A "club" you don't want to join

By Don Kuehn

Given the choice between having money and not having money, it’s a safe bet that most of us would rather have it. Pretty simple, huh?

But when the spending and saving choices you make don’t pan out, or the choices you make leave you between that famous "rock and a hard place," what do you do?

Although this column is generally devoted to what to do with money, the other side of the coin is what happens when you get tapped-out. Whether the cause is a failed business, shopping addiction, a health emergency, divorce or uninsured catastrophe, the road to financial crisis is an all too familiar one to many Americans.

Last year more than 1.3 million people filed for personal bankruptcy, according to the American Bankruptcy Institute. That was a decline of eight percent from the year before, but still shows the extent to which Americans have gotten themselves into money troubles.

"Debt is an indication of how you have lived your life, not an isolated problem," according to Karen McCall, founder of the Financial Recovery Counseling Institute (www.financialrecovery.com).

Contrary to popular belief, the leading cause of personal bankruptcy is not financial recklessness or overextension of credit (although they are factors). About half of all cases occur following a divorce or sudden illness which can lead to a loss of employment.

Getting a handle on debt requires coming to grips with what got you there in the first place. Even when you can see the problem coming, there is no easy solution. Most creditors won't offer you terms unless you have gone into default. Like many addictions, you almost have to hit rock-bottom before you can get help. Then the psychological symptoms start to set in: fear, panic, shame.

By the time the snub-nosed guy in the black car (bill collector) shows up at your door, harasses you and questions your neighbors, pressures your family members and becomes a constant (even if imagined) presence in your life, you know the day of reckoning is coming. Often this brings on physical signs such as stress, anxiety attacks and related health problems.

In fact, the Fair Debt Collection Practices Act (15 USC §1692) protects consumers from the most egregious kinds of debt collector practices. Bill collectors can contact you only between the hours of 8 a.m. and 9 p.m.; cannot contact you at work if they know your employer disapproves; may not harass, oppress or abuse you; may not lie when trying to collect a debt (such as falsely implying that you have committed a crime); must identify themselves over the phone; and must stop contacting you if you ask them in writing.

The full text of the law is available by going to the Credit Facts section at the web site for the National Foundation for Credit Counseling (www.nfcc.org).

For the typical debtor in crisis the next step might be called the "sell everything" stage. You scramble to find money…any amount. First to go is the little stuff like personal possessions, the new bedroom set and the kid's bikes. Then the second car. Finally the house goes on the market at a distressed price. You move in with relatives "just till we get on our feet". Then one day you see it…the TV commercial for a personal bankruptcy lawyer.

There are those who would report that bankruptcy was the best thing they ever did. It cleared the slate and gave them a chance to get a fresh start. More common, however, are those who are haunted by the decision years after the discharge of debt is wiped from their credit history. Words like "humiliating, shameful and disgusting" are not uncommon.

By law, a bankruptcy stays on your credit report for up to ten years. The stain lasts forever. Loss of self-worth and confidence are familiar side effects.

This is a "club" you don't want to join.

There are two main categories of bankruptcy available to individuals, each named after a section of the Code:

• Chapter 7 Liquidation: Results in the sale and distribution of assets except those protected under state laws (which vary). The exempt property may include work-related tools, basic household furnishings, one automobile and other property. You can file for Chapter 7 only once in six years.
  
  
• Chapter 13 Reorganization: Available to individuals who prove that they can no longer meet their obligations and who promise to pay as many creditors as possible from all available income rather than surrender property. Regular payments are made to a bankruptcy trustee to pay creditors over the life of the plan (usually 3 to 5 years).

A study by the Credit Research Center at Purdue University found that about one-third of consumers who filed for bankruptcy had obtained new lines of credit within three years of filing. Half had reestablished credit within five years. However, the new credit line may be at significantly higher rates and will probably be on a "secured" credit card where the amount you put down as collateral sets your borrowing limits.

Still, reestablishing a record of on-time payments--even on secured cards--and paying-off charges as they are incurred is the best way to show credit worthiness later.

It's broken--fix it

How do you prevent the slide into deep, punishing debt? If you feel yourself slipping start keeping a written record of every penny you spend and analyze the patterns that emerge. Cut-up those credit cards. Get help.

Contact your creditors. Let them know what's going on and inquire about lower minimum payments, lower rates of interest or a combination of the two. They'd rather get something from you than risk losing everything in a bankruptcy proceeding.

In searching for credit repair agencies it's okay to pay a small fee if the agency is going to help consolidate or negotiate all or part of your debt. But use common sense before shelling-out big up-front fees or agreeing to turn your entire paycheck over to someone who may do little more than you can do for yourself.

Whether it's through non-profit groups like Consumer Counseling Center or Debtors Anonymous, or fee-based assistance with a credit counselor. Develop a strategy for paying off each creditor (the highest-rate debt first) and gradually climb out of the hole you've dug for yourself.

Another place to start is by getting a copy of your credit report to determine what went wrong and to be sure everything on your report is accurate. If you have been denied credit, you have up to thirty days to obtain a copy of your credit report for free. As a general rule, it's worth checking every two to three years to be sure all reported activity is correct.

There are three main credit-reporting agencies. Their web sites also offer varying levels of consumer information that may be helpful:

• Equifax: 1-800-685-1111 (www.equifax.com)
• Experian: 1-800-682-7654 (www.experian.com/personal.html)
• Transunion: 1-800-916-8800 (www.tuc.com/default.asp?Folder=CreditReport)

Or, you can order all three reports at once through (www.TrueCredit.com)

One of the very best web sites I have found on debt and financial recovery is www.myvesta.org. It contains a rich selection of resources for handling and avoiding money troubles. Want to find out how long it will take to pay off your credit card if you just make the minimum payment? Need to chat with experts at corralling debt? Feel like you’re the only one with money problems? Take a few minutes to browse this site.

Bankruptcy is clearly no panacea, and it's not for everyone or every situation. It's a "gift that keeps on giving." It can solve the most pressing of financial problems, but it will do little to change the spending habits of a lifetime. That takes discipline and a desire to control your money, not let your money control you.

These days we don’t nail one’s ear to a pillory in the public square, or send people to debtors’ prison when they fall behind in their obligations. We’ve progressed a little over time. But the stigma attached to money -- or the lack of it -- is still one of the greatest in our society.