If, like thousands of others, you are having trouble paying your debts, it is important to take action. Doing nothing can lead to much larger problems in the future – bigger debts, the loss of assets, and a bad credit record. If you’re in trouble, focus on improving your relationships with creditors, reducing your debts, and better managing your money.  Here’s how to get a fresh start.

How can you tell when you have too much debt?  Answer the following:

• Have you run several credit cards up to the limit?
• Do you frequently make only the minimum monthly payments on your credit cards?
• Do you apply for almost any credit card you are offered, even without checking out the terms?
• Have you used the cash advance feature from one card to pay the minimum payment on another?
• Do you use cash advances (or use a credit card) for living expenses such as food, rent, or utilities?
• Are you unaware of what your total debt is?
• Are you unaware of how long it would take you to pay off all your current debts (excluding mortgages and cars) at the rate you are paying?

If you find any of these statements apply to you, you may be in some trouble.

Getting Started

Here are some specific steps you can take if you are in financial trouble:

1. Review each debt.  Make sure that the debt creditors claim you owe is really what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors. Let your creditors know that you are having difficulty making your payments. Tell them why you are having trouble.  Perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

Note that most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.

5. Pay down debts using savings. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense.

6. Try to consolidate your debts. There are a number of ways to pay off high-interest loans by getting a refinancing or consolidation loan, such as a second mortgage.  Just be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees. Also, be aware that second mortgages put your home at risk of repossession.  Do not secure such a loan until you are certain you are able to meet the payment requirements.

7. Prepare a financial plan. A financial plan can alleviate financial worries about the future and ensure that you will meet your financial goals.

Credit Counseling Agencies

If you are unable to make satisfactory arrangements with your creditors, there are organizations to help you accomplish this. For instance, the National Foundation for Consumer Credit (NFCC) member agencies provide education and counseling to families and individuals. For consumers who want individual help, counselors with professional backgrounds in money management and counseling are available to provide support.

To promote high standards, the NFCC has developed a certification program for these counselors known as Certified Consumer Credit Counselors (CCCS). A counselor will work with you to develop a budget to maintain your basic living expenses and outline options for addressing your total financial situation.

If creditors are pressing you, a CCCS counselor can also negotiate with these creditors to repay your debts through a financial management plan. Under this plan, creditors often agree to reduce payments or drop interest and finance charges and waive late fees and over-the-limit fees. After starting the plan, you will deposit money with CCCS each month to cover these new negotiated payment amounts. Then CCCS will distribute this money to your creditors to repay your debts.

With more than 1,100 locations nationwide, CCCS agencies are available to nearly all consumers. Supported mainly by contributions from community organizations, financial institutions, and merchants, CCCS provides services free or at a low cost to individuals seeking help. To contact a CCCS office for confidential help call 1 (800) 388-2227, 24 hours a day, for an office near you or visit the website.

Personal Bankruptcy

Bankruptcy is a legal proceeding that is intended to give people who cannot pay their bills a fresh start.  The decision to file for bankruptcy is a serious step which should be taken only if it is the best way to deal with financial problems.

There are two types of bankruptcy available to most individuals:

• Chapter 13 bankruptcy allows debtors to keep property which they might otherwise lose, such as a mortgaged house or car. Reorganizations may allow debtors to pay off or cure a default over a period of three to five years, rather than surrender property.
• Chapter 7 or “straight bankruptcy” involves liquidation of all assets that are not exempt in your state. The exempt property may include items such as work-related tools and basic household furnishings, among others. Some of your property may be sold by a court-appointed official or turned over to your creditors. You can file for Chapter 7 only once every eight years.

Both types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property), and stop foreclosures, repossessions, garnishments, utility shutoffs, and debt collection activities. Both types also provide exemptions that permit most individual debtors to keep most of their assets, though these “exemption” amounts vary greatly from state to state.

Bankruptcy cannot clean up a bad credit record and will be part of this record for up to ten years. Thus, filing bankruptcy will make it more difficult to get a mortgage to buy a house. It usually does not wipe out child support, alimony, fines, taxes, and some student loan obligations. Also, under Chapter 13, unless you have an acceptable plan to catch up on your debt, bankruptcy usually does not permit you to keep property when the creditor has an unpaid mortgage or lien on it. Bankruptcy cases must be filed in federal court.

If you are thinking about bankruptcy, contact an attorney, but be cautious when choosing one. Some of the less reputable lawyers make easy money by handling hundreds of bankruptcy cases without adequately considering individual needs and alternative solutions. Get recommendations from people you know and trust, and from employee assistance programs.

Scams And Pitfalls

Consumers with credit problems have paid millions of dollars to firms that claim they can remove negative information, clean up credit reports, and allow consumers to get credit no matter how bad the credit history.

These credit repair clinics charge consumers anywhere from $50 to $2,000, and often use questionable methods. Most clinics make misleading promises to consumers, and charge high fees for doing what you could do yourself – or simply take your money and do nothing at all.

Here are some common promises made by credit clinics and the reasons consumers should beware of such claims:

“Based on little-known loopholes in Federal credit laws, we can show you how to clean up your credit report!”

These “loopholes” are merely the provisions of the Fair Credit Reporting Act (FCRA) under which you have the right to challenge information in your credit report you believe to be incorrect. Credit repair clinics often flood credit bureaus with requests to check whether or not all negative data is correct. Credit clinics hope creditors will not be able to verify the information in a reasonable time period, causing the negative information to have to be dropped under the FCRA. Some credit clinics even tell consumers to challenge neutral information (e.g., name and address), hoping to distort file data so that the old, negative file will no longer be identifiable when a creditor asks for a consumer’s file. Creditors and credit bureaus have become familiar with such tactics, and they have sought to use the provision of the FCRA that allows them to dismiss “frivolous” disputes of file information and to refuse to respond to repeated disputes of the same data.

“We can show you how to remove negative information from your file-including judgments.”

Some clinics tell consumers to pay off any bills outstanding with the creditor in exchange for removal of negative information. Or, they may tell a consumer who has an account in collections to pay part of the balance with a check. The check is to carry a disclaimer saying that, by cashing the check, the creditor agrees to remove the account from collections and remove any negative information about the account from its files. Creditors are under no obligation to agree to such measures, and the fees paid to clinics for such advice is wasted.

“We can get you a major credit card-even if you’ve been through bankruptcy!”

What you are not told is that you will have to “secure” the card first. Most credit cards are unsecured; that is, you are not pledging any of your assets as collateral for any credit you may use. A card is secured when a consumer puts a deposit in the bank and gets a bankcard with a credit limit based on a percentage of that deposit. While a secured card can be an excellent tool for rebuilding credit, why should you pay the credit clinic just to provide an application and deposit slip?

Often for-profit or non-credential counseling organizations make promises that they cannot or do not keep. Be especially careful when asked for a large sum of money in advance.

Do not lose hope. You can regain financial health if you act responsibly. The options presented here can put you on the road to financial recovery, and professional financial guidance will get you the rest of the way there.