Are you afraid to open your bills? Do you juggle bills, paying the electric one month and your phone bill the next? Do you make only the required minimum payment? Do you have to pay basic necessities like food, rent or gasoline on credit because you’re out of cash?
If some or all of these apply to you, it’s a good bet you’ve taken on too much debt.
Many of us have to deal with a financial crisis at some point in our lives. Whatever the cause, there are ways to overcome these financial problems. Often the first step is to recognize that there is a problem. Then you can begin to take action to solve it.
One key step is to create a realistic budget: Take a cold, hard look at your income and your necessary living expenses. Contacting your creditors and explaining why you’re having trouble paying your bills on time may lead to a reduced payment plan. Setting up an automatic payment plan from your checking or savings account can help establish how serious you are about paying your bills. Check for mistakes on your bills and your credit report; once corrected this could provide some partial relief.
Lowering the cost of debts is another way to improve the situation: Refinance high-cost loans; we are in an all-time low interest rate environment. Refinancing your mortgage may not only provide lower payments but the interest savings may be greater than the cost of acquiring a new loan.
Consolidate your loans: take a number of high interest rate debts (often credit card debit) and replace them with a single loan, often secured by the borrower’s home or auto. Reposition your assets. Take cash or sell things like jewelry and jet skies to pay down or pay off debt. Loans with the highest interest rates should be paid off first.
Many credit counseling agencies are available to help consumers who find themselves in financial trouble. Not all of these agencies work in a consumer’s best interest. A reputable credit counseling agency has counselors trained in budgeting, credit, and debt management. A good counselor works with you to develop a personalized plan to resolve your individual debt problems.
A debt management plan, or DMP, may be recommended by a credit counselor. In a DMP, you make monthly payments to the credit counseling agency, which then uses your money to pay your unsecured debts in accordance with an agreement between you and your creditors. DMP’s are not for everyone and may have restrictions that are unacceptable to some consumers.
Beware of credit “repair” firms: Companies or agencies that offer or promise to “repair” your credit record should be regarded as scams. The passage of time and a regular history of repaying your debts are the only way to truly “fix” your credit report.
If your debts are truly overwhelming, personal bankruptcy is a drastic option of last resort. Bankruptcy is a court-supervised process in which a debtor either has his debts eliminated (Chapter 7) or a plan is arranged that allows debt repayment under the supervision of the bankruptcy court (Chapter 13). Certain debts, such as most taxes, child support, and alimony, cannot be “discharged” through bankruptcy. Federal law requires a debtor to undergo credit counseling before filing bankruptcy and to complete debtor education before bankruptcy can be finalized. Competent legal advice is highly recommended.
Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other Thursday in the Observer-Reporter.