FINANCIAL CRISIS:

You may have lost your job or found yourself deep in debt.

1. No matter your situation, realize you have options.

You can overcome your financial challenge. It is your responsibility to explore your options and make a fully informed decision. Do not make a rushed decision because you are overwhelmed or pressured by another party.

2. React now.

Do not stall because you are in denial or paralyzed by fear. Do not let the mail pile up. See what you have to deal with. The debt list, budget work, and debt calculators described earlier in this program will help you get there. Organize any letters or correspondence, including summons (lawsuits) from creditors/collectors. Again, do not make rushed decisions or let others pressure you but don’t waste time with inaction. Start getting a picture of what you have to deal with.

3. No shame.

Financial problems can cause isolation, embarrassment, and anger to name a few emotions. Know that you are not alone. There is someone filing for bankruptcy every 15 seconds in the United States. You are doing what you need to do to take care of your family and/or yourself. Do not isolate yourself, cower in shame, or take out stress on your loved ones. Find a good family member, friend, or professional to talk to. Focus on how good you will feel when you have overcome this hurdle.

4. Prepare a bare bones emergency budget.

Create a budget. Your budget will show you what you have to work with. Go through your budget and see what you can cut. Start with the wants. Then see if you can cut or cut down on some needs. What do you really need to survive with safety, security, and dignity. This is a good exercise for those not yet in a financial challenge so they can be prepared. You can utilize this budget until you are on your feet.

5. Contact your creditors

Most creditors will appreciate the notice that you will be late or miss a payment. Become a master negotiator. Ask if they will work with you on a repayment plan. Though you may think you have zero leverage, your creditors may want to be paid back something rather than nothing. Get any agreements in writing and keep a written record of any agreement. If you make an agreement, be absolutely certain you can meet your end of the deal. It’s a good policy to let them know the situation, such as a job loss, and to retain credibility, do not make a promise you cannot keep. You do not need to commit to anything yet. See what options you have. For example, you may be able to get a deferment on your student loans. Look for options like that. You will want to get any promises from your creditors in writing. Do not sign anything yourself until you know what you are signing and you are sure you can stick to it.

6. Prioritize your bills

Do not let creditors, collection agencies, or lawsuits intimidate or persuade you. You decide what your most important bills are and pay those first. If you are unable to pay all your bills, pay the ones that matter the most first. Housing may come first, followed by food or transportation. Medical insurance may be high on your list. Think through your priorities. Do what you can.

7. Only borrow as a last resort, and be smart and safe about it

It is difficult to dig out of debt hole with a shovel that digs you into deeper debt. Think through other options that do not involve borrowing. If you must borrow for a need such as housing, medical care or food, be smart about it. Do not take out a home equity line of credit or car title loan (illegal in Washington) because know these items will be on the line. It would make more sense to make those needed purchases with a credit card. They are dischargable in a bankruptcy. Use or look for a low interest credit card. You may need to do the credit card shuffle, transferring balances for a while. But be smart about it. Needs only, housing, medical care, and basic food. A vacation or superfluous charges may be seen as fraud and fraud is not discharable in bankruptcy. Borrowing for a want will not help your situation.

8. Do not take from your retirement accounts

Though it may be tempting, you may need this money later more than you need it now. Hold off from cashing out your retirement account. You may get hit with fees and tax penalties for doing this so it’s not a good choice.

9. Return to your negotiating when you have more info

After some personal assessment of your financial situation, you will have a better idea of what you are able to pay. When you have this information, contact your creditors and tell them the situation. It may be that you do not have the money to pay in full. If they work with you, you may be able to pay something, rather than file bankruptcy. See if they will work with you. If not, you have to do what you have to do to deal with the situation.

If they will work with, again do not promise anything you can’t deliver. Get any agreements in writing and make sure they will erase the debt completely after you meet the agreement. Of course, make sure the agreement is able to reached. (example) Also, some companies may put you on a monthly payment plan that will never wipe out the debt.

10. You may also qualify for assistance programs:

Earned Income Tax Credit: is a tax credit for certain people who work and have low wages. A tax credit usually means more money in your pocket. It reduces the amount of tax you owe and may also give you a refund. See a tax professional to determine if you qualify.
Unemployment compensation: usually only available for people laid-off. Call the personnel office of your former company, the state labor department, or your state’s unemployment office to see if you qualify. If you are a union member, ask the union if it provides help with unemployment compensation applications.
Food stamps: to qualify, your monthly income must be below program limits which vary by family size. Emergency food stamps may also be available in certain circumstances. You apply for food stamps by filing an application form with any food stamp office.
- WIC (Women, Infants and Children) program offers food assistance to pregnant women or a child under five. Public assistance offices or health departments can provide information about WIC.
- Many unions, churches, and community groups have community cupboards or food pantries that distribute food. Churches and social service organizations like the Salvation Army maintain cafeterias to which families can turn. Contact local church offices, United Way offices, or other social service agency for information.
- Many food banks are run by America’s Second Harvest at (800) 771-2303 or www.secondharvest.org.
Other public assistance programs: all states administer some form of cash and other assistance to families with children through the Temporary Assistance for Needy Families (TANF). Applications can be made at local public assistance offices.
Utility and phone assistance: Utilities can be reduced by reduced usage. Utilities often have special programs which allow you to reduce the charges for the service you receive. Check with your utility provider to see what programs are available and how to enroll.
- Evaluate need for extra services on your phone, like long distance, call waiting and date plans. Also reducing usage will reduce your bill. Washington provides Washington Telephone Assistance Program (WTAP), which provides discounts on telephone fees for eligible households, if at least one adult in the household receives help from the DSHS (Department of Social and Health Services). Call the residential customer service number for the telephone company that provides local service in your town to sign up.
- Federal Low Income Home Energy Assistance Program (LIHEAP): helps low-income families pay their utility bills. To apply, contact the local agency in the community administering the program.
Other emergency programs: some states and communities have other emergency funds available to help with basic needs, such as food, shelter, medical care, clothing or transportation. Some are listed in the social services section of the phone book. In some communities, one agency serves as an information clearinghouse or referral service for various sources of assistance.
Social Security and SSI benefits based on age: if you are 62 or over, you may be eligible for Social Security benefits (full benefits at 65 but 62-64 retirees are eligible for reduced benefits). Social Security benefits are available only for those who have been employed a sufficient number of years in covered jobs.
- Supplemental Security Income (SSI) is a federal program open to those whose income and assets are under established guidelines.
- More information (800) 772-1213 or www.ssa.gov.
Disability benefits: to qualify, the impairment or combination of impairments has to have lasted, or be expected to last, a year or more and has to prevent you from engaging in substantial gainful activity in light of your age, education and work experience. Apply at the local Social Security office.
Workers’ Compensation: if you were seriously injured on the job, or if you suffer from serious job-related medical conditions, it’s likely that you are entitled to workers’ compensation. Contact the workers’ compensation board in your state directly.

11. Beware of businesses that take advantage of those in a vulnerable situation

Advertisements for debt relief are everywhere. Be careful who you work with. There are several businesses or non-profit organizations that may provide biased, inaccurate advice and not provide any fundamental relief.

Credit Counseling and Debt Management Plans

Credit Counseling

- How they can help: Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counsels are certified and trained in the areas of consumer credit, money and debt management, and budgeting. Counsels discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems.

Many universities, military bases, credit unions, housing authorizes, and branches of the US Cooperative Extension Services operate nonprofit credit counseling programs.
National Foundation for Consumer Counseling (http://www.nfcc.org) provides member agencies by location for consumers who are in debt.

- Be CAUTIOUS:

Many credit counseling organizations are nonprofit but just because an organization says “nonprofit” there’s no guarantee that its services are free, affordable or even legitimate.
Recent deception by credit counseling agencies about the nature and costs of their services, including but not limited to:
- Failure to pay creditors in a timely manner or at all. Some credit counseling agencies that offer debt management plans may fail to pay creditors in a timely fashion or at all.
  - Consequences can cause serious consumer harm, such as late fees that the creditors impose.
Failure to abide by telemarketing laws. To the extent that these agencies are not bona fide nonprofit organizations, they must comply with the Federal Trade Commission’s (FTC) Telemarketing Sale Rule, including the National Do-Not-Call Registry.
Some recent FTC actions against credit counseling agencies include:
- AmeriDebt – November 2003
- Debt Solutions, Inc – May 2007
- Innovation Systems Technology, Inc. – February 2004
- Debt Resolution Specialists, Inc. – February 2004
- Jubilee Financial Services, Inc. – September 2002

Debt Management Plans

- How they can help: If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). Generally, they will only help with credit card debt and will not directly help secured debts.

A DMP alone is not credit counseling, and a DMPs are not for everyone.
Only sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered your customized advice on managing your money.

- How a DMP works: First, you are only going to benefit from DMP if you have enough money to pay the agency each month.

Continue to pay your bills until the plan has been approved by your creditors. If you stop making payments before your creditors have accepted you into a plan, you’ll face late fees, penalties, and negative entries on your credit report.
Contact you creditors and confirm that they have accepted the proposed plan before you send any payments to the credit counseling organization for your DMP.
In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors.
Make sure the organization’s payment schedule allows your debts to be paid before they are due each month. Paying on time will help you avoid late fees and penalties. Call each of your creditors on the first of every month to make sure the agency has paid them on time.
Review monthly statements from your creditors to make sure they have received you payments.
Creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure that offer the concessions that a credit counseling organization describes to you and are reflected on your statements.
A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan.
Often you have to agree not to apply for or use any additional credit while you’re participating in the plan.

- Questions to help you figure out whether a DMI is right for you:

Are you having trouble mainly with secured debt? If yes, then a DMP isn’t likely to help you. Exception, if you are only slightly behind on your secured debts and cutting your unsecured debts might free up enough extra money to help you pay your secured debts. The DMP will NOT directly help you with your secured debt problems.
Do you have little or no money left over in your budget each month? If yes, then a DMP isn’t right for you.
Are you still current on your credit cards? If yes, then a DMP is probably not a good idea. You might be able to improve your situation by taking budget counseling class and sticking to a tight budget, or by asking your creditors to reduce the interest rate on your cards.
Are you able to pay your priority debts and still have some money left over each month? If yes, then a DMP may be helpful. However, be sure to factor in any fees you will have to pay to the agency.
Can you make a long term commitment to making monthly payments? If no, then a DMP will not help you. The drop-out rates for these plans are very high and it’s a particularly bad idea to start out thinking you probably can’t complete the plan.
Do you want to keep using all your credit cards while on a DMP? If yes, then a DMP is not for you. Most agencies will require you to stop using any remaining credit cards. Some will allow you to keep one card for emergencies.

Protect yourself

- Pay careful attention to the fees an agency charges, the nature of the services it offers and the terms of the contract.

Be wary of high up-front or monthly fees for enrolling in credit counseling or a DMP.
Be wary of credit counseling organizations that pressure you to make “voluntary contributions,” another name for fees.

- Make sure that creditors are willing to work with the agency the consumer plans to choose.

Be wary of credit counseling organizations that demand that you make payments into a DMP before your creditor have accepted you into the program.

- Consider using agencies that offer actual counseling and education, instead of simply enrolling all clients in DMPs.

Be wary of credit counseling organizations that won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card numbers and balances.
Be wary of credit counseling organizations that try to enroll you in a DMP without spending time reviewing your financial situation.

- Check out potential counseling agencies with your state Attorney General, local consumer protection agency, and Better Business Bureau.

They can tell you if consumers have filed complaints about. But even if there are no complaints about them, it’s not a guarantee that they’re legitimate.

- Questions to ask when looking for a counseling agency:

What services do you offer?
- Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes.
- If possible, find an organization that offers in-person counseling
- Do you offer information?
  - Educational materials should be available for free.
  - In addition to helping me solve my immediate problem, will you help me develop a plan for avoiding problems in the future?
  - What are your fees? Are there set-up and/or monthly fees?
    - Get a specific price quote in writing.
    - What if I can’t afford to pay your fees or make contributions?
      - If an organization won’t help you because you can’t afford to pay, look elsewhere for help.
      - Will I have a formal written agreement or contract with you?
        
        Don’t sign anything without reading if first. Make sure all verbal promises are in writing.
      - Are you licensed to offer your services in my state?
      - What are the qualifications of your counselors?
        
        Are they accredited or certified by an outside organization? If so, by whom? If not, how are they trained? Try to use an organization whose counselors are trained by a non-affiliated party.
      - What assurances do I have that information about me (including my address, phone number, and financial information) will be kept confidential and secure?
      - How are your employees compensated?
        
        Are they paid more if I sign up for certain services, if I pay a fee, or if I make a contribution tot your organization? If the answer is yes, consider it a red flag and go elsewhere for help.

- Questions to ask when considering a DMP? (in addition to the counseling agency questions)

Is a DMP the only option you can offer me?
- Will you provide me with on-going budgeting advice, regardless of whether I enroll in a DMP? If an organization offers only DMPS, find another credit counseling organization that also will help you create a budget and teach you money management skills.
- How does your DMP work?
  - How will you make sure that all my creditors will be paid by the applicable due dates and in the correct billing cycle? If a DMP is appropriate, sign up for one that allows all your creditors to be paid before you payment due dates and within the correct billing cycle.
  - How is amount of my payment determined?
    - What if the amount is more than I can afford? Don’t sign up for a DMP if you can’t afford the monthly payments.
    - How often can I get status reports on my accounts?
      - Can I get access to my accounts online or by phone? Make sure that the organization you sign up with is willing to provide regular, detailed statements about your account.
      - Can you get my creditors to lower or eliminate interest and finance charges, or waive late fees?
        
        If yes, contact your creditors to verify this, and ask them how long you have to be on the plan before the benefits kick in.
      - What debts aren’t included in the DMP?
        
        This is important because you’ll have to pay those bills on your own.
      - Do I have to make any payments to my creditors before they will accept the proposed payment plan?
        
        Some creditors require a payment to the credit counselor before accepting into a DMP. If a creditor counselor tells you this is so, call your creditors to verify this information before you send money to the credit counseling agency.
      - How will enrolling in a DMP affect my credit?
        
        Beware of any organization that tells it can remove accurate negative information from your credit report. Legally, it can’t be done. Accurate negative information may stay on your credit report for up to seven years.
      - Can you get my creditors to “re-age” my accounts – that is, to make my accounts current?
        
        If so, how many payments will I have to make before my creditors will do so? Even if your accounts are “re-aged,” negative information from past delinquencies or late payments will remain on your credit report.

- A DMP is often sold as a way to avoid bankruptcy. This may be true for you IF a DMP is right for you. However remember:

Bankruptcy is not necessarily to be avoided at all costs. In many cases bankruptcy may actually be the best choice for you. Bankruptcy is discussed later.
If you sign up for a DMP that you can’t afford, you may end up in bankruptcy anyway.

Debt Consolidation

- You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit.

Remember: these loans require you to put up your home as collateral. If you can’t make payments – or if your payments are late – you could lose your home.

- Costs of consolidation loans can add up.

Interest on the loans
May have to pay points, with one point equal to one percent of the amount you borrow.

- May provide certain tax advantages that aren’t available with other kinds of credit.

Debt Negotiation Programs

- Debt negotiation (or debt settlement) differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report, and in turn your ability to get credit.

- How it works: Must be credit card debt and behind on payment.

Most debt negotiation agencies require you to set a certain amount of money aside each month to build a fund. They will almost always take their fees directly from that account.
Stop payment on your credit cards, which means you could be sued for collection.
Debt negotiation agencies claim to stay in touch with your creditors and monitor your account. When they think your account has sufficient funds set aside, they will try to make a settlement.
Usually charge you a fee at the start to set up and take a percentage of the settlement at the time of negotiation.
Negotiate one credit card debt at a time.

Analyzing risks

They’re nonprofit
- REMEMBER: Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. Most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’re supposedly saved.
- They can arrange for your unsecured debt – typically credit card debt – to be paid off for anywhere from 10-50 percent of the balance owed.
  - BE WARY: No guarantee that a creditor will accept partial payment of a legitimate debt.
  - Their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program.
    - TRUTH: While creditors have no obligation to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the IRS may consider any amount of forgiven debt to be taxable income.
    - If the information on your credit report is accurate and timely, it can’t be changed or removed. Negative information can remain on your credit report for seven years and a bankruptcy will be noted for ten years. If you discover mistakes or outdated items on your report, you can fix them yourself by notifying the bureaus.
    - Even if one debt is settled, your credit report will still show that you are in default on your other debts.
    - Tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay on your creditors on your behalf.
      - BE CAUTIOUS: If you stop making payments on a credit card, late fees and interest usually are added to the debt each month (also default shows up in credit report). If you exceed your credit limit, additional fees and charges also can be added.

- Tip-offs to Rip-offs – Steer clear of debt negotiation companies that:

Guarantee they can remove your unsecured debt
Promise that unsecured debts can be paid off with pennies on the dollar
Require substantial monthly service fees
Demand payment of a percentage of savings
Tell you to stop making payments to or communicating with your creditors
Require you to make monthly payments to them, rather than with your creditors
Claim that creditors never sue consumers for non-payment of unsecured debt
Promise that using their system will have no negative impact on your credit report
Claim they can remove accurate negative information from your credit report.