If your credit goes bad

HERE’S the situation: You haven’t made a payment on your credit cards in three months — there simply isn’t enough money. The late fees are piling on. The interest rates are soaring. Your credit rating is diving.

Worse yet, the phone is starting to ring.

The wolves are at the door.

And they’re hungry.

You don’t dare to speak to them. You know they’re predators, with sharp fangs.

You also don’t dare ignore them. You know they won’t go away until they huff and puff and blow your house down.

So what to do?

 

Before looking for a 14th floor balcony to jump off of, finding a shady character to create a totally new identity for you, or considering a one-way ticket to Albania – you might consider getting some help.

 

There is, in fact, a lot of help out there for those whose credit card debt is out of control or getting close to that point, and for those whose debts in general are getting the better of them.

Today’s economy is forcing more people into such positions every day, and those who want to help them are doing their level best to keep up with the increasing demand.

Read more Dollars & Sense articles

SARA Gilbert, executive director of the Fort Collins-based Consumer Credit Counseling Service of Northern Colorado & Southeast Wyoming, laughs sympathetically at the wolf analogy, but acknowledges that creditors have a case, too.

“Honestly, the lender has got a bill to collect and they want payment, and the consumer has a bill that they’re obligated to pay,” Gilbert says.

“But I think it’s better to at least get some advice before you start talking to the wolves. A lot of times a counselor can help be the middle man.”

Gilbert’s agency, the CCCS, and its Denver counterpart, Money Management International (formerly Consumer Credit Counseling Service of Greater Denver) are two prominent Colorado non-profit corporations that specialize in counseling those who find themselves overwhelmed by unsecured debt, usually in the form of credit card balances.

In addition to a host of other debt and housing related services, both agencies offer credit counseling for hundreds of individuals and families.

The amount of debt amassed by their clients is remarkably similar in Fort Collins and Denver. At CCCS, Gilbert says, the average person or family seeking credit counseling is looking at a $24,000 debt.

In Denver, MMI spokeswoman Kim McGrigg says, the number is $26,661, based on the last quarter of 2010.

The salient point in common — whether the figure is considerably more or less than those averages — is that they are debts that clients feel cannot be paid.

In Fort Collins, Gilbert says that about half of her clients got into their bind through poor money management. The other half are sufferers of ill fortune.

“We track the cause of the problem and I would say about half of our clients have suffered a life issue — a divorce, a job loss, a medical issue.

“With the other half, it may just be that they’re spending more than they’re making or they don’t have an emergency fund so anytime there’s a car repair or anything else it goes on the credit card.

“Those kinds of expenses can creep up on you. That causes some pressure if you can’t get those credit card bills paid off shortly after you use them.”

Gilbert adds that the number of people currently “struggling around issues with employment” is definitely higher, based on the recession and high unemployment rate.

Ever increasing healthcare costs aren’t helping. “A lot of our clients don’t have health insurance so they end up with a lot of medical bills.”

In Denver, McGrigg describes a somewhat different client balance.

“It might just be the result of poor money management,” she says. “Sometimes debts sneak up on people and there is a portion of our clients who fall into that category.

“A larger category by far is people who have had an event in their lives. That could be a job loss, a divorce, a death in the family, an illness. That is what brings the largest percentage of people to seek our help.

“This number has been going up in the last several years. In 2010, 66.3% of people cited loss of job, job change or job-related issues as the reason they had to seek assistance.”

AT both CCCS and MMI — as at most other non-profit and for-profit credit counseling organizations — the battle plan for a downward credit spiral is much the same.

“We sit down with clients and go over a thorough budget analysis,” Gilbert says.

“We take a look at their mortgage or rent, how much they’re spending on groceries and gas, insurances, whether they have children. You know, what’s your life look like and what does it cost?

“We help them come up with a realistic budget first and then we take a look at the debts — house payments, car payments, school loans, unsecured debts, the IRS — and we try to come up with some sort of reasonable payment plan that will get the priorities, like the house payment, electric payment, groceries bought. Then we take a look at if there’s some way that we can feasibly figure out what’s the best way to get debts paid off also.”

Gilbert outlines three basic groups of those in need of credit counseling.

Those in the first group find themselves in an unmanageable situation. They are the ones who go into debt management. Some 25-30% of the clients who come into CCCS with credit worries end up in this program.

“Another third may not be in so much trouble,” she says. “They’re still working. They may just need some budget advice or different tactics for getting things straightened out on a monthly basis so that that they are less stressed financially. They can probably handle things on their own and they need to kind of change the patterns.”

A final third are those who are in the direst of plights.

“They may be unemployed right now and don’t have enough income to support payments for unsecured debts. We talk about the priorities — is the rent paid? — and how can we help them with that first. Eventually, when they’re back to work they may need some sort of debt repayment plan.

“Right now they have to keep the roof over their heads. It’s like, let’s put some band aids on this.”

For people in that position, CCCS often turns to government aid programs, such as those offered by HUD, for which the agency is a certified counseling source.

In Denver, MMI’s initial analysis process is similar.

“We’ll go through a person’s financial situation,” McGrigg says. “That includes not only their debts and sources of income but their monthly budget. The reason we do that is if they’re going to go on a plan to repay their debt we want to make sure that it’s a realistic and reasonable plan.

“It could be anything from trying to find a roommate if you have space to opportunities to earn more. It could be a debt management plan. The consumer gets to make the choice as to what path they would like to take.”

Debt management, McGrigg explains, “is a plan is where we renegotiate the terms of a consumer’s debt with their creditors. It’s a voluntary program on everyone’s behalf. The consumer makes one monthly deposit to our organization which we physically disperse to their creditors.”

Clients in a debt management program make a single payment to the agency, which “acts somewhat like a consolidation loan,” McGrigg says, but the debts themselves are not actually consolidated.

Instead, MMI negotiates with individual creditors over interest rates, late fees and monthly minimum payments.

“What that looks like depends on the person’s individual circumstances and the creditor mix that they bring,” McGrigg says. “We do have longstanding relationships with creditors and many of them do make concessions to help consumers repay their debt.”

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GILBERT says that creditors will almost always concede a little negotiating room on the fine points of a credit card balance.

“Sometimes, if your situation is not too complicated — you’ve got one or two credit cards that are behind — you may be able to negotiate with your lender yourself,” she says. “We would certainly encourage you to stay in good communication with that lender.

“But a lot of our clients have six, eight, 10 credit cards, so trying to remember who you told what and when you’re going to make a payment can get complex fairly quickly.”

Most creditors will agree to a plan to make it easier for clients to pay off their balance, but they almost always want it paid off in total within five years.

“They may reduce interest to get it paid off within five years,” McGrigg says. “They definitely will stop late payments and some of the things that cause balances to increase. For a lot of folks that works and it works pretty well.”

Clients who go into debt management, both Gilbert and McGrigg agree, should expect their negotiated debt management to adversely affect their credit rating. It may take a year or more, after debts are repaid, to be able to successfully apply for credit or secure a loan.

“But eventually,” Gilbert says, “clients on that program get their debts paid off and they look very good. Your credit score gets better over time as your debt balances come down and you make payments on time.”

For some people, either those who fail in debt management programs or those who don’t qualify to get into one in the first place due to lack of income, a last resort might be bankruptcy.

Although both CCCS and MMI do everything in their power to avoid bankruptcy, they are able to help clients with that ultimate choice.

Those filing for bankruptcy must, under recently enacted federal legislation, undergo counseling on bankruptcy before the process can move forward.

Gilbert stresses that the complex processes of debt management and bankruptcy are avenues that consumers should not travel alone.

“Once you start facing complicated financial decisions — non-payment decisions — it really helps to have the advice of a counselor, somebody who is in the trenches day in and day out and knows what collection agencies do and how the home lender may look at your situation,” she says.

“They can help families make good decisions so that they can make it better instead of just ignoring it, which is sometimes tempting.”

THE debt management services offered by agencies like MMI and CCCS are not offered for free. Although they are non-profit corporations, they are not non-revenue. Their reliance upon government and foundation grants and other fundraising must be supplemented by client fees.

At CCCS, while many counseling and educational services are offered at no charge, clients on a debt management program can expect to be charged about $50 per month, which is included in their monthly credit payment. At MMI, the average monthly figure is closer to $40.

There are also private, for-profit corporations that offer similar services. The challenge in choosing that route, Gilbert and McGrigg agree, is which firms to trust.

“As the need for services increased,” McGrigg says, “a lot of organizations popped up offering these services. I do encourage people to always do their homework very, very carefully. Really check an organization out.

“If  you’re not sure who to go with, ask somebody you know for a referral. I would look at history, at industry affiliations. All those kinds of things can help give people a level of comfort.”

Gilbert also prescribes a healthy dose of caveat emptor — buyer beware.

“There’s a fine line between those who do it reputably and those who do it to make money,” Gilbert says.

“There are some companies out there that are very determined to get folks on a debt management plan but they don’t offer any other services. They don’t have much in the way of housing counseling. They don’t teach any classes or have any educational materials for consumers to learn how to manage their money.

“There are less than reputable debt management companies that basically say ‘give us your credit card, we want to know who you owe, we’ll set up a payment plan, you send us the money and you’re all done.’ Maybe a 15-minute conversation.

“There’s not much discussion about the budget. There’s not much help to keep that family stay on a debt management program.”

Some firms, McGrigg and Gilbert say, are fly-by-night, plain and simple.

Often using online or telephone marketing, they collect as many credit card numbers as they can and then disappear, leaving unwary clients with a case of identity theft and potentially much worse.

“You want to be really careful that you’re working with a reputable agency,” Gilbert says, offering these helpful tips:

• Work with non-profit organizations, just to be on the safe side;

• Check out a firm or agency with the local Better Business Bureau;

• Explore a potential debt management program thoroughly, asking how much time you’ll spend with a counselor, whether the firm or agency provides assistance services over and above debt management, what sort of educational materials or classes are provided, what the actual costs to you will be;

• Check out the firm or agency on the website of the National Foundation for Credit Counseling (NFCC.org) both for advice and referrals to reputable agencies;

• Investigate whether the firm or agency has affiliations with the community that it claims to serve;

• Check with state authorities to see whether the agency or firm is regulated. In Colorado, this could be determined with a phone call or website visit to the Attorney General’s office;

• Avoid firms that require you to have a minimum debt amount, often $10,000.

“That should raise a red flag,” Gilbert says. “A true non-profit will help anyone, no matter what their debt load is. You should find a company that’s willing to help you no matter what your circumstances are, no matter how much you owe.

“In general, you need to use good shopping habits, like you would with a lot of other decisions you make.”

ANOTHER potential problem area is in debt settlement, a process in which a broker — most often a lawyer or law firm — negotiates with creditors to reduce a credit balance in order to “settle” the debt, which usually requires making a one-time lump payment.

Gilbert and McGill agree that debt settlement is an area fraught with peril.

“It’s a dangerous route to take because you can’t guarantee that the debt will be settled,” McGrigg says. “In the meantime, your debt is going further and further into arrears, and the creditor may or may not accept a settlement offer, if it’s ever made.”

The Federal Trade Commission, she adds, has online guidelines to advise people considering debt settlement.

“It’s not the concept that’s really the issue, it’s making sure that you’re working with an organization that you can trust,” says McGrigg, adding that those considering this option should also investigate the tax implications.

It’s quite possible that the portion of a balance that a creditor forgives in the settlement process can come back to haunt you, in the form of a “taxable event.”

Gilbert adds that the fees charged for facilitating a debt settlement can be steep — often as much as $2,000 — and that the implications for an individual’s credit rating can also be severe.

A BIG part of her job, Gilbert says, is to help troubled people understand that there is a way out of their situation; that they needn’t give up hope for their financial future.

“Dealing with a financial problem is kind of scary,” she says.

“Our job is to really help the consumer figure out where they are now, where to they want to be and how are they going to get there. It’s very solution oriented and non-judgmental. We realize here that everyone has made mistakes. It’s not a big deal. Itrecognizing those mistakes and moving on.”

Speaking to a counselor who can help guide you though what appears to be an impenetrable maze of debt can be a “tremendous relief,” Gilbert says.

“We’re not psychologists or psychiatrists,” McGrigg says, “but there is an extremely emotional component to what we do.

“I don’t know of another subject that comes close to being as emotionally charged as that of finances.

“The stress that financial problems cause can really impact a person. We hear all the time that it’s impacting relationships, it’s impacting their ability to do a good job at work, which is a real vicious cycle. In some cases, people are losing sleep so their health is suffering. There are far-reaching implications.”

McGrigg regrets that “a lot of people” are simply unaware of the services that her agency, and others like it, is able to provide.

“They often don’t know about them until they’re in absolute crisis,” she says.

“I really do wish we would see people earlier in the process, because not only do we have the debt management plan and the counseling, but MMI has a lot of things to help people be proactive. We have free e-books, free webinars, free webcasts and podcasts. We really work to make sure that people have the tools they need to be successful.”

McGrigg emphasizes that such services can be very useful for people who aren’t having any credit problems at all. Educating oneself on the techniques of handling credit and debt is an invaluable way to avoid getting in trouble.

Her bottom line?

“There really isn’t anyone who couldn’t benefit from learning something about money management.”

Copyright © 2011 by the Intermountain Jewish News