Debt Management Tips
Tips to break a credit addiction and manage debt in a tougher financial environment.
In today’s show I’ll share tips for managing debt in our current financial environment.
Dealing with Tight Credit
Everyone’s on the edge of their seats about the current credit crisis and the volatile financial markets. As the economy has declined, many consumers have been relying on credit sources such as credit cards and home equity loans for everyday spending.
But we’ve come to realize that the days of free-flowing credit are over. Banks and lenders are lowering credit limits on credit cards and scrutinizing new borrowers under their dusty microscopes. For many, this tight credit market will be the catalyst to address financial problems sooner rather than later. If you’ve been living above your means, addicted to credit of any kind, consider this podcast your personal financial intervention!
Face the Debt Music
Debt management is not a one-size-fits-all topic, because every debt-holder is unique. Your debt could be the result of many different circumstances such as overspending, job loss, or medical bills. You have to gauge your own situation and face up to your ability or inability to help yourself.
If you’re seriously drowning in debt, the worst case scenario is to declare bankruptcy. This is the debt management option of last resort. Because a bankruptcy can stay on your credit report for up to ten years it will affect many aspects of your life for a long time. If you’re considering this option, you’ll need to consult a bankruptcy attorney for help with some tough decisions. Next week, I'll explore bankruptcy and foreclosures more thoroughly.
Anyone who intends to declare bankruptcy must get pre-filing credit counseling from an approved agency within six months before the filing. The agency must be approved by the U.S. Department of Justice in the judicial district where you plan to file bankruptcy. You must also complete a pre-discharge education course in order for debts to be officially satisfied.
If you have a debt problem that’s gotten out of control, you should also contact a credit counselor. You’ll want to seek out a nonprofit credit counseling agency that gets most of their funding from your creditors, not from you. They may require nominal fees, but won’t try to sell you anything. Make sure to choose a company that’s accredited with an industry agency such as the National Foundation for Credit Counseling (NFCC) or the Association of Independent Consumer Credit Counseling Agencies (AICCCA).
A good credit counseling agency should be open-minded to every option you have to improve your financial situation. They should help you create a budget and offer free educational resources. Try to meet with them in person if possible.
Debt Negotiation Firms
The debt negotiation industry is growing rapidly. These companies are not low-fee, non-profit counselors, but representatives who aggressively work with your creditors. Many claim to be able to reduce debts by 50% or more. Be careful when dealing with these companies, as there have been some publicized scams. Look for one that is certified by the International Association of Professional Debt Arbitrators and review fee schedules and contracts closely.
Debt Management Plans (DMPs)
You may be eligible to enroll in a debt management plan or DMP. These are also called one-pay plans, because the agency collects one monthly payment from you. They distribute the money to your creditors after negotiating lower payments on your behalf. If you enroll in a DMP, protect yourself by confirming the plan directly with your creditors. Don’t send any payments to a counseling agency or a debt negotiation firm until you know the plan is legit. I’ll put a link in the show notes to some facts about DMPs from the Federal Trade Commission.
Debt consolidation entails paying off one debt with another debt. This may make sense if you can get a lower interest rate or even a discount on the principal amount of the loan. Loan consolidation may help alleviate pressure with lower monthly payments. But if lower payments are achieved by simply extending the terms of the loan, your underlying debt has not been reduced.
Debt settlement is another option if you have cash to offer. You or your attorney can contact your creditor in writing to offer a final cash settlement by a certain date. This is an effective strategy that could result in a deep discount on the debt. Also, be aware that the IRS considers forgiven debt as income subject to normal income tax.
Correct Bad Habits
In the best case debt scenario, you’re credit rating is still good, but you’re simply living above your means (you know who you are!). Debt is usually the symptom of saving too little and spending too much, a deadly combination. Don’t shoot the Money Girl messenger… but there is no magic formula to make debt disappear. The solution is to permanently change your financial behavior by becoming more disciplined with your money. Is it easy? Absolutely not. But the rewards of living life without a credit addiction include much less stress and better sleep.
So, the bottom line on eliminating debt and practicing good money management is what you probably already knew, but needed to hear: Spend less than you make or make more than you spend. Then pay the difference to your debts on a regular basis.
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Chi-Ching, that's all for now, courtesy of Money Girl, your guide to a richer life.
U.S. Trustees Program - find approved pre/post-bankruptcy agencies by state