Debt Relief

Introduction

In today's world, debt is almost unavoidable. We have been brainwashed to think that more is better, regardless of what more is. Our society is largely commercialized. We are bombarded with subliminal messages, urging us to buy, buy, and buy; and many of us do just that. We buy without knowing how we are going to pay. We live above our means trying to keep up with the neighbors. The cost of living increases but our income seems to stay the same. It is virtually impossible to avoid going into debt. In our diverse society, we have one basic commonality: debt. Debt can be controlled, but we all need to understand it and learn to avoid too much of it.

The following information is designed to answer questions about debt and offer solutions to control it. Contents range from financial planning to debt consolidation, credit reports to bankruptcy, and more.

Debt Management

Debt Management is the process by which debts are consolidated into one lower monthly payment. This one payment will be an amount which the client can afford, and will be apportioned amongst their creditors. Payments to creditors will be made on the client's behalf. An Interview was done with a local agency on debt management.

Credit counseling and debt management agencies give professional help to individuals who need assistance paying off debts. These agencies look at the client's debts, listen to needs, make recommendations, and create budgets. These companies have received bad press in the past, do research before selecting one. Make sure it is accredited with an institution, such as the Better Business Bureau. A debtor must also make sure to look at state laws, so that he/she is not overcharged for financial help.

The steps most of these agencies take to help debtors eliminate debt are:

1) They help debtors to assess his/her debt situation.

2) Avoiding overspending and handling existing debts are other areas consultants help debtors with.

3) The final steps are helping the client to build and maintain good credit.

Most financial advisors agree that the most important step a person must take before seeking counsel is to change his/her money management skills. The debtor must change the way he thinks. The debtor must get rid himself of all financial anxieties or debt will probably happen again.

Managing Your Credit

Specific criteria has to be met in order to obtain credit. Creditors solicit your credit history from credit reporting agencies such as Experian, Trans Union, and Equifax. Whether your credit is good or bad is determined by your Beacon or credit score. If your score is low, you are considered "high risk" and chances are your request for credit will be denied. The higher your credit score, the more likely you will receive approval. Each time you apply for credit, your score drops. If your credit score is low, there are steps you can take to help manage your credit and increase your score.

Apply for a secured card or deposit money in your checking account.
Apply for a department store or gasoline credit card and build small balances, but pay them off in full each month.
Do not use your credit cards to purchase food. You will pay 10 times more in interest than what one meal would have cost if you had paid cash.
If possible, consider transferring the balance of your credit card to a lower interest rate card. If you do this, immediately destroy the card with the high rate and close the account.

Over time, your credit score will improve, and you will qualify for unsecured credit cards on your own.

For those who need assitance managing their credit there are a variety of choices and options out there. In an article by Hispanic magazine, financial author Julie Stav explains what a FICO score is, how credit bureaus calculate it, and steps on ways to improve your score. An article by U.S. News and World Report states the following steps to keep this score manageable:

1.) Pay bills on time.

2.) Pay down debt.

3.) Maintain long-term credit relationships.

4.) Do not apply for too many loans.

A great self-help guide to consider is Repair Your Own Credit which instructs debtors how to repair their credit and how to reestablish credit. It also lists organizations that will either give people free assistance or charge a very low cost to help someone stay out of debt. In NEA Today, they also refer to some credit management agencies such as Equifax as well as warn people about credit repair clinic rip-offs saying they do not do anything that you cannot do yourself. The counselors at Credit Union Magazine suggest that bankruptcy be the last resort in certain circumstances.

Credit Card Consolidation

Credit card agencies such as Visa, Discover, MasterCard, and American Express have departments that provide essentially the same services as debt consolidation and debt management companies; however, debt reduction and credit counseling are entirely different functions than what the credit card companies do best. Credit card companies typically prefer their card holders use specialized debt consolidation firms to help with debt consolidation. These firms take on a substantial burden of individual repayment agreements and terms as well as attendant paperwork. MasterCard for example, prefers their card holders use a debt management service. Therefore, Mastercard does not advertise a debt management department within their company. The Mastercard consolidations department will respond to requests for debt consolidation if a written request from the card holder is made to the proper department.

Although trying to set up a debt management plan using services available through the various credit card companies may prove difficult, the small fees and inconvenience associated with debt management companies may be avoided.

PBS' Frontline aired a comprehensive report on 11/23/04 named The History of the Credit Card. The report gives an in depth look at the credit card business and common practices unknown to many of us.

When the topic of debt management and relief comes up, consolidation is usually one of the words that follows. Many experts agree that debt consolidation is a good idea when it seems a person is getting too deep in debt. Three things to consider before deciding on debt consolidation:

Evaluate where you stand with your debts.
Don't wait until you are in over your head.
Be sure to understand how debt consolidation truly works.(Morris, 103)

Numerous experts also agree that a nonprofit company is the best way to go for premium terms. Also, no matter if they are for-profit or nonprofit, one should gain as much information as possible about the company before dealing with them. Futhermore, ensuring the institution you choose works with your creditors. Checking their status with the Better Business Bureau is a great idea. (Brown, 326) However, there are many different opinions on how to go about this. One common opinion is that only school loans should be consolidated, and this is only because of the enormous necessity of a college education. (Orman, 149)

Credit Harrassment

Creditor Harassment: Know Your Rights With Creditors. Are you being harassed by collection agencies? A creditor has the right to contact you when you fall past due on a debt owed to them. However, you have rights if you feel you are being treated unfairly by a debt collector. Your rights are protected under the Fair Debt Collection Act.

How can you protect yourself from harassment? Asking a collector to stop calling should be effective in most cases. However, a Cease and Desist letter can be sent to third party collection agencies. The Cease and Desist letter will prevent a collection agency from calling you. Once the letter has been received, they may not contact you again except to say there will be no further contact or notify you that a specific action will be taken.

You may not send a cease and desist if the debt is still owned by the original creditor, such as a bank or credit card. Cease and desist letters may only be sent to a third party, such as a collection agency or attorney.

The Fair Debt Collection Practices Act protects debtors from unfair debt collection processes. The Act ensures you are treated fairly and prohibits certain methods of debt collection. The Collectors (both original and third party agencies) are unable to:

Harass, oppress, abuse, or publish lists of consumers who refuse payment
Use profane language
Repeatedly use the telephone to badger someone
Give false information
Imply they are attorneys, government representatives, or work for a credit bureau
Insinuate you have committed a crime
Falsely suggest they work for a credit bureau
Misinterpret the debt amount
Submit false information about you to anyone (including credit bureaus)
Indicate sent forms are from the court or government agency when they are not
Participate in unfair practices when collecting debt
Obtain amounts greater or less than debt amount (unless state laws permit change)
Deposit a post-dated check prematurely
Use deception to make a debtor accept collects calls
Threaten to take property (unless done legally)

What can you do if the law has been violated? A debtor has the right to sue a collector in a state or federal court within one year from the date of the violation. If a suit is favored by the debtor you may recover money for damages, court and attorney costs, plus an additional amount up to $1,000. A group of debtors can sue and recover funds for damages up to $500,000, or 1% of the collector’s net worth, whichever is less. Any problems or concerns can be reported to your state’s Attorney General’s office, the Federal Trade Commission, and/or the American Collectors Association or local State Bar Association.

Please be advised, that while a creditor may not call and harass you anymore, they still have the right to pursue the debt. However unlikely, they may still file suit in an attempt to collect the debt. Although Cease and Desist is a valuable tool, it should only be used when absolutely necessary.

Bankruptcy

Bankruptcy occurs when the federal system of statues and courts authorize insolvent individuals or businesses the ability to place their financial affairs under the bankruptcy court's control. When the debtor exceeds his or her ability to pay, the debtor may file a petition with the bankruptcy court for voluntary bankruptcy.

There are two types of personal bankruptcy: Chapter 7 and Chapter 13. Chapter 7 bankruptcy and Chapter 13 bankruptcy are legal proceedings that are available to a person to cope with a financial crisis. Personal bankruptcy must be filed in a federal bankruptcy court. You will have to pay a minimal fee for court and attorney costs.

Chapter 7 bankruptcy:involves the liquidation of all your assets that are not exempt from the bankruptcy settlement.

Chapter 13 bankruptcy:is a court-ordered and approved repayment plan to your creditors.

The following questions were answered during a telephone interview with Robert M. Matson from the law offices of Akin, Webster, & Matson, PC Attorney at Law:

1) What is the process of filing for bankruptcy?

First, we invite all potential clients for a free consultation. Second, upon arriving for a free consultation, we tell the clients to bring in a list of their credits as well as the total amount of income he or she might receive. Finally, after going over the client's credit history and income, we inform the client of the best course of action.

2) How long does filing for bankruptcy stay on your credit report?

Filing for Chapter 7 bankruptcy stays on your credit report for ten years. Filing for Chapter 13 stays on your creit report for seven years or until you pay off your debt in full.

3) Does filing for bankruptcy make your credit bad?

Yes, because somewhere in the future for instance let's say you want to take out a loan. If the person you are trying to get a loan from pulls up your credit report and sees that you filed for bankruptcy in the past, this person may think that your are incapable of paying off the loan.

4) How do you determine the fee that you charge clients who file for bankruptcy?

The fee that clients are charged for filing for bankruptcy depends on the caseload and what type of bankruptcy the client is filing. In Chapter 7 bankruptcy cases the fee is based upon the client's assets. If the client has a large amount of assets, the higher the fee. If the client has a small amount of assets, the lower the fee. In Chapter 13 bankruptcy cases the judge determines the fee.

5) Are they any other forms of bankruptcy besides Chapter 7 and Chapter 13?

Yes, their is Chapter 11 and Chapter 12 bankruptcy;however, Chapter 7 and Chapter 13 are the two most common forms of filing for individual bankruptcy.
Chapter 11 bankruptcy: is the filing of bankruptcy by corporations and some individuals. This form of bankruptcy is rarely filed by individuals because it is rather expensive.
Chapter 12 bankruptcy: is the filing of bankruptcy by farmers.

6) What is the difference between filing for Chapter 7 bankruptcy and Chapter 13 bankruptcy besides, the obvious of Chapter 7 being a liquidation of all you assets and Chapter 13 being court-ordered?

In a Chapter 7 bankruptcy case the court appoints a trustee to handle the liquidation of your property. The trustee can sell or turn over your property to your creditors. The court then discharges your debts and you will become debt free.
In a Chapter 13 bankruptcy case you are allowed to keep your property. This form of bankruptcy allows you to use future income to pay back your debts over a three to five year period. Once you have completed payments under this form of bankruptcy, your debts will be discharged by the court.

Most financial experts agree that bankruptcy should always be the last resort used for managing your debts. Bankruptcy has long lasting results. Filing for bankruptcy remains on your credit report for a period of ten years, making it more difficult to obtain credit in the future.

Bankruptcy is considered to be a "major bomb" in the world of credit. It should be the last resort in most cases for debt relief. Depending on the situation it is sometimes unavoidable.

When selecting a bankruptcy attorney, research his/her background for work experience in this sensitive field of debt relief. There are two types of personal bankruptcies, Chapter thirteen and seven. Corporate bankruptcy is called Chapter eleven and can only be filed by businesses.(Leonard, Attorney Robin "Bankruptcy". Berkley: Nolo Press, 1998). (Credit laws vary from state to state for filing and so does liquidation of assets over a period of time.)

Initially, the person filing will get a sigh of relief from being overwhelmed. Later, credit agencies and other lenders will analyze his/her credit information with a fine tooth comb for at least "ten" years or longer. This a combination of an advantage but a disadvantage to debt relief. Lenders almost immediately view a person as a high - risk for credit due to having bad debt written off through bankruptcies.

Chapter thirteen can be filed in a court with a trustee assigned and is considered a "reorganization" over a period of time to repay debt. The court trustee decides the total amount to be paid back and the time allotted for payment. The person's salary or income determines what will be allowed for the cost of living and the amount that will be disbursed to the creditors. No new debts can be accumulated without the court's permission (i.e., credit cards, loans). Upon closing, obligations are fulfilled and the person can begin on a new credit journey, but the on this new path the person needs to be aware the discharge will remain on the credit report for the next five to seven years.

Chapter seven can be filed in a court and the person will walk away from most of the debt secured and unsecured. The person's salary is freed from the threat of garnishments and being sued by the creditors. The information stays on the credit report for the next ten years and creditors will be view the person as a higher - risk than if the person had filed a Chapter thirteen.

When a person has filed for either bankruptcy it becomes public record information that can be viewed by anyone with acccess to public records documents. Again, bankruptcy needs to be considered as the very last option to debt relief.

Collection Agencies

A Collection agency is not the same as a debt counseling service. Collections agencies are employed by creditors to recover money owed to them.

Creditors wait from six months to two years before turning a bad account over to a collection agency. There are different reasons why the debtor ends up in collections: poor money management skills, illness, no money to pay, and sometimes the debtor just does not care to repay the debt.

The following information was gathered in an interview with Sandra Harden, Manager of Bibb Collections.

A collection agency goes after an individual who will not pay a debt. This debt is anything from medical bills to florists bills.
A Creditor may not employ a collection agency for 6 months to 2 years after the debtor is delinquent.
Bad debt is referred to a collection agency because the debtor has poor money management skills, is ill, or has a lack of desire to pay what is owed.
Collection agencies charge a percentage of what is collected as a fee for the service.
The methods used by credit agencies to collect unpaid accounts are telephone calls to the debtor, lawsuits, and garnishments. Collection agencies will provide a pay plan as well.
If the debtor does not pay using a pay plan, the collection agency will sue or garnishee the wages until the debt is settled.

Something to keep in mind: If there is debt, it does not go away if ignored. The best way to manage it is to face it head on and explore options available.

Bankruptcy is recommended by collection agencies if the debt is severe and there are personal reasons for not being able to pay. Credit counseling is also recommended.

A collection agency is a company that is contacted by the original lender to collect past due and defaulted accounts. (www.spu.edu)

The Federal Trade Commission states that if you use credit cards, owe money on a personal loan, or are paying on a home mortgage, you are a debtor. If you fall behind in repaying your creditors, you will probably be contacted by a collection agency or a "delinquent debt collector".

Mike Ryan, President of NACM Southeast, wrote an article on "Qualifying Your Collection Agency". You, as an owner in a business have to be careful of what collection agency you choose. You have to ask yourself these questions: What does the agency know about your business? Can you rely on them to handle your accounts honestly, ethically, and effectively? Does the agency understand you may do business with this client again in the future? (Ryan, Mike. 106.8) This is the kind of agency that can legimately collect your money.

The FTC also gives a few tips on a fair debt collection. There is an act that requires that debt collectors treat you fairly and prohibits certain methods of debt collection. This is known as the Fair Debt Collection Practices Act. This does not mean that your debt will just go away. You still have to face this debt head on. This just protects your rights.

You can avoid these agencies all together by simply managing your money right. Self-Help may be the Best Help.

Research Reports

Debt Consolidation

When the topic of debt management and relief comes up, consolidation is usually one of the words that follows. Many experts agree that debt consolidation is a good idea when it seems a person is getting too deep in debt. Three things to consider before deciding on debt consolidation:

1)Evaluate where you stand with your debts.

2)Don't wait until you are in over your head.

3)Be sure to understand how debt consolidation truly works.(Morris, 103)

Numerous experts also agree that a nonprofit company is the best way to go for premium terms. Also, no matter if they are for-profit or nonprofit, one should gain as much information as possible about the company before dealing with them. Futhermore, ensuring the institution you choose works with your creditors. Checking their status with the Better Business Bureau is a great idea. (Brown, 326)However, there are many different opinions on how to go about this. One common opinion is that only school loans should be consolidated, and this is only because of the enormous necessity of a college education. (Orman, 149)

Collection Agencies

A collection agency is a company that is contacted by the original lender to collect past due and defaulted accounts. (www.spu.edu)

The Federal Trade Commission states that if you use credit cards, owe money on a personal loan, or are paying on a home mortgage, you are a debtor. If you fall behind in repaying your creditors, you will probably be contacted by a collection agency or a "delinquent debt collector".

Mike Ryan, President of NACM Southeast, wrote an article on "Qualifying Your Collection Agency". You, as an owner in a business have to be careful of what collection agency you choose. You have to ask yourself these questions: What does the agency know about your business? Can you rely on them to handle your accounts honestly, ethically, and effectively? Does the agency understand you may do business with this client again in the future? (Ryan, Mike. 106.8) This is the kind of agency that can legimately collect your money.

The FTC also gives a few tips on a fair debt collection. There is an act that requires that debt collectors treat you fairly and prohibits certain methods of debt collection. This is known as the Fair Debt Collection Practices Act. This does not mean that your debt will just go away. You still have to face this debt head on. This just protects your rights.

You can avoid these agencies all together by simply managing your money right. Self-Help may be the Best Help.

Bankruptcy

Bankruptcy is considered to be a "major bomb" in the world of credit. It should be the last resort in most cases for debt relief. Depending on the situation it is sometimes unavoidable.

When selecting a bankruptcy attorney, research his/her background for work experience in this sensitive field of debt relief. There are two types of personal bankruptcies, Chapter thirteen and seven. Corporate bankruptcy is called Chapter eleven and can only be filed by businesses.(Leonard, Attorney Robin "Bankruptcy". Berkley: Nolo Press, 1998).

Credit laws vary from state to state for filing and so does liquidation of assets over a period of time.

Initially, the person filing will get a sigh of relief from being overwhelmed. Later, credit agencies and other lenders will analyze his/her credit information with a fine tooth comb for at least "ten" years or longer. This a combination of an advantage but a disadvantage to debt relief.

Lenders almost immediately view a person as a high - risk for credit due to having bad debt written off through bankruptcies.

Chapter thirteen can be filed in a court with a trustee assigned and is considered a "reorganization" over a period of time to repay debt. The court trustee decides the total amount to be paid back and the time allotted for payment. The person's salary or income determines what will be allowed for the cost of living and the amount that will be disbursed to the creditors. No new debts can be accumulated without the court's permission (i.e., credit cards, loans). Upon closing, obligations are fulfilled and the person can begin on a new credit journey, but the on this new path the person needs to be aware the discharge will remain on the credit report for the next five to seven years.

Chapter seven can be filed in a court and the person will walk away from most of the debt secured and unsecured. The person's salary is freed from the threat of garnishments and being sued by the creditors. The information stays on the credit report for the next ten years and creditors will be view the person as a higher - risk than if the person had filed a Chapter thirteen.

When a person has filed for either bankruptcy it becomes public record information that can be viewed by anyone with acccess to public records documents.

Again, bankruptcy needs to be considered as the very last option to debt relief.

Definitions and Common Terms

Bankruptcy

Bankruptcy is a court case. It is used when a person cannot pay his or her bills. It helps a person get a fresh financial start. All bankruptcy cases are handled in a federal court. When the debtor exceeds his or her ability to pay, the debtor may file a petition with the bankruptcy court for voluntary bankruptcy. It is wise to have an attorney help you decide whether bankruptcy is the best way for you to handle your situation.

The two most common types of bankruptcy filed by individuals and businesses are: Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 bankruptcy

Involves the liquidation of all your assets that are not exempt from the bankruptcy settlement.

Chapter 13 bankruptcy

Is a court-ordered and approved repayment plan to your creditors.

Beacon or Credit Score

Points kept on file by credit reporting agencies that indicate how much debt a person has; higher scores are ideal. Low scores indicate an unfavorable credit history.

Credit Reports

Credit reports contain information about where you work, live, and your bill paying habits. Credit Reporting Agencies are companies that gather and sell information concerning your credit history to various businesses. This credit history is sold in the form of a credit report. The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, is designed to promote accuracy and ensure the privacy of the information used in credit reports. Under this act, Credit Reporting Agencies must furnish correct and complete information to businesses to use in evaluating your applications for credit, insurance or a job.

Debt

Liability; money owed

Debt Consolidation

The process of combining all debt into one sum and having only one payment. This may be helpful when there are multiple credit cards with high interest rates. In most cases payments are lowered and interest rates are reduced.

Frozen Assets

When someone can no longer have access to funds in a bank or other holding company. Selling of personal items is not permitted at this time either.

Frozen Interest

When interest fees are no longer able to accrue on an account.

Frozen Interest Rate

When an interest rate is no longer fluctuating between variable numbers.

Garnishee or Garnishment

When a creditor can legally take money from a debtor's paycheck.

Insolvent

Unable to meet debts or discharge liabilities.

Liens

When the creditor can legally claim the property of the debtor by placing a lien on the property until the debt is paid.

Liquidation

When a debtor may be legally ordered to sell all assets in order to settle debts.

Secured Credit

Where a deposit is made to the credit supplying company to cover any expenses or purchases made with the credit. Often times calling it a savings account for credit. A limit is then placed on the credit issued for the amount of the deposit paid.

Sue or suit

The creditor can take legal action to get the money owed

Unsecured Credit Card

A credit card where a security deposit is not required to open the credit account.