Eliminating Debt by Watching Your Money

The study found some interesting nuggets of information about the way we tackle debts in this country:

• More than half of poll respondents reportedly noted that the economic slowdown had inspired them to pay down their debts; but
• Only 37 percent of those polled indicated that they had a good idea of how they spent their money each month; and
• Only 20 percent said that they planned to begin budgeting their expenses in order to get on track financially.

The good news from the poll’s findings is that we seem to have had a collective wake-up call about the real cost of debt. But, clearly, we aren’t all on the same page about what kind of financial habits will get us to a debt-free lifestyle.

Steps for Getting out of Debt

Representatives from the NFCC and other financial gurus often offer similar advice for getting on target with financial goals. In fact, the steps to debt elimination are almost identical to those for rebuilding and maintaining healthy finances after filing for bankruptcy:

• Track your spending: In order to seriously pay down debt, you have to know where your money goes each month. Luckily, this step is fairly easy to accomplish, once you decide to do it: for a month, write down everything you spend money on, including rent, utilities, food, clothes and entertainment. No purchase is too big or too small to count – and if you leave anything out, you won’t have a realistic idea of where your finances stand.
• Create a budget: Armed with the information about how you currently spend your money, you can devise a plan for spending and saving your money more effectively – that might mean putting more money toward credit card bills and less toward new shoes, or switching to home-cooked meals most nights of the week. Be sure to give yourself some breathing room so you don’t feel deprived by your budget and give up.
• Start saving money: Now that you’re actively, consciously managing your finances, it’s important to put some money aside each month so you’re ready for any unexpected event (such as illness, injury or job loss). Don’t be daunted if you can only save a little each at a time – anything at all is better than nothing, and your funds will build up over time.

Remember: good intentions are important, but they won’t get you out of debt and back on track financially unless you act on them.

• The company offered payday loans. The companies known as GeteCash and LoanPointe reportedly offered consumers payday loans, a type of short-term, high-interest loan considered by many financial analysts to be “predatory.”
• Consumers agreed to online terms and conditions. In order to apply for a loan online, consumers apparently had to check an agreement of terms box. One of these terms, it seems, indicated that the company could garnish a borrower’s wages (that is, take money from their paycheck) if she failed to make loan payments.
• The garnishment was illegal. According to the FTC’s charges, the payday lending company overreached its legal debt-collection abilities. While laws permit federal agencies to garnish the wages of someone who owes the government money, non-government groups aren’t afforded the same privilege.

The FTC apparently took action because the payday lenders not only indicated that they had the same collection rights as the government, but also claimed that their customers knew that they had agreed to the garnishment clause.

Because of the FTC’s actions, those behind the garnishment scam are barred from certain lending practices and responsible for a $38,133 judgment that has been suspended because of their current financial situation.

Don’t Get Burned by Payday Lenders

In recent years, legislators have taken action against the payday lending industry, which can lead struggling consumers into a perilous cycle of debt. Many financial insiders recommend avoiding payday lenders at all costs because of their high cost. Here are some options you might consider before turning to a payday lender if you’re in need of cash:

• Friends and family: Asking to borrow money from a loved one may be hard, so consider this twist: offer to do chores or run errands in exchange for some money. Or, if you’re already swamped, volunteer to write up a formal payment agreement outlining the terms of repayment.
• Your boss: If you have a decent relationship with your boss, consider asking for extra work and/or an advance on pay. This may not work more than once, but if you’re in a serious pinch, an advance on wages will likely hurt your finances less than a payday loan.
• Your credit card: If you aren’t maxed out on your plastic, using it to pay is generally less expensive than taking out a payday loan. Credit cards generally have lower interest rates than payday lenders and offer you more options for paying them back.

If you’ve already turned to payday lenders to keep up with financial obligations, you may want to consider the financial relief that filing for bankruptcy could offer you.

Think about Sickness When You’re Healthy

The first step to prevent an illness from becoming a financial disaster is to take a little time to think about what an illness would mean for you—right now, while you’re still healthy (hopefully).

• Work time: If you have limited sick leave and/or vacation days, an extended leave of absence (or even one lasting longer than a few days) could mean taking time off without pay and/or risking job loss. To prevent such a calamity, figure out whether you could logistically work from home. If so, figure out specifically how it would work and set aside time to propose the plan to your boss. The proactive stance will not only let you know where you stand but show your commitment to your workplace.
• Provisions: On a very basic level, serious sickness or injury may mean that you can’t get out of your home for a few days. If you live alone, that could mean you’d have to survive on the stuff in your shelves—so make sure you’re stocked with nutritious non-perishables so you don’t have to revert to expensive, non-nourishing delivery meals during your illness.
• Caretakers: While some sicknesses pass quickly enough and let you get back to your life, others require outside help even after you feel relatively normal again (think broken arms or legs). If you don’t know any of your neighbors and aren’t friendly with anyone at the office, you may want to make the effort to get to know a few people. A friendly neighbor might offer to run to the grocery store or pharmacy for you, and a close coworker can help you as you ease back in to office life.
• Money: This is the tricky part. The cost of medical bills, especially for major illnesses, can be daunting. But that’s all the more reason to start a savings account specifically for emergencies, if you haven’t already. Some financial analysts recommend socking away six months’ expenses, but if that sounds overwhelming, just focus on putting away some money from every paycheck. Eventually, small amounts will add up and you’ll benefit from the peace of mind that comes with knowing an illness won’t throw you into a nasty debt spiral.

Remember: you won’t feel like dealing with the details of sickness when you have the flu, so take a few healthy hours of your life to plan. If and when that pesky sickness shows up, you’ll be grateful you did.

Additional Resources

Medical Debts and Bankruptcy Filings

Medical Bills and Bankruptcy

Here’s a look at some of the numbers released recently by the Mortgage Bankers Association and various government organizations and what they might mean for the housing market:

• According to the MBA, the number of homes currently in some stage of foreclosure fell in the second quarter of 2010, marking the first such decline since 2006.
• Sources note that foreclosures on subprime loans may have already peaked and are likely now dropping off; however, it seems that prime loans are now in danger of default, partly because of continued high unemployment.
• Mortgages that are 90 days past due (considered to be in “serious default”) accounted for 9.11 percent of all loans in the second quarter, a drop from 9.54 percent in the first quarter of this year.
• Sources note that existing home sales in July 2010 were 26 percent lower than they were in July 2009.
• Sales of new homes, it seems, were down 32 percent in July 2010, compared to a year earlier, apparently making the month the slowest on record (with stats going back to 1963).
• As many as seven million households were behind on mortgage payments in July, according to sources (down from the high of eight million, reached about eight months ago).
• Numbers suggest that banks and lenders are starting to clear the foreclosure logjam: in July, 279,685 foreclosures were started, an increase from 225,700 in June.

Clearly, these numbers don’t exactly point at recovery in the housing market—and some analysts have reportedly predicted that as many as four million American families could lose their homes to foreclosure before the crisis eases.

And such a high rate of foreclosures could have a seriously detrimental effect on the overall economy:

• Less money, less spending: Consumers who are struggling to make mortgage payments are likely to spend less in other areas, meaning that consumer-supported economic growth may be weak.
• More foreclosures, more houses: As banks start foreclosing on homes, more vacant properties will flood an already saturated market.
• More houses, lower prices: This inundation of homes will mean that supply is far higher than demand, and could lead to further drops in housing prices.
• Lower prices, more underwater mortgages: As home values continue to decrease, more borrowers will likely find that they owe more on their homes than those properties are currently worth.

There is no clear end in sight for this cycle of foreclosure.

Additional Resources

Home Insecurity

Unfortunately, scammers have taken notice and are increasingly trying to bilk people of their hard earned cash. According to Rosemary Shahan, the president of Consumers for Auto Reliability and Safety, car loan scams are a “problem just about everywhere.”

Shahan recognizes that many people are able to refinance their car loans, but warns that “the way to do it isn’t to go to these companies who are out there advertising, ‘We can miraculously get you out of this excruciatingly bad deal.”

A recent article from MarketWatch provides some tips aimed at helping you avoid car loan scams:

• Choose wisely: If you want to refinance your loan, don’t opt for a group that heavily advertises its miraculous refinancing abilities. Instead, choose a safer organization, like a credit union or nonprofits like the Consumer Federation of America, or the National Foundation for Credit Counseling.
• Speak with your lender: Since no lender wants to go unpaid, they are often willing to work with you to adjust your payment plan. According to the Better Business Bureau, lenders will often assist you by stretching your payments over a longer period of time.
• Get it on paper: If a loan reduction company offers you any promises, make sure to get them in writing. Other things to get in writing include the services they will provide, the costs of those services, and promised money-back guarantees.
• Do your homework: Your local Better Business Bureau likely offers reports that reveal how many complaints have been filed against a particular lender and whether that company has been the subject of any lawsuits.
• Shy away from up-front fees: If a company demands that you pay large fees before they provide any services, they may be violating state law. Many states have outlawed this kind of behavior. Even if up-front fees are legal in your state, the practice could still be a scam.

An Alternative to Refinancing

If you cannot make your car payments, but are reluctant to adjust the terms of your loan, there are alternative steps you can take to ease your financial pain.

One helpful alternative may be to simply sell your car. Sources indicate that use-car prices are pretty high right now since last year’s cash-for-clunkers program removed a lot of used cars from the market.

So, you may be able to sell your current car and purchase a cheaper one with more reasonable payment terms.

If, however, your car loan is the least of your financial problems, and you need someone to talk to about your struggles, consider calling a personal bankruptcy lawyer.

A recent post from WalletPop.com offers an outline of what to expect after the death of a family member who owed money. Here’s a summary.

• Can debt be inherited? In most cases, debt does not automatically pass from one family member to the next, according to sources. That means that, if you receive a letter from a creditor demanding payment on a loved one’s debt after his demise, it’s a good idea to do some research before paying.
• Debt in community property states: One of the exceptions to the above rule has to do with state law. If you live in a community property state (find out here), you can inherit debt from a dead spouse (but not from a sibling or parent).
• The link between debt & inheritance: Another exception involves the relationship between a person’s debts and her legacy. If, for example, a parent dies and leaves you money or a house in addition to consumer debt, you’re legally obligated to pay the debt before collecting the inheritance.
• What about debt from a co-signed loan? If you co-signed a loan for a family member or friend and that person passes away, you are responsible for paying the remainder of the loan.

How to Know if You’re Responsible for a Debt

One unfortunate truth about debt and death is that some creditors might try to collect on a debt whether or not it’s legal for them to do so. Worse, some scam artists may specifically target survivors in an attempt to trick them into paying money they don’t really owe.

If you’re mourning a loved one, the last thing you likely want to deal with is finances, but following these guidelines might help protect you from fraudsters:

• Avoid sending a creditor any money at all until you’re sure that you are actually responsible for repaying a debt.
• To determine your obligations, ask the creditor to send you written documentation of the debt’s original purpose, the terms of the debt and the exact amount currently owed.
• If possible, consult an attorney to help you work through the complexities of covering debt’s after a loved one’s demise.

The study looked at several elements of a credit card agreement, including these:

• Clarity on rewards: This category rated how easy it was to interpret and apply rewards points.
• Clarity on annual fee: Here, the study looked at whether issuers displayed the annual fee prominently or hid it among other pricing details.
• Clarity on cost of carrying a balance for new purchases: This section looked at the clarity of introductory interest rates and APRs for new purchases made with the card (i.e. not balance transfers).
• Clarity on cost of making a balance transfer: Here, the study examined the ease of finding how much it would cost to transfer balances from one credit card to another.

The study based its clarity ratings on whether or not the researchers had to click to various pages before finding the information they wanted, whether they had to sift through fine print and whether information was clearly visible on the page.

The Findings

If you’re interested in applying for a new credit card, the study may be worth checking out, as it includes detailed scores for cards put out by the top ten issuers in the U.S. Overall, the study found these trends:

• Transparency is improving on annual fee disclosure: Whether because of new regulations introduced by the Credit CARD Act or other motivations, it seems that most card issuers have improved the clarity with which they explain the annual fees associated with their cards. Annual fees have apparently become more popular since the passage of the CARD Act, which limits overdraft fees.
• Transparency is still poor for balance transfers: One area in which many cards reportedly need improvement is information about transferring balances from one credit card to another. While balance transfers can be used to lower interest rates and thus help pay down debt, they often come with fees and unclear terms, which can make them more trouble than they’re worth.
• Cash-based rewards are easiest to understand: Another area where card issuers fell short of the transparency mark was on disclosing how rewards points and miles work and what exactly they’re worth. Because of this lack of clarity, the researchers recommend cash-back rewards as the most effective kind to use.

What might all of this mean? Hopefully, it will mean people are better informed about using their credit cards and able to manage their finances more effectively—and possibly reverse the trend of unmanageable credit card debt and filing bankruptcy that the country has seen for decades.

Additional Resources

The Credit CARD Act of 2009

It’s important to remember that, even though you owe someone money, you still have rights: you can and should expect to be treated respectfully by collectors and, no matter how much pressure one puts on you, there are a few things that analysts suggest you should avoid.

Here’s a look at some of those no-nos, adapted from this article:

• Sending a post-dated check: While it may be tempting to get a debt collector off your back by sending a post-dated check to cover what you owe, sources indicate that it’s generally not a good idea. Why? Some collectors, it seems, have been known to deposit such checks early, and most banks permit them to do so. This could leave you with bounced check fees and other unpleasant matters to deal with if you don’t have sufficient funds in your account.
• Divulging your bank account number: No matter how much money you owe, debt collectors are not legally entitled to your bank account number or other sensitive financial data. Even if you decide to make regular payments from a certain account, opt for a money order or a cashier’s check from a bank other than your own. If you’ve already given out an account number, keep a careful eye on the activity in that account and be prepared to challenge any withdrawals you haven’t approved.
• Indicating that you’ll be applying for a loan: Sometimes, before applying for a loan, consumers attempt to clean up their credit reports by paying old debts and trying to get rid of other negative information. But letting a collector know what your goals are can work against you—instead, if you choose to contact a creditor, ask him to verify a debt in writing. Then, ask for written proof that he will remove the negative information from your credit report after you’ve paid; once you receive that proof, you can repay the debt.

The difficult economy has meant that more Americans than ever are struggling with day-to-day expenses, and the FTC noted that complaints about debt collectors rose by 12 percent in 2009 and outnumbered all other complaint types.

For a more detailed look at what you can expect, check out this page on your consumer rights with debt collectors. Further, know that debt collectors cannot legally contact you:

• To collect debts whose statute of limitations has passed;
• To collect debts that have been discharged in bankruptcy; or
• To collect debts while bankruptcy’s automatic stay is in place.

How did student loan debt come to outweigh credit card debt, which seems to dominate the headlines and personal finance blogs?

Here’s a look at the numbers behind the scenes:

• Americans currently owe $826.5 billion in revolving credit  -essentially means credit card debt. This is actually down from a high of $975.7 billion two years ago.
• Current educational debt - student loans - comes to $829.9 billion. Analysts estimate that More than  $300 billion of that was accrued in the last four years.

These numbers suggest a variety of explanations and ramifications. Here’s a look at some of the issues and likely outcomes of the new balance of personal debt.

• Paying down debt: Because credit card debts tend to have higher interest rates than student loan debt, it seems that people tend to pay off their credit cards before worrying about their student loans. That could be part of the reason why student debt has crept up in recent years while credit card debt has inched down.
• New credit card requirements: Another potential explanation for the shift is that many credit card issuers have increased minimum payments in recent months, which translates to people paying down more of their debt, whether they like it or not.
• Attention: Credit card debt generally gets more media attention than student loans, which may make paying it off a bigger priority for some people.
• Rising cost of college: The cost of attending college continues to rise. And with graduates entering a tough job market many are finding it difficult to pay down large student loan debts.

Bankruptcy and Student Loan Debt

One especially interesting element of the shifted debt load is the role that personal bankruptcy has to play.

Bankruptcy filing rates are on the rise, and the use of bankruptcy as a credit card debt elimination tool has become more common and accepted. However, bankruptcy cannot typically clear student loan debts.

• Student loans in bankruptcy: Except in cases of extreme financial hardship, student loans are not dischargeable in bankruptcy court. This means that even if a person files for bankruptcy and has other loans discharged she will still be responsible for paying her educational lenders.
• Credit cards in bankruptcy: Credit cards, on the other hand, can be discharged during a bankruptcy filing. With a Chapter 7 bankruptcy, some people clear their credit card debt in only a few months.

So what does all this mean for you? If you’ve found yourself saddled with student debt, credit card debt or both, it’s important to consider all of your options for easing your debt burden. Consider talking with a local bankruptcy attorney to explore your options.

The news sent stock markets tumbling earlier this week as job growth remains frigid.

Here’s a closer look at the latest numbers from the Labor Department and what they mean:

• Initial claims rose to 484,000 from 482,000, meaning the unemployment rate will likely hold steady at 9.5 percent.
• The four-week floating average, which includes more data and so offers a check for highly volatile fluctuations, also rose to 473,500 – an increase of 14,250.
• The average year-to-date number of insured unemployed people in the United States was 5.018 million.

And, while extended unemployment benefits were available to people in many states, some analysts are reportedly growing nervous about the implications of such persistently high job loss numbers. In fact, some seem to be worried that the country is locked into a self-perpetuating cycle of unemployment and a weak economy:

• Many business owners and those responsible for hiring new employees are reluctant to do so because of fears that the recession isn’t over yet: They’re reluctant to commit to increased spending because they’re worried that they won’t be able to pull in enough revenue to justify long-term hires.
• Many individuals, worried about losing their jobs or dealing with reduced hours, are also “hunkering down” by spending less money, taking out fewer loans and focusing on saving more.
• Without adequate consumer purchases, some retailers are struggling to pull in enough income to stay afloat or grow. This means that they’re refraining from expanding or making new hires.

The problem is complex and involves all sectors of the economy and now, some analysts are suggesting that the recession will either end up having a “double dip” - meaning we’ll plunge back into recession after a brief period of economic growth - or that the first period of recession never actually ended.

So what can you expect in the coming months? It doesn’t look like any significant changes are on their way in the near future, which could mean:

• Housing market struggles: Many people are still facing foreclosure, underwater mortgages and bankruptcy. So anyone looking to sell, build or buy a house may face difficulties.
• Credit remains tight: Unless you have a squeaky-clean credit report history, you may not qualify for attractive loan terms while the recession slogs on.
• Income options are limited: While jobless numbers remain high, you may have trouble finding additional income, which can be frustrating if you’re trying to pay down debt.
• Saving matters: Whether you’re just beginning to save or working on a hefty nest-egg, now is not the time to blow it – you might need it for tough times ahead.