credit counseling

Book Review: The Road Out of Debt

Philip Brewer — Mon, 07 Mar 2011 12:36:07 +0000

The Road Out of Debt: Bankruptcy and Other Solutions to Your Financial Problems by Joan N. Feeney and Theodore W. Connolly

You've read stories of people becoming debt-free. In personal-finance blogs, the stories are always ones of debt problems overcome through hard work and frugality. Sadly, in the real world, that doesn't always work. For reasons like illness, divorce, job loss, economic downturn, business failure, natural disaster, war — some debts entered into in good faith simply cannot be paid back. (See also: CitiMortgage Told Me to Default on My Loan)

Feeney and Connolly's new book is about how to find the dividing line between these cases, and what to do once you know which side you’re on.

Money-Management Skills

The authors provide a good short course in money management much like you’d find in any personal finance book or blog — how to budget, how to cut expenses, and how to take control of your finances. Then the book starts talking about debt — mainly about the many, many ways to use debt unwisely. In particular, they’ve got a great chapter on the sort of debt that people with financial troubles turn to in a usually futile effort to stave off financial catastrophe for one more month — payday loans, car title loans, pawn shops, loan sharks, etc.

Even before that, they provide some basic advice on negotiating with your creditors. Especially in the world of finance as it is today, there are plenty of people who could actually fulfill their obligations — except that the creditors have written rules that let them lard up a debtor’s obligations with late fees and penalty interest rates. A knowledgeable debtor with good negotiating skills can often cut through those problems and get their obligations settled reasonably cheaply.

One bit in that section that I particularly like is on the psychology of debt collectors: Some will browbeat you, some will humiliate you, some will pretend to be your friend — but however they act, they’re all just trying to get as much money from you as possible. They don’t care what other debts you have or whether you can support your family. If you don’t understand this — if you allow yourself to imagine that the ones who act like friends are actually friendly — you’re going to be less successful in your negotiations. (I talk about the same psychological issues in my post Don’t Treat Businesses Like People.)

The authors provide some useful advice on seeking help (credit counselors and the like) if your financial problems are beyond what you can manage with those basic skills — and about avoiding the scams that often masquerade as help for people with debt troubles.

Sometimes, even with help, debt problems cannot be overcome. Specifically, if you can’t cover your minimum expenses plus interest on your debts and have money left over to pay down the principle on your debts, then you're over the line. Once you're in that situation, your financial situation can only get worse — your debt burden will rise every month, even if you don't borrow any more money.

When to Consider Bankruptcy

If you could support yourself — pay for your family’s shelter, food, and clothing — except that other obligations drain away more than all the rest of your money, then it’s time to consider bankruptcy.

Even if it’s time to consider bankruptcy, it may not be the best choice. Some obligations (child support, student loans) cannot be wiped out in bankruptcy. Alternatively, if you can’t even afford the necessities, then your household is not a viable economic unit and bankruptcy won’t help.

The core of the book is the information you need to figure whether bankruptcy is worth considering — and the information to consider it and make an informed decision.

Navigating the Rules

Bankruptcy is basically a bunch of rules for recognizing that some debts will never be paid back, and then sorting out how that situation will be dealt with. But because they're rules, it’s possible to break them — and get into kinds of trouble that ordinary people don’t need to worry about.

For example, it’s legal (although perhaps foolish) to borrow money even if you don’t know how you’re going to pay it back. But if you’ve already decided to declare bankruptcy and have no intention of paying the money back, it’s probably fraud. Normally you can choose to pay back some creditors (such as a relative who lent you money to keep the electricity turned on) before others (such as the credit card company). But once you've decided to declare bankruptcy, those decisions must be made according to the rules.

A big chunk of the book is about threading a path through those rules — protecting your ability to make a fresh start while making sure that you meet your obligations to the extent required by law.

A system of bankruptcy is a good thing. Some debts are never going to be paid back. A system that refuses to recognize that just drives economic activity underground (ruining lives in the process).

An Important Story

There's a reason why the story of overcoming debt problems through hard work and frugality is so compelling: The story models successful financial behavior. The behaviors that it takes to work through debt problems — spending less than you earn, taking control of your finances — are the same behaviors that lead to financial security in general.

That, I think, is why the story of bankruptcy is less compelling: It doesn’t serve as much of a model for households that aren't in debt. The skills — understanding an arcane area of law, filling out government forms correctly — don’t contribute much to an average person's life.

But that doesn’t make it an unimportant story. For those who are in trouble with debt, bankruptcy can free up the time and effort they’ve been spending trying to handle the demands of creditors and put that effort toward supporting their families.

Written by a bankruptcy judge and a bankruptcy lawyer, The Road Out of Debt does a good job of integrating these two stories in a way that illuminates the line between the sort of debt that can (and should be) worked through, and the sort of debt that will never be paid back.

Disclosure: This post contains affiliate links, and I will earn a commission for any purchase made through these links.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How You Know When It's Time For Bankruptcy

Stacy Johnson — Mon, 25 Jan 2010 15:00:02 +0000

While producing news stories and researching books (here's my latest: Life or Debt 2010), I've explored virtually every way to deal with debt. This story is about the nuclear bomb of debt destruction: bankruptcy.

When I produced the news story you’re about to see, I was just looking for a lawyer to interview regarding the basic facts. What I got in addition was a heartbreaking, personal story from just one of the 1.4 million Americans who filed bankruptcy last year.

Watch this 90-second news story, then meet me on the other side and we’ll go into more detail about what bankruptcy is how it compares with other ways of dealing with a debt dilemma.

So bankruptcy is the ultimate debt destroyer, because rather than paying it back, you're often wiping it out, or at least partially so. But it’s not the only way out.

You could obviously try to repay your debts yourself. You can try to repay them in full on better terms by going to a credit counselor. You can try to satisfy specific debts by paying less than you owe. Or you can try to take out a new loan to pay off your old ones in a process known as debt consolidation.

When is bankruptcy the right choice? Ultimately, you file bankruptcy because there’s no other way out. For example, in Ron's case, his monthly payments were higher than his monthly retirement income. He couldn't repay the debt, even with help from a credit counselor, debt consolidation or settlement.

But before you even contemplate bankruptcy, understand it. For individuals (as opposed to corporations) there are two types:

Chapter 7, which wipes out all your debts
Chapter 13, where you’ll be required to pay some of your debts back over time

Which you’ll be eligible to file depends on how deeply in debt you are relative to your ability to pay, as well as other factors, including the median income where you live. But even a Chapter 7 won’t rid you of all your debts. You can’t ditch student loans (except in rare cases), IRS liens (unless you successfully file a tax bankruptcy), child support, or alimony. You can’t use Chapter 7 to discharge debts you incurred through fraud. And bankruptcy isn't a way to get rid of mortgage debt.

It will probably come as no surprise that bankruptcy will also cost you big time when it comes to your credit score. According to Fair Isaac (creator of the most popular credit scoring model), you’ll lose from 130 to 240 points out of a possible 850. That’s enough to turn even a perfect score into a subprime one. (Here's a story I did about three ways to improve your credit score.)

Is there credit after bankruptcy? Yes, if you can afford it. There are people who will sell you a car on credit or give you a credit card, but expect to pay exceedingly high rates of interest, since you’ll be a high-risk borrower.

And bankruptcy will remain in your credit history for 10 years. Most other infractions only last seven. But a bankruptcy won’t leave you living in the streets. Depending on the state where you file, you might still end up with some home equity, a car, clothing and furnishings.

The cost of bankruptcy filing varies, but expect to pay at least $1,500. (Here are three tips to lower lawyer bills.)

Does all this sound like I’m discouraging you from filing bankruptcy? Not if you're like Ron.

Bankruptcy involves hiring a lawyer and going to court, which makes it by far the most serious way to deal with debt. It also means getting rid of most of your assets and really screwing up your credit history. That's why it's a measure of last resort. But most people don't mess up by filing. They mess up by not doing it soon enough.

Because my news story was so short, you didn’t get to hear much from Ron, the guy who filed bankruptcy. You didn't get to see the tears in his eyes when he described how he had sacrificed everything he had to take care of his grandchildren. Or the relief on his face as he talked about putting his pride aside and getting help.

For months before he walked into that lawyer’s office, he’d been verbally abused by creditors and frozen like a deer in the headlights by shame. He admitted feeling suicidal.

When you're in major trouble, whether it's legal, health, or financial, hesitation is natural. But recognize that when you hesitate, you waste stress, time, and money. Before he got help, Ron wasted all three trying to stay ahead of bills he had no hope of ultimately paying. Especially since rather than helping him, his lenders chose instead to bury him with impossibly high rates and penalty fees.

So if you ever consider this path, or know someone who does, remember that. Assess your situation honestly, forget your embarrassment, and talk to a lawyer or credit counselor sooner rather than later. They can give you advice on your options and, if bankruptcy is the right one, they can help with a strategy to maximize what you keep and minimize what you lose.

If you're a proud, responsible person like Ron, you'll probably feel that bankruptcy is the end of your life. But it might just turn out to be a new beginning.

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This article is from Stacy Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Dealing With Debt: Credit Counselors

Stacy Johnson — Thu, 21 Jan 2010 15:00:02 +0000

If you're in debt trouble, get help.

I just published my third book about living debt-free. It's called Life or Debt 2010. To go with it, I'm doing TV news stories and writing blog entries that I hope will help you find extra money in your budget to pay off debt.

But this story is for people who can't think about embarking on a debt-destroying mission yet because their debt is currently destroying them. If you've got creditors calling, are behind on your payments, and basically just not making it, you need to find help, and the sooner the better. But what kind? There are three heavily-advertised options these days: credit counseling, debt settlement, and bankruptcy. (In fact, notice the Google ads all around this article right now!)

Over the next few days we'll take a closer look at each, starting with credit counseling.

Have a look at the 90-second news story below, then I'll go into more detail on the other side.

Credit Counseling

One of the first news stories I ever did 20 years ago was about credit counseling. Over the years I've done plenty more and have gotten involved with them in other ways as well: I'm on the advisory board of one local counseling agency, I've produced video and sold books to others, and several sponsor my news stories in various cities nationwide. Suffice to say this is a business I know quite well.

And they're a great way to get help with debts. There's no shortage of them out there, and many will help you for free. But look before you leap.

Open your yellow pages or look online for "credit and debt counseling" and you'll see lots of companies that seem to be falling all over themselves to bring you back from the brink of debt destruction. They're all over the TV and radio these days. Many wave the nonprofit banner like a flag and promise to reduce your interest rates, or even get the amount you owe cut in half. Some claim their services are free, or nearly free. So how do these things work?

Credit counselors typically help by putting you on a Debt Management Program, also known as a DMP. When you participate in a DMP, the agency is essentially getting between you and the people you owe, most often credit card companies. They contact your creditors and attempt to negotiate lower interest rates, get penalty fees waived and arrive at a monthly payment you can actually afford. Once your plan is approved, you send one check to the counseling agency every month and they divide the money among your creditors. It's not a quick fix — a typical DMP lasts three to five years.

Most counseling agencies give free advice, but if you end up in a DMP, you'll typically pay a small monthly fee to get it set up (0-$50) and monthly fees (5-10% of your debt payment, but normally capped at $25-$50).

But here's something important to know: the monthly fees these agencies collect aren't what keeps them alive. They're also getting paid by the banks whose accounts they're collecting. In years past the percentage they got was 10 to 12 percent of the debt. In recent years, that percentage has declined considerably, and some major banks have started handing out grants instead. Still, it's banks that supply the primary support for this industry, and historically that's largely been through debt management programs.

Why do you care? Well, since credit counselors make a large part of their income from putting you on a DMP, they obviously have a powerful incentive to do so. It could be a problem, since sometimes that might not be in your best interests. Other options, like repaying your debt without a DMP, or declaring bankruptcy might be better in some instances, but credit counselors don't get paid by recommending either.

That doesn't mean you shouldn't approach these folks. There are plenty of agencies that dispense honest, objective advice, including advice that ultimately doesn't pay them. But if you're not careful, you could get hooked up with a "DMP mill." These are companies that typically do a lot of advertising and put virtually everybody on a debt management program simply to make money. If your problem includes bills that don't qualify for a DMP (like a mortgage or car loan, for example) they won't help you with them. They also won't offer any type of budget counseling. And if your situation is so tenuous that bankruptcy should be a consideration? You'll never hear that suggestion from them.

For the DMP mill, it only takes a few minutes to sign you up for a program, and if you ultimately have to file bankruptcy anyway, who cares? You'll have wasted your time and tons of money, but they'll have collected their money for as long as you were able to stick with the program. And like most other credit counselors, they too are non-profit, lulling many into a false sense of security.

The way a credit counseling agency should work is that they should counsel you regarding all your debts and present you with all your options before you do anything that you can't undo. In other words, they should counsel you, not slam you into the only fix that makes money for them.

A quality credit counseling organization will also help with simple, free advice and other non-debt, credit-related issues. Here's an interesting story I did where a credit counselor helped untangle a credit card billing mess.

Specific Recommendations

I'd look for a credit counseling agency that belongs to one of two trade associations: the National Foundation of Credit Counselors (NFCC), or the Association of Independent Credit Counseling Agencies (AICCCA). I personally know many members of both of these organizations and in my experience, they're normally credible and well-intentioned. You can find NFCC members near you at their Find a Counselor Now page. You can find AICCCA members near you by using their state by state lists.

Full disclosure: as I mentioned above, my company has done work for members of both of these organizations. But rest assured, my recommendation is never for sale.

Are there other quality agencies that don't belong to either of these organizations? Most definitely. Dues for NFCC and AICCCA aren't cheap, and I also personally know agencies that don't feel like paying them, yet still maintain high standards. So you shouldn't necessarily assume non-members are bad. But wherever you go, ask questions before you agree to anything. Questions like:

What is the percentage of clients they have on debt management programs? If the answer is nearly all, that's bad. If the answer is about half, that's good, because it shows they're trying to help their clients with other methods.
What fees will you have to pay?
What amount of budget counseling you're going to get. If you're not going to get any tools to help change the way you deal with debt, you could end up in the same place farther down the road.
Do their counselors have any training and certification?
Is the agency accredited by an independent organization?
What will their help mean to your credit history? The correct answer here is, "There's no way to tell for sure. Could even be negative. But consider the alternative." The wrong answer is, "No problem, buddy! Sign here!"

Check the BBB or other online sources for complaints. And talk to more than one agency. When you talk to several, it's easy to distinguish between the ones that come across like used-car salesmen vs. ones that sound like what you're really looking for: an objective counselor.

Bottom line? If you can't see your way out of a debt disaster, definitely get help. And don't be ashamed or embarrassed to do so. More than a million people every year file personal bankruptcy. Millions more do nothing to try to help themselves and end up with ruined credit and lots of sleepless nights. Going to a pro for help may not be your proudest moment, but there are definitely a lot worse things that could happen.

Next time we'll be covering another heavily-advertised debt solution: debt settlement.

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This article is from Stacy Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Credit Counseling: When you Need it and When you Don't

Nora Dunn — Wed, 05 Mar 2008 01:11:52 +0000

So you are up to your eyeballs. Drowning in debt, expenses, and struggling to keep your head above water. You have been reduced to the life of a monk and are still making no headway. Is it time to see a credit counselor?

First, let’s take a look at the typical symptoms that may require credit counseling:

You use credit cards to pay for groceries and other household expenses because you don’t have the cash.
You don’t even know how much debt you owe any more.
You use one credit card to pay off another.
You use cash advances as the only way to get some cash.
You are denied when you ask for an increase in your credit limit.
You ask for a credit increase in the first place because you think it will help you manage your expenses.
You worry about money all the time.

Let’s also assume that you have tried every way possible to “find money” in your current budget and are still financially suffering.

Now it may be time to see a credit counselor.

What Credit Counselors Do

First of all, a credit counselor will (or at least should) spend some time with you to get a handle on your situation. If it’s appropriate, they will prescribe a Debt Management Program (DMP). Basically a DMP will consolidate your debts at lower interest rates. The actual interest rates you get vary by creditors and what they can offer to credit counseling firms – it’s fairly standardized. As part of the DMP, late fees and other penalties you have incurred will also be waived – which can be substantial if you’re at the point of needing credit counseling.

Once you’re in the DMP program, you will pay the credit counselor monthly, and they will distribute the money among the creditors you owe. You have the advantage now of not having to juggle a million debt payments, and in turn you agree not to charge anything further to your cards or apply for any credit increases.

For this service, credit counselors get paid in two ways:

They receive a rebate from the creditors
You will also pay an upfront and monthly fee for this service

Not All Credit Counselors are Created Equal

As with any business service, you need to do your research before you sign up for a DMP plan. There are some shady credit counselors out there.

Here is a checklist of things you should look for:

Not-for-profit status
A good Better Business Bureau status with minimal complaints (ideally none)
Certification with the National Foundation of Credit Counselors (NFCC) or the Independent Association of Credit Counselors (IACC)

Questions to Ask a Credit Counselor

Before signing on the dotted line (or even agreeing to an appointment), here are a few questions you should ask of your potential credit counselor:

How long is the initial appointment? You are looking for them to say they’ll spend at least ½ an hour with you. They need to assess your entire financial situation, which can’t be done effectively if you are shuffled in and out the door in record time.
What will you do? The best answer you can get is for them to say they’ll examine your situation, and only if it is appropriate, they can arrange a Debt Management Plan suited to your situation. Sometimes after a consultation, they will advise you to tackle your debts on your own because they’re not bad enough yet, or conversely will advise you to see a bankruptcy attorney.
What kind of debt can you help me with? You don’t want a counselor who will just address your credit card debt if your student loans, mortgage, and other debts are also eating away at your finances.
How much will this cost? Ideally you should not pay more than $75 up front, and no more than $35/month ongoing.

Don’t be too embarrassed about your financial situation to see somebody who can help you. The best way to move forward with your life is to take ownership of your current predicament and make the right moves towards financial freedom. It is still possible.

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This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: