No one likes being in debt, yet 80% of Americans are entangled in its web. A single mother struggles to keep up with her car payment while keeping food on the table. As a widow grieves her late husband, she’s scared about the mortgage looming over her. The current global pandemic has exacerbated the problem as millions have lost their jobs.
While you may be tempted to ignore your problems, it’s important you deal with it head-on because the longer you wait, the more your situation worsens. That’s why we’re going to examine four options to consider when trying to solve your debt problems.
Option 1: Credit Counseling Services
Solving your debt problem starts with having a solid plan. Credit counseling services are there to provide you with the resources you need to ameliorate your financial condition. They analyze your financial situation and draft a personalized plan for you, which includes an efficient budget. Moreover, they link you up with money management educational programs to help you develop healthy spending habits.
Where can you get credit counseling?
You can get free or low-cost counseling services at:
Credit unions
Religious organizations
Extension offices
Not-for-profit agencies
Just ensure that your credit counseling provider is accredited either by the Financial Counseling Association of America (FCAA) or the National Foundation for Credit Counseling (NFCC).
What if I’m a military service member?
For active-duty military members, the Servicemembers Civil Relief Act (SCRA) was created to help ease financial burdens. It can help with a reduced interest rate on credit card debts and mortgage, as well as delaying foreclosure, bankruptcy, and divorce proceedings. You can confirm if you qualify at your local Armed Forces Legal Assistant office.
Option 2: Debt Consolidation
Debt consolidation is the act of taking a new loan to pay off unsecured consumer debts and liabilities. It involves combining multiple debts into a single, larger piece of debt with more favorable terms like lower monthly payment or reduced interest. Debt consolidation can be a great way to ease your debt burden. But before you proceed with it, it’s prudent to talk to a qualified credit counselor to assess your options.
What are the debt consolidation options available?
Two common options adopted for debt consolidation includes home equity loan or home equity line of credit.
A home equity loan allows the lender to advance the total loan amount upfront to you. On the other hand, with a home equity line of credit, you are provided with a source of fund you can withdraw as needed.
Caveat: Both of these options are secured loans, meaning you have to use your home as collateral. Failure to make payments within the stipulated timeframe could cause you to lose your home.
Where to get more information about debt consolidation
Any credit counseling service accredited by either NFAA or NFCC can help provide valuable insight if debt consolidation is right for you.
Resolving problems with a lender
If you’re having issues with a lender concerning debt consolidation, try to resolve it with the lender. If that doesn’t work, you can file a complaint to the Consumer Financial Protection Bureau (CFPB).
Option 3: Debt Collection
If you’re way behind on your debt payment, you might be contacted by a debt collector. A debt collector is a person or company whose job is to recover money owed on delinquent accounts. Many companies hire debt collectors to help them in debt collection from debtors.
It’s important that you know how to deal with this scenario if it arises so that you’re rightly dealt with as the Fair Debt Collection Practices Act (FDCPA) is there to protect you from the unfair, abusive or deceptive practices debt collector often use to collect from ignorant debtors.
What debt types are covered?
FDCPA covers personal, family, and household debts including personal credit card accounts, medical bills, auto loans, and mortgages. However, debts incurred while running a business are not covered by this Act.
What to do after a debt collector contacts you?
After the initial contact, the collector must send you a written note within five working days. The note will contain the creditor’s name, the debt amount, and actions to take if you are convinced you do not owe.
If you’re in debt, you should contact the collector so you can work out a payment plan. On the other hand, if you do not owe, inform the creditor of the mixup and send a copy to the collector to inform them to stop contacting you.
What are some wrong practices by debt collectors?
You might be in debt but it is your right that you’re treated accordingly. Here are some practices that you can report if a debt collector uses it on you.
Contacting you at inappropriate times – for instance, before 8 AM or after 9 pm or while you’re at work – unless you gave permission.
Repeated harassment with phone calls, profane language, and threats of arrest or harm.
Communicating with your relatives, friends, or others on issues other than your contact information.
Contacting you after you’ve informed them to stop, except to notify you of a creditor’s plan to take action.
Threatening to remove the debt from your paycheck, unless instigated by the creditor and it is legal.
Filing a complaint about a debt collector
If a debt collector engages in any of these practices or if you have any other problem you would like resolved with a debt collection agency, contact the Federal Trade Commission (FTC), and CFPB. Since different states have their debt collection laws that differ from the federal Fair Debt Collection Practices Act, you can get the right information from your state Attorney General’s office so you should also contact them.
Option 4: Declaring Bankruptcy
Bankruptcy is a court proceeding involving a person unable to repay outstanding debts. It involves liquidating your assets to pay off the outstanding debts or redesigning payment plans.
Declaring bankruptcy can give you the fresh start you need to get your finances in order. However, bankruptcy information may stay in your credit report for up to 10 years. This huge blow to your credit score can make it difficult to get credit, purchase a home, or obtain life insurance.
Types of Personal Bankruptcy
There are two main types of personal bankruptcy:
Chapter 7: This involves liquidating your assets that are not exempt under state or federal law.
Chapter 13: For people with a steady income, this type of bankruptcy allows you to keep your property while you create a repayment plan.
The Filing Process
You’ll need to file a petition in a federal bankruptcy court. Here is what you need to know about that.
File Documents: You’ll need to submit a monthly income statement. Also, you will need to include tax returns for the preceding year (4 years in the case of Chapter 13 bankruptcies).
You’ll then need to take a pre-filing credit counseling and post-filing education course.
Finally, you need to pay the filing fee, as well as the credit-counseling and education fees. You may get a waiver if you show that you cannot afford the payments
Tips
Since the bankruptcy process is complex, it is advisable to get an attorney to walk you through the process. Although that will come at an additional cost, it drastically improves your chances of success.
To learn more about the intricacies of the bankruptcy process, you can check out our post on ‘What Happens If You Declare Bankruptcy’.
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