you this publication. charge for the use of your money is entirely up to you. In What not to do: fact, the Internal Revenue Service (IRS) has some say in Pay high fees for the matter. Check the IRS Web site for information about debt negotiation monetary “gifts” and the Applicable Federal Rate. (also known as n Payment schedule. Are payments to be made monthly? debt settlement) By what date each month? When is the loan to be repaid services. This is very in full? different from credit counseling. Besides n Payment amount. Use an online calculator to calculate being expensive, debt the amount of each payment, or the accrued interest at negotiation could the end of the term if the loan amount will be paid in one create a tax bill for lump sum. you for the forgiven portion of your debt— n Payment method. By check? Direct deposit or automated transfer? If so, because it will be considered income—and to what account? your credit score could suffer. n Late payment penalties. Will you charge a late payment fee or take a n Seek housing counseling. If you’re having specific action if a payment isn’t made on time? trouble making your mortgage payments, talk to a housing counselor. He or she will n Security interest. Will the loan be secured by any personal property? be able to narrow your options based on n Recourse for default. Would you take legal measures, such as filing a your equity, financial situation, and goals. lawsuit? Or repossessing a car used as collateral? Or would you simply Find a housing counseling agency through never lend the borrower money in the future? Spell out exactly what the U.S. Department of Housing and Urban recourse you would take for nonpayment. Development (HUD) (800-569-4287) or the Homeowner’s HOPE™ Hotline (888-995- Source: Loans Among Friends and Family: Win-Win, or Sure Loss? Home & HOPE). According to Mark, lenders are much Family Finance Resource Center; search for the complete article on this Web site. more committed now than they may have (continued on p. 8)

Turning Points 5 Avoiding Bankruptcy on track could, at the very least, creditor know. Provide concrete Tips for Working encourage your creditor to hold off dates whenever possible. on reporting you delinquent to the with Your Creditors n Propose a solution. Tell your credit reporting agencies. How do some borrowers avoid creditor exactly what would help severe consequences—a lawsuit, n Be polite. It’s easy to get anxious or you most: a lower interest rate, foreclosure, or repossession— frustrated when dealing with a reduced payment for six despite missing one or more credit debt issues, but courtesy months, a larger credit payments? The key is in how they and respect will get you line, or any other approach the situation. Here are further. “Remember, concession. Do this some tips that will greatly increase [your creditor is] not only after doing the your chances of successfully the enemy,” says math and figuring working with your creditors. Mark. “Treat them that out exactly what way, and you give you could afford to n Be proactive. Call your creditor as them less incentive to pay and when. Never soon as you determine that missing work with you.” agree to a payment a payment is unavoidable. By amount or schedule unless n Explain the situation. contacting the creditor first, rather you’re absolutely sure you can Creditors want to know that there is than forcing the creditor to track afford it and will be able to keep the a good reason—something beyond you down, you convey that you commitment. are concerned, committed, and your control, such as a job loss—for responsible. the delinquency. Let the creditor n Keep a log. Keep track of all know how your financial situation communications, including the date, Some experts recommend making has changed and why you can’t who contacted whom and how a “good faith” token payment. Todd make a full, or any, payment. Be (letter, e-mail, or phone call), the Mark, vice president of education prepared to provide specifics about name of the creditor representative, for Consumer Credit Counseling your income, expenses, and other the key points discussed and any Service of Greater Dallas, suggests debts. agreement reached, and follow-up first asking the creditor if it will help. needed. He says that if money is very tight, n Give a prognosis. What changes and a token payment won’t help do you see in the near future that n Follow through. Notify the you avoid a late fee or a “ding” to would enable you to get back on creditor of any snag that will make your credit report, you may want track? Starting a new job soon, it impossible to fulfill your new to keep the extra dollars to pay making your last car payment, agreement. moving to lower-cost housing—these for necessities. Mark also says that Creditors always maintain the right all are things that could make it communicating with your creditor to report you delinquent, sell your easier to pay your bills, so let your and making a real effort to get back account to a collection agency, repossess or foreclose on your Maxed out? Seek help from: property, or sue you. Your sincere effort at communicating with the n Your credit union—Ask if someone there provides one-on-one credit creditor and repaying your debt, counseling to help get your finances in order. however, may buy you enough n The National Foundation for Credit Counseling (NFCC)—The NFCC, Silver time to recover and avoid serious Spring, Md., has nonprofit Consumer Credit Counseling Service (CCCS) repercussions. affiliates around the country ready to help you get back on track from Source: Steer Clear of Credit financial difficulty. To locate the nearest CCCS office, call 800-388-2227 Counseling Bad Guys; Home & (en Español, 800-682-9832), or visit nfcc.org. Family Finance Resource Center

Turning Points 6 Avoiding Bankruptcy How to find a the agency negotiates interest and assistant director of the Federal payment concessions with your Trade Commission’s (FTC) division of reputable credit creditors and then disburses your financial practices. monthly payment among those Is there full disclosure? counseling participating in the plan, should The agency should provide a written be established only if it is in your agency agreement that clearly states fees, interest, and it should include main source of funding (typically What are your options when the all your unsecured creditors, gap between your income and your creditors), creditor concessions, bill payments has become so big amount to be disbursed, how long you’ve given up hope of them ever the DMP will last (not be more than meeting again? One of them is to 48 months), and the possible impact consult a credit counselor. of a DMP on credit reports. What kind of customer service does While finding a credit-counseling the agency provide? agency may be easy, finding a Live assistance should be available reputable one that has your best during hours of operation, including interest at heart isn’t always so. Start some evening and weekend hours, by asking at your credit union for and the wait for an appointment a referral. You also can search for should not exceed two days. As an agency at nfcc.org (National tough times continue, and agencies Foundation for Credit Counseling) are busier than normal, you may or aiccca.org (Association of have to book an appointment Independent Consumer Credit a week out for some agencies. Counseling Agencies). You should receive monthly DMP When considering agencies, here account statements, and payments are some ways to separate the good should arrive to your creditors by from the bad. the due date. even if they do not make a “fair Is the organization an accredited What is the agency’s complaint share” contribution to the agency. nonprofit? record? Money management classes and Think twice about working with an Check the agency’s record of educational materials should be agency that isn’t accredited by an complaints with the U.S. Council available. organization such as the Council on of Better Business Bureaus and the Accreditation (COA). What are the fees? state attorney general. Ask about There are excellent agencies that the agency’s internal complaint Does the agency provide provide counseling free, do not resolution process. substantive counseling and charge more than $50 to set up a education services? “Any agency you choose should DMP, and limit monthly fees to $50 The counseling session, whether be consumer-focused, low-cost, or the amount allowable by state face to face or by phone, should and aspire to high standards [of law. Never work with an agency last 30 minutes to 90 minutes and service],” advises Jessica Cecere, that keeps your entire first month’s cover your income, expenses, the president of Consumer Credit consolidated DMP payment. debt, the reason for your current Counseling Service of Palm Beach financial issues, and your goals. “A company that asks you to pay a County/Treasure Coast of Florida. You should receive a customized lot of money in exchange for getting Source: Adapted from Steer Clear of action plan, and your options you out of debt is probably helping Credit Counseling Bad Guys; Home should be explained clearly. A debt only its own bottom line, not & Family Finance Resource Center management plan (DMP), where yours,” points out Alice Saker Hrdy,

Turning Points 7 Avoiding Bankruptcy seemed in recent years to helping you stay your creditor will have few or no options for in your home. collecting on your debt unless and until your circumstances change for the better. At that What not to do: Fall prey to scammers who time, you may be able to afford to repay the promise to stave off foreclosure and lower debt, and you will have avoided the cost and your mortgage payments in exchange for a repercussions of bankruptcy, though your fee that typically runs into the thousands of credit rating will have been damaged by the dollars. You can achieve the same results— unpaid debt. See The High Cost of Filing for free—on your own or with the help of a Bankruptcy in this publication. housing counselor. (The FTC offers information about how to avoid foreclosure rescue scams.) What not to do: Assume your creditors have no recourse. Being wrong could result in n Do nothing. For some people with certain your being sued and your wages or bank types of debts—unsecured credit debt and accounts being garnished. Talk to a credit medical bills, for example—and limited counselor or other professional to find out income and assets, bankruptcy is overkill: how your creditors could and could not The negative repercussions far outweigh collect from you. the advantages. If this is your situation, I have enough income to Budget for Infrequent Expenses make partial bill payments. Use a grid with infrequent expenses listed on the left side and columns for Should I file for Chapter 13 annual and monthly budget goal amounts across the top to help develop bankruptcy or try to repay your spending plan. my debts on my own?

There are some significant differences Estimated annual cost* Monthly savings goal between paying your debts in a Chapter 13 Car repair $1,000 $84 bankruptcy and paying them on your own. To New tires for car 360 30 make the best choice, you need to consider the advantages and disadvantages of each Car replacement unknown 200 option. Dental care 360 30 Vision care 300 25 The high cost Television 480 40 of filing for Other electronics $1,200 $100 bankruptcy Total $ 3,700 $509 In a June 2008 report, the U.S. This sample grid is for a 24-year-old woman named Amy living on her own Government Accountability Office in a rented apartment. Amy owns a five-year-old car with 103,000 miles. (GAO) estimated the total average She believes she can use it for two more years, as long as she buys new cost of filing for Chapter 7 to be tires next year. In the meantime, she’s saving for her next car. $1,477 ($1,078 for attorney’s fees, $299 for court fees, and $100 for Save what you can until you build a stronger backup fund to meet these mandatory credit counseling and and other now-and-then expenses. One effective strategy: As soon as you debtor education fees). Many pay off a loan, divert that monthly payment to your savings or money market estimates put attorney fees at account. closer to $1,500 to $2,000 to file for *All amounts are estimates only; check actual costs in your area when setting your budget Chapter 7, and more for Chapter 13.

Turning Points 8 Avoiding Bankruptcy Chapter 13 bankruptcy (court-administered the creditors you pay through the plan payment plan)—This type of bankruptcy could report your account as not being Obtaining your offers certain legal protections for debtors. paid as promised if they have reduced your One of the most important of these is the payments or interest, or if your payments are credit report ability to shelter your home from foreclosure arriving after the due date. Credit counselors Before you make any major and force the lender to accept a repayment point out that these “dings” to your credit decisions about how to handle your plan to make up delinquent mortgage score are less damaging than a bankruptcy debt, order a copy of your credit payments over three to five years. If a or a string of missed payments. report. The report will tell you whom Chapter 13 bankruptcy is, in fact, the only It’s always a good idea to know where you owe, how much you owe, the way to protect your home, it may be the best you stand. Order your credit report before status of your account, and whom option to pursue. beginning a DMP or pursuing any other to contact regarding the debt. (A Before making that determination, contact resolution. You’ll see your total debt, a listing creditor may have sold or assigned your lender or a HUD-approved housing of creditors, and how your account is being the debt to a collection agency.) counseling agency to explore ways to keep reported (“satisfied,” “paid as agreed,” or Only creditors who report to the your home without filing for bankruptcy. “charge-off,” for example). See Obtaining credit reporting agencies will be (Find one through HUD, 800-569-4287, listed. or the Homeowner’s HOPE™ Hotline, You are entitled to a free copy of 888-995-HOPE). Today, lenders are more your credit report from each of willing than ever to make loan modifications the three major credit-reporting that could help you get current and make agencies—Equifax, Experian, and future mortgage payments more affordable. TransUnion—every 12 months. These modifications could include reducing (Order one from each credit bureau the interest rate, adding missed payments every four months both to monitor to the end of the loan, extending the loan your credit standing and to be term, and reducing the monthly payment on the lookout for identity theft.) so it doesn’t exceed a certain percentage of Your Credit Report in this publication. Order your free reports online, at income. AnnualCreditReport.com, or by Independent or credit counseling- How can I avoid getting to phone, at 877-322-8228. Your free administered payment plan—If you do not the point where bankruptcy report will not include your credit need the protections provided by Chapter 13, seems like my only option? score. paying your debts on your own or through If you notice any inaccuracies a credit counseling agency-administered Generally speaking, bankruptcy, foreclosure, (debts that aren’t yours, debts that DMP allows you to avoid the stigma, repossession, and wage garnishment come have been paid off, or old debts that consequences, and cost of bankruptcy. A only after at least a few missed payments should have aged off the report), credit union representative can help you and many unsuccessful attempts by the follow the instructions that come evaluate your options, and refer you to a creditor to contact you and discuss a with the report to file a dispute. The credit counseling agency it already has a resolution. So, you’ll have more options than credit reporting agency must verify relationship with if you decide that is the just bankruptcy if, at the very first sign of the information with the creditor way to go. See How to Find a Reputable problems, you take action. that provided it. If it can’t verify the Credit Counseling Agency in this publication. n Communicate with your creditor. Contact item, it must remove it. Some consumers fear that participating in a your creditor, and respond to your creditor’s DMP will lower their credit score. According attempts to contact you. Being unresponsive to Fair Isaac Corporation, creator of the suggests you don’t intend to pay your debt widely used FICO® score, credit counseling and eliminates any motivation the creditor has and DMP participation themselves should to postpone legal action. See Tips for Working not affect your credit standing. However, with Your Creditors in this publication.

Turning Points 9 Avoiding Bankruptcy n Talk to a professional credit counselor. bonuses, gifts, and tax refunds. And save up He or she will analyze your financial for special treats such as vacations rather situation, set priorities with your expenses, than finance them on credit. present your options, and offer guidance n Use credit responsibly. Make it a goal based on your goals. The sooner you make to reduce or eliminate short-term debt the appointment, the more options will whenever you’re able. be available to you. See How to Find a Reputable Credit Counseling Agency in this n Anticipate expenses. Save monthly for publication. expected but infrequent large bills, such as insurance premiums, the replacement n Make damage control your goal. Make of an old refrigerator, and car tune-ups a tough decision sooner rather than later and repairs. Talk to the professionals at if it will enable you to avoid the worst-case your credit union about setting up a direct scenario. For example, if you know you deposit savings account for these expenses. will not be able to keep up with your car payments for the long term, sell the car, n Build an adequate emergency fund. refinance the loan, or give the car back to Three to six months of expenses is a savings the lender rather than wait for the inevitable guideline. If this is too big a goal to start repossession. Repossession doesn’t just with, begin by saving one month’s living mean you lose the vehicle. The lender could expenses, then work up to the equivalent of get a deficiency judgment against you, three to six months worth of ongoing costs. meaning you would owe the difference If your household has only one breadwinner, between the outstanding loan balance, plus you might want to set aside as many as eight repossession fees, and what the lender months’ expenses. Only tap this fund in was able to get for the vehicle. If the lender times of dire need.

forgives any of your debt, you could end n Have a plan for the worst-case scenario. up with a tax bill for the “income.” And Know what you would do if you lost your job your credit score will be damaged by the next week. repossession. n Ask for help. Your credit union offers ® The higher your FICO credit When it comes to financial planning services that will help you score, the lower your payments financial challenges, prepare for the future, or can refer you to it’s better to be those resources. Interest rates accurate as of Aug. 11, 2009: proactive than reactive. That means n 30-year fixed-rate mortgage not only addressing I’m having trouble paying financial problems my bills. Should I file for FICO® score APR Monthly payment head-on when they bankruptcy? 760-850 5.109% $1,631 arise, but also making Only as your very last resort. Bankruptcy—a choices that are 700-759 5.331% $1,672 legal process that results in either the less likely to create discharge of debts (Chapter 7) or the 680-699 5.508% $1,705 financial problems in repayment of debts under a court-approved the first place. 660-679 5.722% $1,745 payment plan (Chapter 13)—is an option n 640-659 6.152% $1,828 Live beneath your for some consumers, and not for others. means. Don’t buy a Whether filing for either type of bankruptcy 620-639 6.698% $1,935 car you can’t easily is an option for you depends on various Source: myFico.com afford. Save rather factors, both legal and personal. than spend raises, First, federal law restricts who can file

Turning Points 10 Avoiding Bankruptcy for bankruptcy. To file for Chapter 7, your resources to repay at least something income must be below your state’s median toward your debts. If you can repay at least income for a family of the same size. If part of your debt, you only will be allowed to it’s not, you must take a “means” test, file for Chapter 13, not Chapter 7. There are which determines if you have the financial other legal requirements as well.

Second, even if bankruptcy is an option for you legally, it may not be something you’re willing to consider for personal reasons. in financial trouble themselves; Dealing with the Dave Ramsey, radio and television show host they may help you feel “we’re and author of “The Total Money Makeover: in the same boat” but may not stress of debt A Proven Plan for Financial Fitness,” calls be your best sources for sound bankruptcy one of the “top five life-altering The stress that comes with debt can advice. If your employer offers negative events that we can go through.” have an impact on your closest an employee assistance program If you can’t reconcile bankruptcy with relationships, your performance (EAP), call its 800 number to find your values, or if bankruptcy could make at work, and your outlook on life. reliable resources you can use it difficult or impossible to achieve your Experts say there also is research to anonymously. support that the stress debt causes goals—such as getting a particular job or can, over the long-term, lead to Another key step in the recovery promotion, or obtaining credit to start a physiological health problems as process is taking action. Todd Mark, business—or if your filing would leave a well. Successfully managing the side vice president of education for co-signer “holding the bag” for one of your effects of debt offers big benefits for Consumer Credit Counseling Service debts, you may not see bankruptcy as a both your mind and your body. of Greater Dallas, says people choice worth contemplating. dealing with debt can’t worry about Assuming you’re able to file for bankruptcy One of the most important steps the past, only about their actions under the law—in other words, you meet all in any recovery process is talking in the weeks and months ahead. legal requirements—you must ask yourself about how you feel. Yet, experts Making an appointment for credit or two questions: say, it’s common to hear consumers financial counseling is an important overwhelmed by debt say they first step toward empowerment and 1. Is filing for bankruptcy the best way to don’t feel like they can discuss their self-reliance. deal with my money troubles? Make any situation with friends or family, decision to file for bankruptcy with a clear For financial planning assistance or that they don’t want to talk to understanding of what it can and can’t do or a referral to a credit counselor, anyone face to face. Thanks to the for you. Internet, a support group that fits contact your credit union. You also For example, many debts—including spousal your needs is just a few keystrokes can search for a credit counseling and child support, most tax debts, most away. agency at nfcc.org (National Foundation for Credit Counseling) student loans, secured debts, restitution, There also are many blogs (Web or aiccca.org (Association of and criminal fines—are not dischargeable in logs) focused on personal finance Independent Consumer Credit a Chapter 7 bankruptcy. For consumers with and debt. Some bloggers welcome Counseling Agencies). these types of debt, bankruptcy offers little comments from visitors, creating relief but carries a large, long-term cost. an informal support group. Do an For mental health counseling, look If you have specific objectives, such as Internet search for “debt blog” and for a licensed therapist that has keeping collectors from harassing you or “personal finance blog.” When you experience with working through protecting your home from foreclosure, see the long list of results, you’ll money issues. Again, if your there may be ways other than bankruptcy know you’re not alone. employer offers an EAP, counseling may be available free. to achieve them. For example, federal and Keep in mind, these sites feature state laws prohibit creditors from harassing nonprofessionals who are already borrowers. See What Debt Collectors

Turning Points 11 Avoiding Bankruptcy Can and Can’t Do in this publication. And In a Chapter 7 bankruptcy, also referred to 10 years, meaning you could have difficulty you may be able to avoid foreclosure by as liquidation, you must forfeit any assets obtaining credit, renting a home, getting contacting your lender and asking for a that do not qualify as exempt under state insurance, or qualifying for a particular job loan modification that would make your guidelines. Forfeited assets are sold— or promotion long after your bankruptcy payments more affordable, or a repayment liquidated—to pay your creditors. case is closed. plan to make up past-due amounts. Bankruptcy stays on your credit report for Whether or not you should file for 2. Are the costs and bankruptcy is a question only you consequences of bankruptcy can answer. As you seek advice worth the benefits it might from various sources, you may offer? The dollar cost of an find that it can be difficult to find attorney-assisted bankruptcy truly unbiased input. Your best can be quite high—as much course of action is to gather all as a few thousand dollars. the information you can and then See The High Cost of Filing for make a decision about whether or Bankruptcy in this publication. not to file for bankruptcy based While it’s possible to file for on the facts you’ve gathered, your bankruptcy without an attorney, alternatives, your personal and the consensus is that the financial goals, and your values. process is so complex as to make U.S. Department of Housing legal assistance necessary. and Urban Development

What debt n Contact you directly if you’ve It makes sense to talk to a collector hired an attorney and have notified at least once to get key information collectors can and the collector. such as the name of the creditor, the name and contact information of n Contact anyone other than you, can’t do the collector, the amount due, and your spouse, or your attorney to so on. If you don’t want the collector You don’t have to file for bankruptcy discuss your debt, except to find out to contact you after that, you can to get peace from debt collectors. your address, home phone number, send a letter by certified mail, The Fair Debt Collection Practices and employer. Act (FDCPA) sets guidelines for what return receipt requested, telling the debt collectors can and can’t do. n Use obscene or profane language. collector not to contact you again. From that point, the collector can In a nutshell, third-party collectors n Make false statements, such contact you only to confirm that (collection agencies, lawyers as claiming to be an attorney or there will be no further contact or to who routinely collect debts, and government employee. companies that buy delinquent debts let you know that a specific action, and then try to collect them) can’t n Threaten to take your assets or such as filing a lawsuit, will be use abusive, unfair, or deceptive property unless they are legally taken. entitled to do so. practices to collect from you. For more information about debt Specifically, collectors cannot: n Threaten legal action unless they collection and related topics, visit intend to follow through. the Federal Trade Commission (FTC) n Contact you before 8 a.m. or after online. To report a violation of the n Continue to contact you if you 9 p.m., unless you give permission. FDCPA, contact your state attorney dispute the debt in writing (unless n general’s office and the FTC. Contact you at work if you tell the collector provides proof you them you’re not allowed to receive really do owe the debt). calls.

Turning Points 12 Avoiding Bankruptcy Useful resources

(HUD) Guide to Avoiding Foreclosure

“Mortgage Payments Sending You Reeling? Here’s What to Do,” FTC

“Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom” (11th edition), by Robin Leonard and John C. Lamb, Nolo, 2007

“Guide to Surviving Debt,” by Deanne Loonin, National Consumer Law Center, 2008

“Debt Collection FAQs: A Guide for Consumers,” FTC

“Before You File for Personal Bankruptcy: Information about Credit Counseling and Debtor Education,” FTC

“How to Get Out of Debt, Stay Out of Debt and Live Prosperously,” by Jerrold Mundis, Bantam, 2003

“Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence,” by Vicki Robin, Joe Dominguez, and Monique Tilford, Penguin, 2008

IRS Withholding Calculator, Internal Revenue Service

“Improving Your FICO® Credit Score,” Fair Isaac Corporation

Turning Points 13 Avoiding Bankruptcy