US CREDIT COUNSELING

Overextending your finances by relying too heavily on credit leads to financial trouble. While the Fair Debt Collection Practices Act protects against undue harassment and abuse by creditors, their appointed debt collectors may try exhaustively to collect what you owe.

You may be tempted to enroll in one of the many credit counseling or debt management programs that advertise “little or no cost” to you, the debtor. However, approach for-profit or fee-based services with caution and make sure that the service is worth what it costs. Make sure that you don't worsen your situation by enlisting others to help with debt management.

DEBT CONSOLIDATION

Debt consolidation is a method of combining all your bills into one monthly payment. By combining your bills, you can decrease the amount you pay per month and reduce or eliminate interest rates. To consolidate your debts, you usually have to work with a debt consolidation company that specializes in helping people manage their debt.

Secured debts, such as mortgages, usually cannot be consolidated. Unsecured debts, typically can be consolidated, including:

Credit Card Debts

Medical Bills

Student Loans

Taxes

DEBT CONSOLIDATION LOANS

A debt consolidation loan combines all your debts into a single loan that you make monthly payments on. This process reduces your interest rates and the amount you pay every month. A debt consolidation loan will stop the creditors from calling and can save you from bankruptcy. However, this type of debt consolidation requires you to own a home against which you can take or refinance a loan.

While a loan to consolidate all of your debt into a single obligation is appealing and may have a lower interest rate than credit card interest rates, make sure that you can really repay that amount. Understand the terms clearly, including the interest rate on the loan.

It may be that even lowering the interest rate does not make your present debts manageable, but just postpones the day of reckoning.

Find out whether the loan will pay off over the life of the loan, or whether you will owe a "balloon" lump sum payment at the end. For many borrowers, balloon payments are just an invitation to another loan, and you never get free of the debt!

DEBT MANAGEMENT PLANS

A debt management plan is an agreement your debt consolidation company negotiates with your creditors. The plan describes how and when you are going to pay off your creditors. By sticking to the plan, your monthly payments go down and you can completely payoff your debt. This method of debt consolidation also keeps the creditors from calling you. Significantly, a debt management plan does not require you to own a house.

If you participate in a program where a service negotiates with your creditors or makes payments on your debts for you, understand whether the service promises to lower the amount you owe or the interest rate you pay, or just promises to lower the payments you make every month, without significantly changing your obligation. Know what happens if a creditor won't negotiate.

Make sure the program deals with all your debt. Some credit counselors confine themselves to dealing with your unsecured commercial creditors, excluding your obligations for child support or unpaid taxes. In effect, they ignore the debts that won't go away, while channelling your money to creditors whose claims could be jettisoned in bankruptcy.

WARNING: Anyone can use the name "credit counselor," and some of these people have turned out to be incompetent and sometimes dishonest. Before you pay a counselor any money or obligate yourself to pay any fee, you need to carefully investigate their background. You also need to be careful when they recommend one big "debt consolidation loan." They may be earning a large commission from selling the loan, and you may be no better off.

A RULE OF THUMB

Although it is hard to generalize about an individual's debt paying ability, there are a few rules of thumb. If your total debts are under 20 percent of your assets, then you are a typical American consumer. If your debts exceed 30 percent, then you are carrying a significantly higher debt burden than the average person and you should be considering bankruptcy. If your "consumer debts" exceed one year of your family income, then you should be considering bankruptcy.