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—
particularly as drastic an action as filing for
bankruptcy—without considering all the
consequences.
and far-reaching.” Bankruptcy can make
it difficult to obtain credit at reasonable
rates, rent a house, get insurance, or
Questions:
n How can my credit union help me
qualify for a particular job or promotion.
avoid bankruptcy?
The Federal Trade Commission (FTC),
And since many filers find themselves still
the nation’s consumer protection
dealing with the fallout many years down
n What options besides bankruptcy
agency, Washington, D.C., describes the
the road—bankruptcy stays on your credit
repercussions of bankruptcy as “long-lasting
report for 10 years—it can hardly be touted
do I have if I’m having trouble
paying my bills?
n I have enough income to make
partial bill payments. Should I file
MEDICAL BILLS CUT DEEP
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
American Journal of Medicine. Medical problems contributed to 62.1% of
all bankruptcies in 2007. That number probably has increased during the
current recession, which began in December 2007. The report also noted
that, between 2001 and 2007, the percentage of all bankruptcies attributable
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.”
for Chapter 13 bankruptcy, or try to
repay my debts on my own?
n How can I avoid getting to the
point where bankruptcy seems like
my only option?
n I’m having trouble paying my
bills. Should I file for bankruptcy?
Turning Points 2 Avoiding Bankruptcy
How can my credit union
help me avoid bankruptcy?
who participate agree to lower payments,
troubles and bankruptcy. “Emergency
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
more than just a customer, you’re a member.
Agency in this publication.)
Other financial institutions expect customers
Mike Schenk, an economist at the Credit
Union National Association (CUNA), says it’s
If you need to borrow to make ends meet
never too late to ask for help at your credit
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
to just come and go.
layoffs, and a stock market free fall seem
really is looking out for your best interest.”
to have left no family untouched. Times
What options besides
bankruptcy do I have
if I’m having trouble
paying my bills?
are tough. But things will get better. And
when they do, you’ll be relieved to have
avoided bankruptcy and its long-lasting
consequences. Here are some ways the
people at your credit union can help you do
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
credit counseling agency for help. A
can find elsewhere. This makes credit more
Enter your numbers, print the results, and
credit counselor can look at your financial
affordable for you. It also protects you from
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.
be participation in a debt-management plan
(DMP).
As times get better, your credit union can
help you establish or strengthen a direct
In a DMP, you repay all or some of your
deposit savings plan to help you build an
debts by sending a single payment to the
adequate emergency fund. Being prepared
credit counseling agency, which distributes
for the worst is the best way to avoid money
it among your creditors. Many creditors
then do one or more of the following to close
the gap.
n Increase income. Pick up overtime hours
if they’re available, find an additional job,
or start a small side business offering a
service you’re qualified to provide, such as
babysitting, gardening, senior assistance,
music lessons, sewing, or repairs. If you
have an extra room or an unneeded garage,
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
them if you had to file bankruptcy. If you
normally get a tax refund when you file,
AARP’s “25 Ways to Cut Costs on Just About
Everything”
consider changing your withholding to have
What not to do: Cut costs by not paying
less money taken out of each paycheck.
insurance premiums. Rather than let
(The IRS provides tips and a worksheet to
your policies lapse, talk to your
calculate the correct amount.)
insurance agent about a
What not to do: Wait until you need the
money immediately, making a pawn shop
your only option. A pawnbroker will give you
a fraction of the value of your possessions—
much, much less than you would get if you
had time to sell them on your own terms.
your home unless you’re absolutely sure
you can make the payments for the long
term. (Otherwise, if you get behind on your
mortgage payments, you could put your
home at risk of foreclosure.) Keep in
mind that by doing this, you will
pay more over the long haul
payment plan, consider
because you’re taking short-
reducing coverage if you’re
term debt and financing it
overinsured, or shop
for as long as 30 years.
around for better rates for
n Consider borrowing from
comparable coverage. But
a friend or family member.
don’t choose an insurance
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
cuts and how much you can save will depend
financial strength and stability online
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
this credit union Web site and in these lists:
n Tap your home equity. If your home is
worth more than you owe on it, and if your
“66 Ways to Save Money,” available from
credit score is still in decent shape, consider
the Federal Citizen Information Center
refinancing your mortgage or opening a
“Living on Less: 20 Painless Ways to Cut
Costs and Save Money,” published by
Associated Content
and make consistent payments. (See
Borrowing from family and friends)
Federation of America’s (CFA) Web site to
see what a payday loan could cost you.
Ask at your credit union about payday loan
alternatives offered there.
home equity line of credit. Talk to your credit
n Work with your creditors. Contact your
union lender about home loans that fit your
creditors when you realize you won’t be
needs.
able to make your full payment on time.
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
While using a pawnbroker can seem like a quick way to get cash, about
one-third of pawned items are never redeemed. As a result, the owner
history. See Tips for Working with Your
Creditors in this publication.
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
If you’re willing to give up the item, it’s best to sell it outright to avoid fees
and get its full value. If you’re not willing to give it up, look for other loan
sources, such as a short-term personal loan from your credit union.
plus income taxes on the amount you
withdraw. And, the money won’t be there
when you need it.
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 counselingadministered debt management plan
(DMP), the agency will send a proposal to
your creditors requesting that they reduce
payments, reduce or waive interest charges
Borrowing from family and friends
Ideally, a loan between friends or family would be a win-win situation:
You, as the borrower, would get credit that might not have been available
and fees, and bring your account current.
Not all creditors offer all concessions. You
send one payment to the agency, which
disburses it to your creditors on the plan.
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
n Loan amount.
Reputable Credit
n Interest rate. You might think the interest rate you
this publication.
Counseling Agency in
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
lump sum.
create a tax bill for
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,
n Security interest. Will the loan be secured by any personal property?
talk to a housing counselor. He or she will
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
Source: Loans Among Friends and Family: Win-Win, or Sure Loss? Home &
Family Finance Resource Center; search for the complete article on this Web
site.
Homeowner’s HOPE™ Hotline (888-995HOPE). According to Mark, lenders are much
more committed now than they may have
(continued on p. 8)
Turning Points 5 Avoiding Bankruptcy
Tips for Working
with Your Creditors
How do some borrowers avoid
severe consequences—a lawsuit,
foreclosure, or repossession—
despite missing one or more credit
payments? The key is in how they
approach the situation. Here are
some tips that will greatly increase
your chances of successfully
on track could, at the very least,
creditor know. Provide concrete
encourage your creditor to hold off
dates whenever possible.
on reporting you delinquent to the
credit reporting agencies.
n Be polite. It’s easy to get anxious or
n Propose a solution. Tell your
creditor exactly what would help
you most: a lower interest rate,
a reduced payment for six
frustrated when dealing with
debt issues, but courtesy
months, a larger credit
and respect will get you
line, or any other
concession. Do this
further. “Remember,
[your creditor is] not
only after doing the
the enemy,” says
math and figuring
working with your creditors.
Mark. “Treat them that
out exactly what
n Be proactive. Call your creditor as
way, and you give
you could afford to
them less incentive to
soon as you determine that missing
a payment is unavoidable. By
contacting the creditor first, rather
than forcing the creditor to track
you down, you convey that you
are concerned, committed, and
pay and when. Never
agree to a payment
work with you.”
n Explain the situation.
Creditors want to know that there is
a good reason—something beyond
your control, such as a job loss—for
amount or schedule unless
you’re absolutely sure you can
afford it and will be able to keep the
commitment.
responsible.
the delinquency. Let the creditor
n Keep a log. Keep track of all
Some experts recommend making
know how your financial situation
communications, including the date,
has changed and why you can’t
who contacted whom and how
make a full, or any, payment. Be
(letter, e-mail, or phone call), the
prepared to provide specifics about
name of the creditor representative,
your income, expenses, and other
the key points discussed and any
debts.
agreement reached, and follow-up
a “good faith” token payment. Todd
Mark, vice president of education
for Consumer Credit Counseling
Service of Greater Dallas, suggests
first asking the creditor if it will help.
He says that if money is very tight,
and a token payment won’t help
you avoid a late fee or a “ding” to
your credit report, you may want
to keep the extra dollars to pay
for necessities. Mark also says that
communicating with your creditor
and making a real effort to get back
n Give a prognosis. What changes
needed.
do you see in the near future that
n Follow through. Notify the
would enable you to get back on
creditor of any snag that will make
track? Starting a new job soon,
it impossible to fulfill your new
making your last car payment,
agreement.
moving to lower-cost housing—these
all are things that could make it
easier to pay your bills, so let your
Creditors always maintain the right
to report you delinquent, sell your
account to a collection agency,
repossess or foreclose on your
Maxed out? Seek help from:
property, or sue you. Your sincere
n Your credit union—Ask if someone there provides one-on-one credit
counseling to help get your finances in order.
creditor and repaying your debt,
n The National Foundation for Credit Counseling (NFCC)—The NFCC, Silver
Spring, Md., has nonprofit Consumer Credit Counseling Service (CCCS)
affiliates around the country ready to help you get back on track from
financial difficulty. To locate the nearest CCCS office, call 800-388-2227
(en Español, 800-682-9832), or visit nfcc.org.
time to recover and avoid serious
effort at communicating with the
however, may buy you enough
repercussions.
Source: Steer Clear of Credit
Counseling Bad Guys; Home &
Family Finance Resource Center
Turning Points 6 Avoiding Bankruptcy
How to find a
reputable credit
counseling
agency
the agency negotiates interest and
assistant director of the Federal
payment concessions with your
Trade Commission’s (FTC) division of
creditors and then disburses your
financial practices.
What are your options when the
all your unsecured creditors,
gap between your income and your
monthly payment among those
participating in the plan, should
be established only if it is in your
interest, and it should include
Is there full disclosure?
The agency should provide a written
agreement that clearly states fees,
main source of funding (typically
creditors), creditor concessions,
amount to be disbursed, how long
bill payments has become so big
the DMP will last (not be more than
you’ve given up hope of them ever
48 months), and the possible impact
meeting again? One of them is to
of a DMP on credit reports.
consult a credit counselor.
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.
Is the organization an accredited
nonprofit?
Think twice about working with an
agency that isn’t accredited by an
organization such as the Council on
Accreditation (COA).
Does the agency provide
substantive counseling and
education services?
The counseling session, whether
face to face or by phone, should
last 30 minutes to 90 minutes and
cover your income, expenses,
debt, the reason for your current
even if they do not make a “fair
share” contribution to the agency.
Money management classes and
educational materials should be
available.
What is the agency’s complaint
record?
Check the agency’s record of
complaints with the U.S. Council
of Better Business Bureaus and the
What are the fees?
state attorney general. Ask about
There are excellent agencies that
the agency’s internal complaint
provide counseling free, do not
resolution process.
charge more than $50 to set up a
DMP, and limit monthly fees to $50
or the amount allowable by state
law. Never work with an agency
that keeps your entire first month’s
consolidated DMP payment.
financial issues, and your goals.
“A company that asks you to pay a
You should receive a customized
lot of money in exchange for getting
action plan, and your options
you out of debt is probably helping
should be explained clearly. A debt
only its own bottom line, not
management plan (DMP), where
yours,” points out Alice Saker Hrdy,
“Any agency you choose should
be consumer-focused, low-cost,
and aspire to high standards [of
service],” advises Jessica Cecere,
the president of Consumer Credit
Counseling Service of Palm Beach
County/Treasure Coast of Florida.
Source: Adapted from Steer Clear of
Credit Counseling Bad Guys; Home
& Family Finance Resource Center
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
What not to do: Fall prey to scammers who
promise to stave off foreclosure and lower
your mortgage payments in exchange for a
fee that typically runs into the thousands of
dollars. You can achieve the same results—
free—on your own or with the help of a
housing counselor. (The FTC offers information
about how to avoid foreclosure rescue scams.)
n Do nothing. For some people with certain
types of debts—unsecured credit debt and
medical bills, for example—and limited
income and assets, bankruptcy is overkill:
The negative repercussions far outweigh
the advantages. If this is your situation,
Budget for Infrequent Expenses
Use a grid with infrequent expenses listed on the left side and columns for
annual and monthly budget goal amounts across the top to help develop
your spending plan.
Car repair
Estimated annual cost*
Monthly savings goal
$1,000
$84
360
30
unknown
200
Dental care 360
30
Vision care
300
25
Television
480
40
Other electronics
$1,200
$100
Total
$ 3,700
$509
New tires for car
Car replacement circumstances change for the better. At that
time, you may be able to afford to repay the
debt, and you will have avoided the cost and
repercussions of bankruptcy, though your
credit rating will have been damaged by the
unpaid debt. See The High Cost of Filing for
Bankruptcy in this publication.
What not to do: Assume your creditors have
no recourse. Being wrong could result in
your being sued and your wages or bank
accounts being garnished. Talk to a credit
counselor or other professional to find out
how your creditors could and could not
collect from you.
I have enough income to
make partial bill payments.
Should I file for Chapter 13
bankruptcy or try to repay
my debts on my own?
There are some significant differences
between paying your debts in a Chapter 13
bankruptcy and paying them on your own. To
make the best choice, you need to consider
the advantages and disadvantages of each
option.
The high cost
of filing for
bankruptcy
In a June 2008 report, the U.S.
This sample grid is for a 24-year-old woman named Amy living on her own
in a rented apartment. Amy owns a five-year-old car with 103,000 miles.
She believes she can use it for two more years, as long as she buys new
tires next year. In the meantime, she’s saving for her next car.
Save what you can until you build a stronger backup fund to meet these
and other now-and-then expenses. One effective strategy: As soon as you
pay off a loan, divert that monthly payment to your savings or money market
account.
*All amounts are estimates only; check actual costs in your area when setting your budget
Government Accountability Office
(GAO) estimated the total average
cost of filing for Chapter 7 to be
$1,477 ($1,078 for attorney’s fees,
$299 for court fees, and $100 for
mandatory credit counseling and
debtor education fees). Many
estimates put attorney fees at
closer to $1,500 to $2,000 to file for
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
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
ability to shelter your home from foreclosure
arriving after the due date. Credit counselors
and force the lender to accept a repayment
point out that these “dings” to your credit
plan to make up delinquent mortgage
score are less damaging than a bankruptcy
payments over three to five years. If a
or a string of missed payments.
Chapter 13 bankruptcy is, in fact, the only
Obtaining your
credit report
Before you make any major
decisions about how to handle your
debt, order a copy of your credit
report. The report will tell you whom
It’s always a good idea to know where
you owe, how much you owe, the
you stand. Order your credit report before
status of your account, and whom
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
way to protect your home, it may be the best
option to pursue.
listed.
(Find one through HUD, 800-569-4287,
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
so it doesn’t exceed a certain percentage of
Your Credit Report in this publication.
income.
Independent or credit counselingadministered payment plan—If you do not
need the protections provided by Chapter 13,
paying your debts on your own or through
How can I avoid getting to
the point where bankruptcy
seems like my only option?
on the lookout for identity theft.)
Order your free reports online, at
AnnualCreditReport.com, or by
phone, at 877-322-8228. Your free
report will not include your credit
score.
a credit counseling agency-administered
Generally speaking, bankruptcy, foreclosure,
If you notice any inaccuracies
DMP allows you to avoid the stigma,
repossession, and wage garnishment come
(debts that aren’t yours, debts that
consequences, and cost of bankruptcy. A
only after at least a few missed payments
have been paid off, or old debts that
credit union representative can help you
and many unsuccessful attempts by the
should have aged off the report),
evaluate your options, and refer you to a
creditor to contact you and discuss a
follow the instructions that come
credit counseling agency it already has a
resolution. So, you’ll have more options than
with the report to file a dispute. The
relationship with if you decide that is the
just bankruptcy if, at the very first sign of
credit reporting agency must verify
way to go. See How to Find a Reputable
problems, you take action.
the information with the creditor
Credit Counseling Agency in this publication.
n Communicate with your creditor. Contact
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.
that provided it. If it can’t verify the
item, it must remove it.
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
based on your goals. The sooner you make
the appointment, the more options will
be available to you. See How to Find a
to reduce or eliminate short-term debt
whenever you’re able.
Reputable Credit Counseling Agency in this
n Anticipate expenses. Save monthly for
publication.
expected but infrequent large bills, such
n Make damage control your goal. Make
a tough decision sooner rather than later
if it will enable you to avoid the worst-case
scenario. For example, if you know you
will not be able to keep up with your car
as insurance premiums, the replacement
of an old refrigerator, and car tune-ups
and repairs. Talk to the professionals at
your credit union about setting up a direct
deposit savings account for these expenses.
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
your credit score will be damaged by the
repossession.
The higher your FICO® credit
score, the lower your payments
Interest rates accurate as of Aug. 11, 2009:
When it comes to
financial challenges,
it’s better to be
proactive than
reactive. That means
n 30-year fixed-rate mortgage
FICO® score
n Use credit responsibly. Make it a goal
not only addressing
financial problems
Know what you would do if you lost your job
next week.
n Ask for help. Your credit union offers
financial planning services that will help you
prepare for the future, or can refer you to
those resources.
I’m having trouble paying
my bills. Should I file for
bankruptcy?
APR Monthly payment
760-850
5.109%
$1,631
700-759
5.331%
$1,672
680-699
5.508%
$1,705
financial problems in
660-679
5.722%
$ 1,745
the first place.
for some consumers, and not for others.
head-on when they
arise, but also making
choices that are
less likely to create
Only as your very last resort. Bankruptcy—a
legal process that results in either the
discharge of debts (Chapter 7) or the
repayment of debts under a court-approved
payment plan (Chapter 13)—is an option
640-659
6.152%
$1,828
n Live beneath your
620-639
6.698%
$1,935
means. Don’t buy a
Whether filing for either type of bankruptcy
car you can’t easily
is an option for you depends on various
afford. Save rather
factors, both legal and personal.
Source: myFico.com
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
Dealing with the
stress of debt
in financial trouble themselves;
The stress that comes with debt can
advice. If your employer offers
have an impact on your closest
relationships, your performance
at work, and your outlook on life.
Experts say there also is research to
support that the stress debt causes
they may help you feel “we’re
in the same boat” but may not
be your best sources for sound
an employee assistance program
(EAP), call its 800 number to find
reliable resources you can use
anonymously.
willing to consider for personal reasons.
Dave Ramsey, radio and television show host
and author of “The Total Money Makeover:
A Proven Plan for Financial Fitness,” calls
bankruptcy one of the “top five life-altering
negative events that we can go through.”
If you can’t reconcile bankruptcy with
your values, or if bankruptcy could make
it difficult or impossible to achieve your
goals—such as getting a particular job or
Another key step in the recovery
promotion, or obtaining credit to start a
process is taking action. Todd Mark,
business—or if your filing would leave a
vice president of education for
co-signer “holding the bag” for one of your
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.
One of the most important steps
the past, only about their actions
can, over the long-term, lead to
physiological health problems as
well. Successfully managing the side
effects of debt offers big benefits for
in any recovery process is talking
about how you feel. Yet, experts
say, it’s common to hear consumers
overwhelmed by debt say they
don’t feel like they can discuss their
situation with friends or family,
or that they don’t want to talk to
anyone face to face. Thanks to the
Internet, a support group that fits
dealing with debt can’t worry about
in the weeks and months ahead.
Making an appointment for credit or
financial counseling is an important
Assuming you’re able to file for bankruptcy
under the law—in other words, you meet all
legal requirements—you must ask yourself
two questions:
first step toward empowerment and
1. Is filing for bankruptcy the best way to
self-reliance.
deal with my money troubles? Make any
For financial planning assistance
or a referral to a credit counselor,
contact your credit union. You also
decision to file for bankruptcy with a clear
understanding of what it can and can’t do
for you.
can search for a credit counseling
For example, many debts—including spousal
away.
agency at nfcc.org (National
and child support, most tax debts, most
student loans, secured debts, restitution,
There also are many blogs (Web
Foundation for Credit Counseling)
or aiccca.org (Association of
and criminal fines—are not dischargeable in
Independent Consumer Credit
a Chapter 7 bankruptcy. For consumers with
Counseling Agencies).
these types of debt, bankruptcy offers little
your needs is just a few keystrokes
logs) focused on personal finance
and debt. Some bloggers welcome
comments from visitors, creating
an informal support group. Do an
Internet search for “debt blog” and
“personal finance blog.” When you
see the long list of results, you’ll
know you’re not alone.
Keep in mind, these sites feature
nonprofessionals who are already
For mental health counseling, look
relief but carries a large, long-term cost.
for a licensed therapist that has
If you have specific objectives, such as
experience with working through
keeping collectors from harassing you or
money issues. Again, if your
protecting your home from foreclosure,
employer offers an EAP, counseling
there may be ways other than bankruptcy
may be available free.
to achieve them. For example, federal and
state laws prohibit creditors from harassing
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.
Bankruptcy stays on your credit report for
Whether or not you should file for
plan to make up past-due amounts.
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.
What debt
collectors can and
can’t do
You don’t have to file for bankruptcy
to get peace from debt collectors.
The Fair Debt Collection Practices
Act (FDCPA) sets guidelines for what
and Urban Development
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
the collector.
such as the name of the creditor, the
n Contact anyone other than you,
your spouse, or your attorney to
discuss your debt, except to find out
your address, home phone number,
and employer.
debt collectors can and can’t do.
n Use obscene or profane language.
In a nutshell, third-party collectors
n Make false statements, such
(collection agencies, lawyers
who routinely collect debts, and
companies that buy delinquent debts
as claiming to be an attorney or
government employee.
name and contact information of
the collector, the amount due, and
so on. If you don’t want the collector
to contact you after that, you can
send a letter by certified mail,
return receipt requested, telling the
collector not to contact you again.
From that point, the collector can
contact you only to confirm that
there will be no further contact or to
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.
practices to collect from you.
entitled to do so.
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
9 p.m., unless you give permission.
n Contact you at work if you tell
them you’re not allowed to receive
calls.
n Continue to contact you if you
dispute the debt in writing (unless
the collector provides proof you
For more information about debt
online. To report a violation of the
FDCPA, contact your state attorney
general’s office and the FTC.
really do owe the debt).
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