T u r n i n g  p o i n T s  n

Avoiding Bankruptcy

Turning Points 2 Avoiding Bankruptcy

Being deep in debt can feel a lot like

drowning. Just when you think you finally

can keep your head above water, something

happens to pull you back under. All it takes

for hope to disappear is another unexpected

car repair, a new medical bill, or an increase

in gas prices. At such a time, it may be

tempting to throw in the towel—to ignore

the situation and hope it resolves itself, or to

file bankruptcy.

While the mantra “I’ll think about that

tomorrow” helped “Gone with the Wind’s”

Scarlett O’Hara make it through another

day, avoidance and procrastination are

never wise strategies when it comes to

dealing with debt. Neither is taking action—

particularly as drastic an action as filing for

bankruptcy—without considering all the

consequences.

The Federal Trade Commission (FTC),

the nation’s consumer protection

agency, Washington, D.C., describes the

repercussions of bankruptcy as “long-lasting

and far-reaching.” Bankruptcy can make

it difficult to obtain credit at reasonable

rates, rent a house, get insurance, or

qualify for a particular job or promotion.

And since many filers find themselves still

dealing with the fallout many years down

the road—bankruptcy stays on your credit

report for 10 years—it can hardly be touted

as a “fresh start.” Bankruptcy should be

considered only after all other options have

been exhausted.

And you do have options. There are many

steps toward recovery you can take on your

own, and many others you can take with the

help of your creditor, a counselor, or a credit

union adviser. Exactly which routes will be

available to you will depend on factors such

as your financial situation, your creditors’

policies, and your goals. In any case, the

sooner you ask for help with your debt, the

more options you’ll have.

Questions:n How can my credit union help me avoid bankruptcy?

n What options besides bankruptcy do I have if I’m having trouble paying my bills?

n I have enough income to make partial bill payments. Should I file for Chapter 13 bankruptcy, or try to repay my debts on my own?

n How can I avoid getting to the point where bankruptcy seems like my only option?

n I’m having trouble paying my bills. Should I file for bankruptcy?

Understand All Your Options for Dealing With Debt

by Monica SteiniSch

MEDICAL BILLS CUT DEEP As reported in the New York Times in June 2009, high medical bills cause almost two-thirds of bankruptcies, according to a study published by The American Journal of Medicine. Medical problems contributed to 62.1% of all bankruptcies in 2007. That number probably has increased during the current recession, which began in December 2007. The report also noted that, between 2001 and 2007, the percentage of all bankruptcies attributable to medical problems surged by 50%. Among families bankrupted by medical problems, those with private insurance had average medical bills of $17,749, compared with average costs of $26,971 for those without insurance. “The U.S. health care financing system is broken, and not only for the poor and uninsured,” wrote the study’s authors. “Middle-class families frequently collapse under the strain of a health-care system that treats physical wounds, but often inflicts fiscal ones.”

Turning Points 3 Avoiding Bankruptcy

How can my credit union help me avoid bankruptcy?The people at your credit union strive to

maintain a lifelong relationship with you—

through all of life’s financial ups and downs.

When you belong to a credit union you’re

more than just a customer, you’re a member.

Other financial institutions expect customers

to just come and go.

Lately, the U.S. economy has given us

more “downs” than “ups.” Foreclosures,

layoffs, and a stock market free fall seem

to have left no family untouched. Times

are tough. But things will get better. And

when they do, you’ll be relieved to have

avoided bankruptcy and its long-lasting

consequences. Here are some ways the

people at your credit union can help you do

that.

If you’re having trouble paying your bills,

and your debts include credit union

accounts, contact a credit union represen-

tative to discuss the possibility of modifying

your loans or credit card terms to make

payments more affordable. Modification

could mean, for example, lowering the

interest rate or extending the loan term.

Other concessions that could help might

include waived fees, a “payment holiday,” or

“re-aging” the account to bring you current

after you’ve missed a payment.

If you have non-credit union debt

you’ve fallen behind on, a credit union

representative can refer you to a credit

union counselor or to a reputable nonprofit

credit counseling agency for help. A

credit counselor can look at your financial

picture—income, expenses, and debt—and

present possible actions, one of which might

be participation in a debt-management plan

(DMP).

In a DMP, you repay all or some of your

debts by sending a single payment to the

credit counseling agency, which distributes

it among your creditors. Many creditors

who participate agree to lower payments,

reduce interest rates, waive fees, and re-age

accounts. Counseling is free or low cost.

There is a DMP fee of $20 to $50 per month,

though a reputable agency shouldn’t deny

you services if you can’t afford to pay. (See

How to Find a Reputable Credit Counseling

Agency in this publication.)

If you need to borrow to make ends meet

until things improve, a credit union loan

officer can help with credit cards, mortgages,

home equity loans and lines of credit, and

other products generally at lower interest

rates and better repayment terms than you

can find elsewhere. This makes credit more

affordable for you. It also protects you from

lenders who prey on borrowers who believe

they have no other options.

As times get better, your credit union can

help you establish or strengthen a direct

deposit savings plan to help you build an

adequate emergency fund. Being prepared

for the worst is the best way to avoid money

troubles and bankruptcy. “Emergency

savings is hugely important, especially

in uncertain times,” says Todd Mark, vice

president of education for Consumer Credit

Counseling Service of Greater Dallas. “It’s

the life raft that keeps you afloat.”

Mike Schenk, an economist at the Credit

Union National Association (CUNA), says it’s

never too late to ask for help at your credit

union, though the earlier you do it, the more

options you’ll have. “As a member-owned

not-for-profit institution, your credit union

really is looking out for your best interest.”

What options besides bankruptcy do I have if I’m having trouble paying my bills?There are many options besides bankruptcy

for dealing with debt, particularly if you’re

willing and able to make some changes.

“Your money troubles may be insurmount-

able under current circumstances, but there

are things you can do that make it more

feasible to repay your debt,” says Mark. “No

matter how desperate your situation may

seem, taking positive steps now has value.”

To determine what changes you’ll need to

make, you first have to find out just how

much you’re running short each month.

There are many tools available on the

Internet for calculating your income, living

expenses, and debt payments; look for the

Budget Blueprint calculator on this Web site.

Enter your numbers, print the results, and

then do one or more of the following to close

the gap.

n Increase income. Pick up overtime hours

if they’re available, find an additional job,

or start a small side business offering a

service you’re qualified to provide, such as

babysitting, gardening, senior assistance,

music lessons, sewing, or repairs. If you

have an extra room or an unneeded garage,

Turning Points 4 Avoiding Bankruptcy

consider renting it out. Think about selling

some of your assets, such as an RV, a second

car, jewelry, or collectibles—you could lose

them if you had to file bankruptcy. If you

normally get a tax refund when you file,

consider changing your withholding to have

less money taken out of each paycheck.

(The IRS provides tips and a worksheet to

calculate the correct amount.)

What not to do: Wait until you need the

money immediately, making a pawn shop

your only option. A pawnbroker will give you

a fraction of the value of your possessions—

much, much less than you would get if you

had time to sell them on your own terms.

n Reduce expenses. Where you can make

cuts and how much you can save will depend

on your spending habits. Many consumers

find there’s “wiggle room” in the categories

of transportation, food away from home, and

entertainment. But don’t limit your efforts to

these areas. Scrutinize every expense. You’ll

find many ways to save money throughout

this credit union Web site and in these lists:

“66 Ways to Save Money,” available from

the Federal Citizen Information Center

“Living on Less: 20 Painless Ways to Cut

Costs and Save Money,” published by

Associated Content

Kiplinger’s “Save Money on Practically

Everything”

AARP’s “25 Ways to Cut Costs on Just About

Everything”

What not to do: Cut costs by not paying

insurance premiums. Rather than let

your policies lapse, talk to your

insurance agent about a

payment plan, consider

reducing coverage if you’re

overinsured, or shop

around for better rates for

comparable coverage. But

don’t choose an insurance

policy based on price alone.

Check the issuing company’s

financial strength and stability online

at Moody’s, Standard and Poor’s, A.M.

Best, or J.D. Power. Research the company’s

complaint record with the National

Association of Insurance Commissioners and

your state insurance department.

n Tap your home equity. If your home is

worth more than you owe on it, and if your

credit score is still in decent shape, consider

refinancing your mortgage or opening a

home equity line of credit. Talk to your credit

union lender about home loans that fit your

needs.

What not to do: Turn unsecured debt—such

as credit card debt—into debt secured by

your home unless you’re absolutely sure

you can make the payments for the long

term. (Otherwise, if you get behind on your

mortgage payments, you could put your

home at risk of foreclosure.) Keep in

mind that by doing this, you will

pay more over the long haul

because you’re taking short-

term debt and financing it

for as long as 30 years.

n Consider borrowing from

a friend or family member.

To protect the relationship,

pay a competitive interest rate

and make consistent payments. (See

Borrowing from family and friends)

What not to do: Take out a payday loan. At

interest rates of 300% per year or more, this

short-term solution almost always leads to a

long-term debt disaster. Check the Consumer

Federation of America’s (CFA) Web site to

see what a payday loan could cost you.

Ask at your credit union about payday loan

alternatives offered there.

n Work with your creditors. Contact your

creditors when you realize you won’t be

able to make your full payment on time.

Your lender could offer remedies such as

reducing the monthly payment, lowering

the interest rate, waiving late and overlimit

fees, or tacking missed payments on to the

end of the loan. What any creditor is willing

and able to do depends on many factors,

including that creditor’s policies, the reason

for your delinquency, and your payment

history. See Tips for Working with Your

Creditors in this publication.

What not to do: Tap your retirement

accounts. If you’re not of retirement age,

you’ll pay a 10% early withdrawal penalty

plus income taxes on the amount you

withdraw. And, the money won’t be there

when you need it.

Pawn it or sell it?When you bring an item to the pawnshop, the pawnbroker holds it as collateral and lends you an amount that usually represents a fraction of the item’s actual value. To get your item back, you repay the loan plus fees, usually within 30 days. If you don’t repay, the pawnbroker keeps the item.

While using a pawnbroker can seem like a quick way to get cash, about one-third of pawned items are never redeemed. As a result, the owner gives up the item for much less than it’s worth. Even when items are redeemed, the cost of the loan usually is the equivalent of paying an interest rate of more than 100%.

If you’re willing to give up the item, it’s best to sell it outright to avoid fees and get its full value. If you’re not willing to give it up, look for other loan sources, such as a short-term personal loan from your credit union.

Turning Points 5 Avoiding Bankruptcy

n Seek credit counseling. A professional

credit counselor can review your

situation and offer possible solutions.

If you participate in a credit counseling-

administered debt management plan

(DMP), the agency will send a proposal to

your creditors requesting that they reduce

payments, reduce or waive interest charges

and fees, and bring your account current.

Not all creditors offer all concessions. You

send one payment to the agency, which

disburses it to your creditors on the plan.

You most likely will

pay a monthly DMP

fee of $20 to $50. The

counseling typically

is free or low cost.

See How to Find a

Reputable Credit

Counseling Agency in

this publication.

What not to do:

Pay high fees for

debt negotiation

(also known as

debt settlement)

services. This is very

different from credit

counseling. Besides

being expensive, debt

negotiation could

create a tax bill for

you for the forgiven portion of your debt—

because it will be considered income—and

your credit score could suffer.

n Seek housing counseling. If you’re having

trouble making your mortgage payments,

talk to a housing counselor. He or she will

be able to narrow your options based on

your equity, financial situation, and goals.

Find a housing counseling agency through

the U.S. Department of Housing and Urban

Development (HUD) (800-569-4287) or the

Homeowner’s HOPE™ Hotline (888-995-

HOPE). According to Mark, lenders are much

more committed now than they may have

Borrowing from family and friendsIdeally, a loan between friends or family would be a win-win situation: You, as the borrower, would get credit that might not have been available from a traditional source. The lender would earn a competitive interest rate on your money while also helping someone out.

Here are some of the terms and conditions you should agree on before money changes hands:

n Loan amount.

n Interest rate. You might think the interest rate you charge for the use of your money is entirely up to you. In fact, the Internal Revenue Service (IRS) has some say in the matter. Check the IRS Web site for information about monetary “gifts” and the Applicable Federal Rate.

n Payment schedule. Are payments to be made monthly? By what date each month? When is the loan to be repaid in full?

n Payment amount. Use an online calculator to calculate the amount of each payment, or the accrued interest at the end of the term if the loan amount will be paid in one lump sum.

n Payment method. By check? Direct deposit or automated transfer? If so, to what account?

n Late payment penalties. Will you charge a late payment fee or take a specific action if a payment isn’t made on time?

n Security interest. Will the loan be secured by any personal property?

n Recourse for default. Would you take legal measures, such as filing a lawsuit? Or repossessing a car used as collateral? Or would you simply never lend the borrower money in the future? Spell out exactly what recourse you would take for nonpayment.

Source: Loans Among Friends and Family: Win-Win, or Sure Loss? Home & Family Finance Resource Center; search for the complete article on this Web site.

(continued on p. 8)

Turning Points 6 Avoiding Bankruptcy

Tips for Working with Your CreditorsHow do some borrowers avoid severe consequences—a lawsuit, foreclosure, or repossession—despite missing one or more credit payments? The key is in how they approach the situation. Here are some tips that will greatly increase your chances of successfully working with your creditors.

n Be proactive. Call your creditor as soon as you determine that missing a payment is unavoidable. By contacting the creditor first, rather than forcing the creditor to track you down, you convey that you are concerned, committed, and responsible.

Some experts recommend making a “good faith” token payment. Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas, suggests first asking the creditor if it will help. He says that if money is very tight, and a token payment won’t help you avoid a late fee or a “ding” to your credit report, you may want to keep the extra dollars to pay for necessities. Mark also says that communicating with your creditor and making a real effort to get back

on track could, at the very least, encourage your creditor to hold off on reporting you delinquent to the credit reporting agencies.

n Be polite. It’s easy to get anxious or frustrated when dealing with debt issues, but courtesy and respect will get you further. “Remember, [your creditor is] not the enemy,” says Mark. “Treat them that way, and you give them less incentive to work with you.”

n Explain the situation. Creditors want to know that there is a good reason—something beyond your control, such as a job loss—for the delinquency. Let the creditor know how your financial situation has changed and why you can’t make a full, or any, payment. Be prepared to provide specifics about your income, expenses, and other debts.

n Give a prognosis. What changes do you see in the near future that would enable you to get back on track? Starting a new job soon, making your last car payment, moving to lower-cost housing—these all are things that could make it easier to pay your bills, so let your

creditor know. Provide concrete dates whenever possible.

n Propose a solution. Tell your creditor exactly what would help you most: a lower interest rate,

a reduced payment for six months, a larger credit

line, or any other concession. Do this only after doing the math and figuring out exactly what you could afford to

pay and when. Never agree to a payment

amount or schedule unless you’re absolutely sure you can afford it and will be able to keep the commitment.

n Keep a log. Keep track of all communications, including the date, who contacted whom and how (letter, e-mail, or phone call), the name of the creditor representative, the key points discussed and any agreement reached, and follow-up needed.

n Follow through. Notify the creditor of any snag that will make it impossible to fulfill your new agreement.

Creditors always maintain the right to report you delinquent, sell your account to a collection agency, repossess or foreclose on your property, or sue you. Your sincere effort at communicating with the creditor and repaying your debt, however, may buy you enough time to recover and avoid serious repercussions.

Source: Steer Clear of Credit Counseling Bad Guys; Home & Family Finance Resource Center

MAxED oUT? SEEk hELP fRoM:n Your credit union—Ask if someone there provides one-on-one credit counseling to help get your finances in order.

n The National Foundation for Credit Counseling (NFCC)—The NFCC, Silver Spring, Md., has nonprofit Consumer Credit Counseling Service (CCCS) affiliates around the country ready to help you get back on track from financial difficulty. To locate the nearest CCCS office, call 800-388-2227 (en Español, 800-682-9832), or visit nfcc.org.

Turning Points 7 Avoiding Bankruptcy

How to find a reputable credit counseling agency What are your options when the gap between your income and your bill payments has become so big you’ve given up hope of them ever meeting again? One of them is to consult a credit counselor.

While finding a credit-counseling agency may be easy, finding a reputable one that has your best interest at heart isn’t always so. Start by asking at your credit union for a referral. You also can search for an agency at nfcc.org (National Foundation for Credit Counseling) or aiccca.org (Association of Independent Consumer Credit Counseling Agencies).

When considering agencies, here are some ways to separate the good from the bad.

Is the organization an accredited nonprofit? Think twice about working with an agency that isn’t accredited by an organization such as the Council on Accreditation (COA).

Does the agency provide substantive counseling and education services? The counseling session, whether face to face or by phone, should last 30 minutes to 90 minutes and cover your income, expenses, debt, the reason for your current financial issues, and your goals. You should receive a customized action plan, and your options should be explained clearly. A debt management plan (DMP), where

the agency negotiates interest and payment concessions with your creditors and then disburses your monthly payment among those participating in the plan, should be established only if it is in your interest, and it should include all your unsecured creditors,

even if they do not make a “fair share” contribution to the agency. Money management classes and educational materials should be available.

What are the fees? There are excellent agencies that provide counseling free, do not charge more than $50 to set up a DMP, and limit monthly fees to $50 or the amount allowable by state law. Never work with an agency that keeps your entire first month’s consolidated DMP payment.

“A company that asks you to pay a lot of money in exchange for getting you out of debt is probably helping only its own bottom line, not yours,” points out Alice Saker Hrdy,

assistant director of the Federal Trade Commission’s (FTC) division of financial practices.

Is there full disclosure? The agency should provide a written agreement that clearly states fees, main source of funding (typically creditors), creditor concessions, amount to be disbursed, how long the DMP will last (not be more than 48 months), and the possible impact of a DMP on credit reports.

What kind of customer service does the agency provide? Live assistance should be available during hours of operation, including some evening and weekend hours, and the wait for an appointment should not exceed two days. As tough times continue, and agencies are busier than normal, you may have to book an appointment a week out for some agencies. You should receive monthly DMP account statements, and payments should arrive to your creditors by the due date.

What is the agency’s complaint record? Check the agency’s record of complaints with the U.S. Council of Better Business Bureaus and the state attorney general. Ask about the agency’s internal complaint resolution process.

“Any agency you choose should be consumer-focused, low-cost, and aspire to high standards [of service],” advises Jessica Cecere, the president of Consumer Credit Counseling Service of Palm Beach County/Treasure Coast of Florida.

Source: Adapted from Steer Clear of Credit Counseling Bad Guys; Home & Family Finance Resource Center

Turning Points 8 Avoiding Bankruptcy

seemed in recent years to helping you stay

in your home.

What not to do: Fall prey to scammers who

promise to stave off foreclosure and lower

your mortgage payments in exchange for a

fee that typically runs into the thousands of

dollars. You can achieve the same results—

free—on your own or with the help of a

housing counselor. (The FTC offers information

about how to avoid foreclosure rescue scams.)

n Do nothing. For some people with certain

types of debts—unsecured credit debt and

medical bills, for example—and limited

income and assets, bankruptcy is overkill:

The negative repercussions far outweigh

the advantages. If this is your situation,

your creditor will have few or no options for

collecting on your debt unless and until your

circumstances change for the better. At that

time, you may be able to afford to repay the

debt, and you will have avoided the cost and

repercussions of bankruptcy, though your

credit rating will have been damaged by the

unpaid debt. See The High Cost of Filing for

Bankruptcy in this publication.

What not to do: Assume your creditors have

no recourse. Being wrong could result in

your being sued and your wages or bank

accounts being garnished. Talk to a credit

counselor or other professional to find out

how your creditors could and could not

collect from you.

I have enough income to make partial bill payments. Should I file for Chapter 13 bankruptcy or try to repay my debts on my own?There are some significant differences

between paying your debts in a Chapter 13

bankruptcy and paying them on your own. To

make the best choice, you need to consider

the advantages and disadvantages of each

option.

Budget for Infrequent Expenses

Use a grid with infrequent expenses listed on the left side and columns for annual and monthly budget goal amounts across the top to help develop your spending plan.

Estimated annual cost* Monthly savings goal

Car repair $1,000 $84

New tires for car 360 30

Car replacement unknown 200

Dental care 360 30

Vision care 300 25

Television 480 40

Other electronics $1,200 $100

Total $ 3,700 $509

This sample grid is for a 24-year-old woman named Amy living on her own in a rented apartment. Amy owns a five-year-old car with 103,000 miles. She believes she can use it for two more years, as long as she buys new tires next year. In the meantime, she’s saving for her next car.

Save what you can until you build a stronger backup fund to meet these and other now-and-then expenses. One effective strategy: As soon as you pay off a loan, divert that monthly payment to your savings or money market account.

*All amounts are estimates only; check actual costs in your area when setting your budget

The high cost of filing for bankruptcyIn a June 2008 report, the U.S. Government Accountability Office (GAO) estimated the total average cost of filing for Chapter 7 to be $1,477 ($1,078 for attorney’s fees, $299 for court fees, and $100 for mandatory credit counseling and debtor education fees). Many estimates put attorney fees at closer to $1,500 to $2,000 to file for Chapter 7, and more for Chapter 13.

Turning Points 9 Avoiding Bankruptcy

Chapter 13 bankruptcy (court-administered

payment plan)—This type of bankruptcy

offers certain legal protections for debtors.

One of the most important of these is the

ability to shelter your home from foreclosure

and force the lender to accept a repayment

plan to make up delinquent mortgage

payments over three to five years. If a

Chapter 13 bankruptcy is, in fact, the only

way to protect your home, it may be the best

option to pursue.

Before making that determination, contact

your lender or a HUD-approved housing

counseling agency to explore ways to keep

your home without filing for bankruptcy.

(Find one through HUD, 800-569-4287,

or the Homeowner’s HOPE™ Hotline,

888-995-HOPE). Today, lenders are more

willing than ever to make loan modifications

that could help you get current and make

future mortgage payments more affordable.

These modifications could include reducing

the interest rate, adding missed payments

to the end of the loan, extending the loan

term, and reducing the monthly payment

so it doesn’t exceed a certain percentage of

income.

Independent or credit counseling-

administered payment plan—If you do not

need the protections provided by Chapter 13,

paying your debts on your own or through

a credit counseling agency-administered

DMP allows you to avoid the stigma,

consequences, and cost of bankruptcy. A

credit union representative can help you

evaluate your options, and refer you to a

credit counseling agency it already has a

relationship with if you decide that is the

way to go. See How to Find a Reputable

Credit Counseling Agency in this publication.

Some consumers fear that participating in a

DMP will lower their credit score. According

to Fair Isaac Corporation, creator of the

widely used FICO® score, credit counseling

and DMP participation themselves should

not affect your credit standing. However,

the creditors you pay through the plan

could report your account as not being

paid as promised if they have reduced your

payments or interest, or if your payments are

arriving after the due date. Credit counselors

point out that these “dings” to your credit

score are less damaging than a bankruptcy

or a string of missed payments.

It’s always a good idea to know where

you stand. Order your credit report before

beginning a DMP or pursuing any other

resolution. You’ll see your total debt, a listing

of creditors, and how your account is being

reported (“satisfied,” “paid as agreed,” or

“charge-off,” for example). See Obtaining

Your Credit Report in this publication.

How can I avoid getting to the point where bankruptcy seems like my only option?Generally speaking, bankruptcy, foreclosure,

repossession, and wage garnishment come

only after at least a few missed payments

and many unsuccessful attempts by the

creditor to contact you and discuss a

resolution. So, you’ll have more options than

just bankruptcy if, at the very first sign of

problems, you take action.

n Communicate with your creditor. Contact

your creditor, and respond to your creditor’s

attempts to contact you. Being unresponsive

suggests you don’t intend to pay your debt

and eliminates any motivation the creditor has

to postpone legal action. See Tips for Working

with Your Creditors in this publication.

Obtaining your credit reportBefore you make any major decisions about how to handle your debt, order a copy of your credit report. The report will tell you whom you owe, how much you owe, the status of your account, and whom to contact regarding the debt. (A creditor may have sold or assigned the debt to a collection agency.) Only creditors who report to the credit reporting agencies will be listed.

You are entitled to a free copy of your credit report from each of the three major credit-reporting agencies—Equifax, Experian, and TransUnion—every 12 months. (Order one from each credit bureau every four months both to monitor your credit standing and to be on the lookout for identity theft.) Order your free reports online, at AnnualCreditReport.com, or by phone, at 877-322-8228. Your free report will not include your credit score.

If you notice any inaccuracies (debts that aren’t yours, debts that have been paid off, or old debts that should have aged off the report), follow the instructions that come with the report to file a dispute. The credit reporting agency must verify the information with the creditor that provided it. If it can’t verify the item, it must remove it.

Turning Points 10 Avoiding Bankruptcy

n Talk to a professional credit counselor.

He or she will analyze your financial

situation, set priorities with your expenses,

present your options, and offer guidance

based on your goals. The sooner you make

the appointment, the more options will

be available to you. See How to Find a

Reputable Credit Counseling Agency in this

publication.

n Make damage control your goal. Make

a tough decision sooner rather than later

if it will enable you to avoid the worst-case

scenario. For example, if you know you

will not be able to keep up with your car

payments for the long term, sell the car,

refinance the loan, or give the car back to

the lender rather than wait for the inevitable

repossession. Repossession doesn’t just

mean you lose the vehicle. The lender could

get a deficiency judgment against you,

meaning you would owe the difference

between the outstanding loan balance, plus

repossession fees, and what the lender

was able to get for the vehicle. If the lender

forgives any of your debt, you could end

up with a tax bill for the “income.” And

your credit score will be damaged by the

repossession.

When it comes to

financial challenges,

it’s better to be

proactive than

reactive. That means

not only addressing

financial problems

head-on when they

arise, but also making

choices that are

less likely to create

financial problems in

the first place.

n Live beneath your

means. Don’t buy a

car you can’t easily

afford. Save rather

than spend raises,

bonuses, gifts, and tax refunds. And save up

for special treats such as vacations rather

than finance them on credit.

n Use credit responsibly. Make it a goal

to reduce or eliminate short-term debt

whenever you’re able.

n Anticipate expenses. Save monthly for

expected but infrequent large bills, such

as insurance premiums, the replacement

of an old refrigerator, and car tune-ups

and repairs. Talk to the professionals at

your credit union about setting up a direct

deposit savings account for these expenses.

n Build an adequate emergency fund.

Three to six months of expenses is a savings

guideline. If this is too big a goal to start

with, begin by saving one month’s living

expenses, then work up to the equivalent of

three to six months worth of ongoing costs.

If your household has only one breadwinner,

you might want to set aside as many as eight

months’ expenses. Only tap this fund in

times of dire need.

n have a plan for the worst-case scenario.

Know what you would do if you lost your job

next week.

n Ask for help. Your credit union offers

financial planning services that will help you

prepare for the future, or can refer you to

those resources.

I’m having trouble paying my bills. Should I file for bankruptcy?Only as your very last resort. Bankruptcy—a

legal process that results in either the

discharge of debts (Chapter 7) or the

repayment of debts under a court-approved

payment plan (Chapter 13)—is an option

for some consumers, and not for others.

Whether filing for either type of bankruptcy

is an option for you depends on various

factors, both legal and personal.

first, federal law restricts who can file

The higher your FICO® credit score, the lower your payments

Interest rates accurate as of Aug. 11, 2009:

n 30-year fixed-rate mortgage

FICO® score APR Monthly payment

760-850 5.109% $1,631

700-759 5.331% $1,672

680-699 5.508% $1,705

660-679 5.722% $1,745

640-659 6.152% $1,828

620-639 6.698% $1,935

Source: myFico.com

Turning Points 11 Avoiding Bankruptcy

for bankruptcy. To file for Chapter 7, your

income must be below your state’s median

income for a family of the same size. If

it’s not, you must take a “means” test,

which determines if you have the financial

resources to repay at least something

toward your debts. If you can repay at least

part of your debt, you only will be allowed to

file for Chapter 13, not Chapter 7. There are

other legal requirements as well.

Second, even if bankruptcy is an option for

you legally, it may not be something you’re

willing to consider for personal reasons.

Dave Ramsey, radio and television show host

and author of “The Total Money Makeover:

A Proven Plan for Financial Fitness,” calls

bankruptcy one of the “top five life-altering

negative events that we can go through.”

If you can’t reconcile bankruptcy with

your values, or if bankruptcy could make

it difficult or impossible to achieve your

goals—such as getting a particular job or

promotion, or obtaining credit to start a

business—or if your filing would leave a

co-signer “holding the bag” for one of your

debts, you may not see bankruptcy as a

choice worth contemplating.

Assuming you’re able to file for bankruptcy

under the law—in other words, you meet all

legal requirements—you must ask yourself

two questions:

1. Is filing for bankruptcy the best way to

deal with my money troubles? Make any

decision to file for bankruptcy with a clear

understanding of what it can and can’t do

for you.

For example, many debts—including spousal

and child support, most tax debts, most

student loans, secured debts, restitution,

and criminal fines—are not dischargeable in

a Chapter 7 bankruptcy. For consumers with

these types of debt, bankruptcy offers little

relief but carries a large, long-term cost.

If you have specific objectives, such as

keeping collectors from harassing you or

protecting your home from foreclosure,

there may be ways other than bankruptcy

to achieve them. For example, federal and

state laws prohibit creditors from harassing

borrowers. See What Debt Collectors

Dealing with the stress of debtThe stress that comes with debt can have an impact on your closest relationships, your performance at work, and your outlook on life. Experts say there also is research to support that the stress debt causes can, over the long-term, lead to physiological health problems as well. Successfully managing the side effects of debt offers big benefits for both your mind and your body.

One of the most important steps in any recovery process is talking about how you feel. Yet, experts say, it’s common to hear consumers overwhelmed by debt say they don’t feel like they can discuss their situation with friends or family, or that they don’t want to talk to anyone face to face. Thanks to the Internet, a support group that fits your needs is just a few keystrokes away.

There also are many blogs (Web logs) focused on personal finance and debt. Some bloggers welcome comments from visitors, creating an informal support group. Do an Internet search for “debt blog” and “personal finance blog.” When you see the long list of results, you’ll know you’re not alone.

Keep in mind, these sites feature nonprofessionals who are already

in financial trouble themselves; they may help you feel “we’re in the same boat” but may not be your best sources for sound advice. If your employer offers an employee assistance program (EAP), call its 800 number to find reliable resources you can use anonymously.

Another key step in the recovery process is taking action. Todd Mark, vice president of education for Consumer Credit Counseling Service of Greater Dallas, says people dealing with debt can’t worry about the past, only about their actions in the weeks and months ahead. Making an appointment for credit or financial counseling is an important first step toward empowerment and self-reliance.

For financial planning assistance or a referral to a credit counselor, contact your credit union. You also can search for a credit counseling agency at nfcc.org (National Foundation for Credit Counseling) or aiccca.org (Association of Independent Consumer Credit Counseling Agencies).

For mental health counseling, look for a licensed therapist that has experience with working through money issues. Again, if your employer offers an EAP, counseling may be available free.

Turning Points 12 Avoiding Bankruptcy

Can and Can’t Do in this publication. And

you may be able to avoid foreclosure by

contacting your lender and asking for a

loan modification that would make your

payments more affordable, or a repayment

plan to make up past-due amounts.

2. Are the costs and

consequences of bankruptcy

worth the benefits it might

offer? The dollar cost of an

attorney-assisted bankruptcy

can be quite high—as much

as a few thousand dollars.

See The High Cost of Filing for

Bankruptcy in this publication.

While it’s possible to file for

bankruptcy without an attorney,

the consensus is that the

process is so complex as to make

legal assistance necessary.

In a Chapter 7 bankruptcy, also referred to

as liquidation, you must forfeit any assets

that do not qualify as exempt under state

guidelines. Forfeited assets are sold—

liquidated—to pay your creditors.

Bankruptcy stays on your credit report for

10 years, meaning you could have difficulty

obtaining credit, renting a home, getting

insurance, or qualifying for a particular job

or promotion long after your bankruptcy

case is closed.

Whether or not you should file for

bankruptcy is a question only you

can answer. As you seek advice

from various sources, you may

find that it can be difficult to find

truly unbiased input. Your best

course of action is to gather all

the information you can and then

make a decision about whether or

not to file for bankruptcy based

on the facts you’ve gathered, your

alternatives, your personal and

financial goals, and your values.

U.S. Department of Housing and Urban Development

What debt collectors can and can’t doYou don’t have to file for bankruptcy to get peace from debt collectors. The Fair Debt Collection Practices Act (FDCPA) sets guidelines for what debt collectors can and can’t do. In a nutshell, third-party collectors (collection agencies, lawyers who routinely collect debts, and companies that buy delinquent debts and then try to collect them) can’t use abusive, unfair, or deceptive practices to collect from you.

Specifically, collectors cannot:

n Contact you before 8 a.m. or after 9 p.m., unless you give permission.

n Contact you at work if you tell them you’re not allowed to receive calls.

n Contact you directly if you’ve hired an attorney and have notified the collector.

n Contact anyone other than you, your spouse, or your attorney to discuss your debt, except to find out your address, home phone number, and employer.

n Use obscene or profane language.

n Make false statements, such as claiming to be an attorney or government employee.

n Threaten to take your assets or property unless they are legally entitled to do so.

n Threaten legal action unless they intend to follow through.

n Continue to contact you if you dispute the debt in writing (unless the collector provides proof you really do owe the debt).

It makes sense to talk to a collector at least once to get key information such as the name of the creditor, the name and contact information of the collector, the amount due, and so on. If you don’t want the collector to contact you after that, you can send a letter by certified mail, return receipt requested, telling the collector not to contact you again. From that point, the collector can contact you only to confirm that there will be no further contact or to let you know that a specific action, such as filing a lawsuit, will be taken.

For more information about debt collection and related topics, visit the Federal Trade Commission (FTC) online. To report a violation of the FDCPA, contact your state attorney general’s office and the FTC.

Turning Points 13 Avoiding Bankruptcy

Useful resources

(HUD) Guide to Avoiding Foreclosure

“Mortgage Payments Sending You Reeling? Here’s What to Do,” FTC

“Solve Your Money Troubles: Get Debt Collectors Off Your Back & Regain Financial Freedom” (11th edition), by Robin Leonard and John C. Lamb, Nolo, 2007

“Guide to Surviving Debt,” by Deanne Loonin, National Consumer Law Center, 2008

“Debt Collection FAQs: A Guide for Consumers,” FTC

“Before You File for Personal Bankruptcy: Information about Credit Counseling and Debtor Education,” FTC

“How to Get Out of Debt, Stay Out of Debt and Live Prosperously,” by Jerrold Mundis, Bantam, 2003

“Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence,” by Vicki Robin, Joe Dominguez, and Monique Tilford, Penguin, 2008

IRS Withholding Calculator, Internal Revenue Service

“Improving Your FICO® Credit Score,” Fair Isaac Corporation