Drowning in Debt?

If you are drowning in red ink and can't pay your bills, you need to act quickly to rebuild your credit. There are a number of solutions, with bankruptcy as a last resort. Also read the pamphlet, Surviving Debt, Counseling Families in Financial Trouble, put out by the National Consumer Law Center. It should be available through your local library or contact Publications, NCLC, 18 Tremont Street, Suite 400, Boston, MA 02108, telephone (617) 523-8010. What with all the recent news of foreclosures, this is a popular site and resource.

Creditors. If you find you cannot make your payments, contact your creditors at once. If you have paid your bills promptly in the past, they may be willing to work with you. Do not wait until your account has been turned over to a collection agency. At that point, the creditor has given up on you. You can ask creditors to rewrite your loans to extend the time you have to pay and to change the payments so that you can afford to make them. After all, what other choice do they have but to sue you, which will cost them a lot of money and cause a lot more headaches. The extensions will increase your overall cost, because the creditors will charge you interest over a longer period.

Consumer Credit Counseling Services (CCCSs). These not-for-profit organizations have cropped up in virtually every city. For a modest fee, the CCCS provides debt counseling services for families and individuals with serious financial problems. The Services are supported by contributions from banks, consumer finance companies, credit unions, merchants and other community-minded firms and individuals. A credit counselor meets with you and analyzes your total financial situation. The counselor may develop a repayment plan and contact your creditors to arrange new repayment terms. The counselor also offers education and helps you design a budget so that you can stick to the repayment plan and avoid future financial difficulty.

Credit doctors or credit rebuilders. If you are having trouble paying your bills, you may be tempted to turn to a company that claims to offer assistance in solving debt problems. There are people who claim they can resurrect your credit. But be very careful, since they are not only expensive but are often involved in fraudulent schemes, which can leave you worse off than your original credit problems. Before signing with such a company, investigate it. Be sure you understand the services the company says it will provide and what it will cost you. Do not rely on oral promises that are not in the contract. Also, check with the Better Business Bureau and your state or local consumer protection office. They may be able to tell you whether other consumers have registered complaints about the company.

Loan consolidators. These private businesses lend you money to pay off all your debts. You then owe only one creditor — the loan consolidation company. The good news is that you pay only one check a month, you can repay over a long term, and you can make low monthly payments. The bad news is that the interest charged by loan consolidators may be very high, and you may be hit with a stiff fee for paying off the loan ahead of schedule.

Another danger is that a consolidation loan does nothing to resolve the habits and tendencies that often caused the credit problems in the first place. If you go to the trouble of setting up a consolidation loan, only to again build up an equally imposing mountain of debt the next time you have the opportunity to do so, you won't have accomplished much, and possibly will be worse off than before the consolidation. Unfortunately, this is all too common. And if you have pledged the equity in your home as security for the consolidation loan (usually known as "home equity" loans), you may end up both broke and homeless.

Home equity loans. Most credit counselors advocate the general rule that you should not convert unsecured debt into secured debt. Following this rule would mean not using your home equity to collateralize your credit card debt. Although this is certainly a logical and prudent rule, like most general rules, we think there are times where exceptions may be in order. For instance, such a loan may be appropriate if most or all of the following factors are true:

• You have home equity that you can tap into.
• You presently have been able only to make the minimum monthly payment required on your credit cards.
• Your credit card debt carries very high interest compared to what you could obtain for a home equity loan
• You would meet the qualifications that would make interest to be paid on the home equity loan deductible on your federal income tax return
• You will pay back the home equity loan on a relatively short payment schedule — probably five years, but no more than 10 years. (If this doesn't seem short, remember: if you are only paying the minimum monthly amount required on a large charge balance, your account may not be paid in full for 20 years or more!)
• You have an adequate and dependable source of income available to repay the home equity loan.
• You have made the necessary adjustments to your lifestyle and personal finances necessary to ensure that you won't slide back into the credit card debt morass once your existing credit balances are extinguished. This is probably the most important factor.

Save Money If you do decide to use a home equity loan to extinguish your credit card balances, don't forget to consider this useful additional step: Keep the charge account that you currently have that offers the best overall terms (interest rate, fees, credit limit, wide acceptability), and cancel your other charge cards. This will have the immediate benefit of saving you money on any of the cards that charge annual fees, plus, more importantly, remove some of the temptation to built up charge balances again.