Why Seek Debt Help Now?

It is never an advantage to be in debt; however, if you happen to already there, it can work to your advantage to be in debt during a recession. One of the advantages of being in debt in a down economy is that so many others are suffering through the same circumstances. And companies are much more likely to work with you, since so many of their other customers are struggling to pay their debt, too.

There are many other reasons why you would want to seek assistance now. Some might be:

Way too much debt and you don’t know how to get a handle on it.
Interest rates on your credit cards are super high due to late payments or over the limit fees.
You need to get a loan for a car, but your credit score is dragging you down.
You want to buy a home, but your lender requires you to have private mortgage insurance (PMI). PMI payments with your mortgage payments are way more than you can afford, or you need to scrape up a more robust down payment, but don’t how to get it done.
Your credit history is in dire need of repair.

Bankruptcy: Is it a Viable Option?

Bankruptcy should always be avoided if at all possible. Not everyone who chooses bankruptcy arrives at that decision based on difficulty managing finances. In the current economy, there is good reason why someone would be forced into bankruptcy. The unemployment rate is at a record high in some states. Many homes are in foreclosure due to loss of jobs, not due to financial inaptitude.

Deciding to file for bankruptcy is a big step. The results can be debilitating, causing you some very uncomfortable long-term difficulties, and there are other issues you need to consider before you do. Below are just a few:

Pre-Qualification – There are now bankruptcy laws in place that require you to jump through several Federal hoops before you will even be allowed to file for bankruptcy.
Employment – Some jobs require a credit check, which means if they find a bankruptcy on your report, you may immediately be disqualified for the position. Another consideration is that you may end up losing some of your assets in a bankruptcy, e.g., rental property, surplus cars, luxury property.
Mortgage – Banks typically will not consider a loan for a mortgage for at least two years after the bankruptcy has been finalized.
All other loans – You will probably have difficulty finding any financing institution that will give you a loan, period. If one does, it will most likely be at a very high rate of interest.
Credit Reporting – By law, bankruptcy will stay on your credit report for up to 10 years. Credit reporting agencies typically keep Chapter 7 Bankruptcy on your report for the entire 10 years, but Chapter 13 Bankruptcy reporting may be released as early as 7 years.

credit crunch

If you have negotiated to the umpteenth degree in attempts to resolve your debts, but you are now faced with garnishments, foreclosure or other collection efforts, bankruptcy may be a viable option. You don’t want to lose everything if it can be avoided.

Alternatives to Bankruptcy

Before you bound down that lane to bankruptcy, however, you’ll want to consider a variety of alternatives. Here are some examples:

Budget – Your first step before deciding to file for bankruptcy would be to fully itemize your monthly income and your monthly expenses. If you can find ways to obtain more income and decrease your expenses, you may find enough income to negotiate payments on your debts and save yourself from any future pending legal action. Regardless, you would need this information if you proceed with bankruptcy.
Communication – Communication is key to preventing collection calls and action by your creditors. Due to the current economic climate, creditors are offering alternatives today that have not been considered before.
Balance Transfer – Depending upon your credit score, you may be eligible for a new low-interest credit card that allows balance transfers with no interest for the first several months. Just don’t accept the card until you are fully informed as to the credit limit, interest rate after introductory rate ends and all fees (e.g., balance transfer, maintenance, over-the-limit, late) associated with the card you choose.
Refinance/Second Mortgage – If your credit score is still somewhat intact, you might want to refinance your home. You can pay your debt off over a longer period of time with a lower interest rate and a much lower consolidated payment. You also may want to consider a second mortgage to consolidate your debt and pay it off. If you do this, make sure you are diligent to close your accounts and cut up those credit cards. You don’t need to be back in that same boat that you started from.
Judgment Proof – Are you judgment proof or financially insolvent? If so, this means that you lack adequate income or assets that would make the satisfaction of any judgment against you worthwhile. Creditors will, most likely, take no action against you and simply write off your debt. To initiate this, you need to send a standard letter specific to each debtor informing them that you have insufficient assets and income to pay your debts, and instructing them to no longer contact you regarding the debts. The FTC (Fair Trade Commission) requires that debtors comply upon receipt of the notification. If your financial situation improves, however, your debt would become collectible.
Debt Settlement – If you feel you’ve got the moxie to do it yourself, you could actually take on the daunting task of negotiating a debt settlement with each of your debtors. You have the potential to reduce your debt by 50% or even more. You may either negotiate to pay each in a one-lump sum or work out a payment plan to pay over time. Debtors are more likely to consider this if you are several months behind on your payments.
Debt Management Program (DMP) – Credit or debt counseling services offer debt management programs that are regulated by the Federal Trade Commission (FTC). The FTC provides direction to consumers considering a DMP.

Video: How to Settle Credit Card Debt

Debt Counselor = Debt Relief?

Generally, a debt counselor’s responsibility is to evaluate your income/expenses and to assist you in understanding options for you to resolve your debt. A debt counselor can provide direction that enables you to deal strategically with your debt. Here are some ways a debt counselor can help:

Counsels you regarding your current credit situation and future credit management.
Acts as your mediator and relieves you of the stress of having to negotiate with each of your individual creditors yourself.
Consolidates your overall payments into one much smaller, manageable lump sum.
Can help you avoid bankruptcy based on information provided by and negotiations performed by your debt counselor.
Negotiates a reduction of your debt up to or more than 50%.
Pays individual payments directly to each of your creditors for you, but you only make one payment to your debt counseling company.
Stops harassing phone calls, late fees and over-the-limit fees.

Be sure you check out several debt counseling companies prior to selecting one. You’ll want to stay away from any company that touts hard-to-believe promises, and doesn’t disclose all of their rates and fees up front. The FTC provides documentation of debt reduction companies prosecuted for committing fraud against the consumer.

Recovery and Rebound

Congratulations! You’ve sought out assistance and have begun your recovery. Now, you’ll want to make sure that, like a love lost, you don’t make mistakes in the rebound.

Video: Jerome Love - Getting Out of Debt

Here are some tricks and tips to steer clear of debt:

Budget – The bottom line is live on a budget. Put together and maintain a thorough accounting of all your monthly income and all your monthly debt. Don’t spend more than you earn. Babysit your budget month-to-month to ensure your compliance.
New Debt – Don’t accrue new debt. Period. Cut up the credit cards. Keep only one on hand for emergencies, and I mean emergencies, only.
Frugal Living – You have to learn to live frugally. Look at all the times you drop just a few bucks for that berry smoothie or stop by Starbucks for that Monday mocha. Although, on the surface these expenditures appear innocuous, in reality, collectively they are emasculating your income. Reduce these kinds of trips to only one a month. The bigger expenses like clothes and luxuries need to be kept to a skeletal minimum until you are debt free. Even then, you need to budget out a specific amount monthly for these purchases.
Auto-Pay – Set up as many bills as you can on automatic payments, so that they are debited from your checking account. A very good way to remember these are to note all payments that will be debited monthly at the very beginning of a new check register. Make sure you include the expected date each will be debited. This is your reference to ensure you always keep enough in your account to cover your expected monthly expenses. You’ll want to include this information in every register you use.
Emergency Fund – You’re always going to have unexpected expenses, and you may as well be ready for them. This may be one of the biggest obstacles to overcome. Set aside a specific amount of your net income into this fund.
Pareto Rule – You’ve probably heard of Pareto and his 80/20 rule; however, don’t pay attention to the principle, just pay attention to the percentage. Set aside 80% of your net income to pay for bills, and the other 20% to be distributed as follows: 10% to savings, 5% to emergency fund and 5% for fun.
Set a Goal – You have to have a goal, other than just to pay off your debts, in order to feel that you are successfully managing your debt. Make a goal of purchasing with cash something you’ve always wanted. Don’t shoot for the moon, but make it something that is within your reach (e.g., landscaping for your yard, an exotic vacation, a jet ski).
Celebrate – Once you pay off a debt, celebrate! You must have a method of congratulating and rewarding yourself for this accomplishment. Budget it, of course, but do go and celebrate.

Life is devastating when all you have to look forward to is more debt, especially during a recession. Take advantage of the times to take command of your debt. You will be empowered to plot a course to financial success in fresh, new, innovative and rewarding ways.

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