STEP #3: Respond To Credit Difficulties

Helen & Allen are in over their heads financially. They have been trying to balance creditor demands for money, but are having difficulty keeping up with all of their monthly payments.

Large numbers of Americans are over-extended on their credit obligations and need to dig themselves out. Depending on the extent of your current indebtedness, you will need to respond to your stage of credit difficulty by taking the prescribed actions.

Early Stages: The early stages of credit difficulty are marked by being routinely late on payments, paying penalties, being over approved credit limits, and being a month or more behind on obligations. It may be relatively easy to rectify the problem by simply cutting back on spending for a couple of months and getting caught up on bills.

If you find yourself in the early stages of credit difficulty, contact your creditors immediately. Explain the reasons for your current bind and give assurances (with dates if possible) of your intent to pay. Your creditors will probably be very willing to help you develop a temporary, revised payment plan, since you have recognized a problem and are taking steps to correct it before it gets too large. As you pay your bills, make the minimum payments as they become due. Failure to make timely payments could damage your credit rating.

If your problems are just beginning, ask to have some of the late payment and over-the-limit fees waived. Many creditors are willing to do this as a one-time courtesy on a case-by-case basis. You might see if you can negotiate a lower interest rate with this particular creditor. If you have other credit cards and they are not up to their credit limits, consider transferring some or all of your high interest rate balances to a card with a lower interest rate. You might also consider taking out a bill consolidation or home equity loan to pull your credit card balances into one loan that could be repaid at a lower interest rate over a set period of time.

Middle Stages: If your problem has progressed into the middle stages of credit difficulty, your task will be more difficult. Bills may be months overdue, minimum payments may be totally out of reach, and creditors may be contacting you.

You should seize the initiative by contacting your creditors immediately. Grabbing the bull by the horns - by voluntarily contacting your creditors - may keep creditors from taking further action or initiating collection activities against you. You are seizing the initiative at a time when you probably still have many options available to you. Remember, it is much easier to deal with a creditor in the earlier stages, since options tend to diminish as the quality of the dialogue between creditor and debtor deteriorates. Once a line of communication has been established, make every effort to keep it open.

Since dealing with creditors who are engaged in collection activities can sometimes be difficult, many people are tempted to avoid such collection activities (by refusing to return phone calls, pretending they are not the debtor when a creditor calls, or generally failing to be responsive to the creditor’s overtures). However, the worst thing you can do if you are experiencing credit difficulty is to avoid your creditors. There is no way you are going to be able to wish the problem away. If you do not talk to your creditors now, you will more than likely talk to them later, perhaps in court. The preferable, responsible approach is to deal with your creditors. When contacting your creditors, you will need to negotiate repayment plans with each of them.

Develop Repayment Plans With Your Creditors: You must make repayment arrangements or develop repayment plans with all creditors. When contacting your creditors, be forthcoming with them. Provide each creditor with enough information about your financial situation and any extenuating circumstances so they feel confident there is some basis on which you should be granted special consideration.

Creditor payments must be determined on a pro rata basis. Hence your payment to a particular creditor must bear some relation to the size of your debt with that creditor, contrasted with your other obligations. Smaller debts will result in smaller payments; larger debts will yield larger payments. When negotiating repayment plans with creditors, stress that you are treating all creditors fairly through the development of a pro rata repayment plan. Let creditors know that any attempt to satisfy the demands of a single creditor, through disproportionate payments, may be detrimental to your other creditors. Do not pay any one creditor to the exclusion of others.

Assure each creditor that you do not intend to create any new obligations until all accounts are paid or at least brought under control. Be realistic when developing repayment plans with creditors, making certain you can maintain the agreed-on payments. Failure to abide by the terms of your repayment plan could be disastrous. Once a repayment plan has been devised, make every effort to follow this agreement tenaciously.

Later Stages: During the later stages of credit difficulty, court proceedings may be threatened or pending against you, your wages may be subject to garnishment, goods may have been attached, and articles repossessed.

When talking with the credit card companies in these final stages, it is a good time to ask them to lower your rates. They are likely to do this at this time because your account can begin to cost them more money through major collection activities, possible court actions, etc. This is why credit-counseling agencies find it easy to get your rates lowered for you.

After months of neglect in repaying accounts and refusals to deal with creditors when they attempted to contact you, you may think it impossible to see yourself clear of your current credit difficulties. Even if you have been conscientiously trying to handle your credit obligations, your condition may have so deteriorated that your repayment efforts have barely scratched the surface of your total indebtedness. Indeed, you may believe your credit difficulties have progressed beyond your ability to effectively deal with them.

Consider Using A Non-Profit Consumer Credit Counseling Agency: If you find yourself in the later stages of credit difficulty, do not despair. Low- or no-cost professional help in dealing with credit problems is available through the non-profit consumer credit counseling agencies identified below.

These services are staffed by counselors who will help you work through your credit problems. If you choose to enter one of these programs, they will help you set up a budget and develop a realistic, mutually acceptable repayment plan. Once this is done, they will contact creditors on your behalf to negotiate a repayment schedule. These services may even be able to negotiate lower monthly payments, reduced interest charges, or waived fees.

While individual circumstances will obviously vary, a typical program is a two- to three-year repayment plan during which your outstanding debts will be repaid. As part of your plan, you will be required to:

• Not incur any new debt until your repayment plan has been completed; and
• Make payments directly to your credit counseling service once a month; these payments, in turn, will be parceled out among your creditors.

If you think you might need some help in resolving your credit problems, contact one of the following non-profit consumer credit counseling services:

• National Foundation For Credit Counseling (NFCC) has 1,300 local offices throughout the U.S. Call 800.388.2227 for a listing of offices or go to www.debtadvice.org and use the member agency locator. Make an appointment, gather together your bills, and go speak with a financial professional;
• AmeriDebt, which does not have local offices, can be contacted by calling 800.408.0044 for a free evaluation or by going online at www.ameridebt.org to apply for services; or
• American Financial Solutions, which does not have local offices, can be reached by calling 800.570.3341 for a free interview or by going online to www.debtfixers.org to apply for services online.