Managing Debt

Debt can be healthy – helping us to establish credit and a track record of responsible money management – but it can also be dangerous. Easy access to credit cards and balloon interest rates have left many residents of our county, including the poorest among us, in a seemingly endless and inescapable debt spiral.

Fortunately, resources exist to help avoid unhealthy debts, and to pay off existing debts before they push us to the breaking point.

Avoiding Debt

As a practical matter, for most in today’s society credit cards, mortgage payments, and auto loans are a necessary fact of life. Even so, minimizing these debts and avoiding overdue bills is a goal everyone should strive for. The best way to avoid the stress of never-ending pressure from creditors to repay overdue bills is, quite simply, to not let bills become overdue in the first place.

Many debt avoidance tools and best practices apply simple common sense, and double as guides for setting a personal budget. Some good ideas include:

• Paying with cash whenever possible, and taking only the amount of cash you can afford to spend with you when you go shopping.
• Staying within pre-established spending limits.
• Avoiding impulse purchases, and comparison shopping before making major purchases.
• Avoiding offers that postpone debt, like “buy now, pay later” offers, “interest-free” financing, and rent-to-own options.
• Avoiding borrowing to finance staple purchases, and if you cannot avoid borrowing, finding the lender with the lowest possible interest rate before committing to new debts.
• Keeping track of bank balances to avoid costly overdraft charges and other fees.
• Tracking credit card purchases, and paying more than the minimum payment on credit card debts.
• Asking credit card companies for lower interest rates, and transferring card balances to lower rate cards where that option is available.
• Avoiding credit cards that charge interest from the date of purchase with no grace period, and cards that charge interest immediately on cash advances and/or fees for each advance.

If you find yourself in debt, take care to avoid credit scams that prey on those in your position. These schemes offer credit repair or counseling – for a fee. In many cases, however, even after consumers have paid up front for services, many such companies may do nothing to improve a debtor’s credit report and, in extreme cases, may vanish with the debtor’s money. In many cases, free credit counseling is available from non-profit organizations, and is the best choice for most consumers.

You can find credit counseling resources locally through the Portage County Consumer Credit Counseling Service.

Coping with Debt

For many of us, debt is simply a reality. Financial crisis is something many people face during their lives, as a result of personal or family illness, job loss, overspending, or other reasons. Often, however, debt crises can be overcome without resorting to bankruptcy. The Federal Trade Commission offers great self-help guides for budgeting, tips for dealing with debt collectors, and much more here.

Debt Relief Services

In some cases, consumers struggling with debt cannot work out repayment plans on their own, and require additional assistance to repay their debts responsibly without causing undue burdens on other parts of their personal budgets. In those cases, a debt relief service may make sense. These services offer advice on dealing with mounting bills, and help consumers create plans for repayment.

Consumers must use caution in selecting a debt relief service, however, as unscrupulous vendors sometimes take advantage of the vulnerable. Reputable credit counselors can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems.

An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Most reputable credit counselors are non-profits and offer services through local offices, online, or on the phone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

A good starting point locally is the Portage County Consumer Credit Counseling Service.

Debt Management Plans

If you have too much debt or you are unable to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (or “DMP”). DMPs are not for everyone.

Do not sign up for one of these plans until a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money.

In a DMP, you deposit money each month with the credit counseling organization or other debt servicer. That company then uses your deposits to pay your unsecured debts according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees. A successful DMP requires you to make regular, timely payments, and it could take 48 months or more to complete repayment. Ask your credit counselor to estimate how long repayment will take before you agree to begin the plan. You may also have to agree not to apply for or use any additional credit while you are participating in the plan.

Debt Settlement Programs

Debt settlement programs are typically offered by for-profit companies. These companies negotiate with your creditors to allow you to pay a “settlement” to resolve your debt. This settlement is a lump sum that is less than the full amount that you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into a holding account to accumulate enough savings to pay off any settlement that is eventually reached. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Debt Settlement Risks

Although a debt settlement company may be able to settle one or more of your debts, there are also risks associated with these programs to consider before enrolling.

These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled, and end up dropping out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.

Your creditors also have no obligation to agree to negotiate a settlement. For that reason, there is a possibility that your debt settlement company will not be able to settle some of your debts, even if you set aside the monthly amounts required by the program. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to continue to mount.

Debt settlement programs often ask or encourage you to stop sending payments directly to your creditors while you participate in the program. This may have a negative impact on your credit report. Your debts may also continue to accrue late fees and penalties that can put you further in debt. You may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

Some companies offering debt settlement programs may not deliver on their promises, like “guarantees” to settle all your credit card debts for 30 to 60 percent of the amount you owe. Other companies may try to collect their fees from you before they settle any of your debts. Some companies may not explain the risks associated with their programs, including that many (or most) of their clients drop out without settling their debts, that their clients’ credit reports may suffer, or that debt collectors may continue to call.

Before you enroll in a debt settlement program, do your homework. Enter the name of the company name with the word "complaints" into a search engine. Read what others have said about the companies you are considering, including whether they are involved in a lawsuit with any state or federal regulators for engaging in deceptive or unfair practices.

Fees

If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours, and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.

Disclosure Requirements

Before you sign up, the debt relief company must give you information about the program, including its price and terms, how long it will take to get results, how much you must save before the company will make a settlement offer to creditors on your behalf, and what happens if you stop making payments. The debt relief company also must tell you that the funds are yours and you are entitled to the interest earned, that the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees, and that you may withdraw your money at any time without penalty.

Tax Consequences

Credit card companies and others may report settled debt to the IRS, which the IRS considers income, unless you are "insolvent." Insolvency means your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine. Talk to a tax professional if you are not sure whether you qualify for this exception.

Use Caution When Shopping for Debt Relief Services

Avoid any debt relief organization that charges fees before it settles your debts or enters you into a DMP plan, or pressures you to make "voluntary contributions," which is really another name for fees. You should also use caution with businesses touting "new government programs" to bail out personal credit card debt.

No company can guarantee that it can eliminate your unsecured debt, stop collection calls, or end lawsuits. You should view such claims very skeptically.

Whatever the offer, it is absolutely critical that a certified counselor reviews your personal situation with you before you enroll in a program. Do not enroll in a program without taking this first step.

If you fear you may have been the victim of predatory debt relief practices, notify the Consumer Financial Protection Bureau or Ohio Attorney General immediately.