In Over Your Head—Life-Saving Strategies for Financial Crisis

Bulletin 891

Section 1: First steps

Unemployment, illness, family problems, and careless spending, as well as other issues, can be reasons for not being able to pay your bills. As unpaid bills mount up, the total amount of your debt can overwhelm you. If you answer "yes" to most of the questions to the right, you are in over your head in debt. You may have to take some lifesaving financial actions.

Lifesaving actions

• Admit that you have a problem.
• Stop spending! Limit spending to items basic to survival, such as food, shelter, and essential medical treatment.
• Discuss the problem with your family. Call an emergency meeting and explain the situation. Everyone will have to pull together in order to get out of "deep water." It won't be easy to say, "We can't afford to do ... or buy....." or "We don't have the money to buy that."
• Open all mail from creditors. Complete the Know what you owe form on pages 3–6. Record the name, address and phone number of each creditor; the amount you owe; the amount past due; the minimum monthly payment; and the Annual Percentage Rate (APR) of interest that you are paying on the balance.
• Cut up your credit cards and close your accounts by notifying creditors in writing. If you decide to save one in case of an extreme emergency, freeze the card in a bowl of water so that it is not readily available. Be sure to keep the card with the lowest APR. Remember, cutting up your credit cards doesn't eliminate the debt nor does it close the account.
• Cancel overdraft protection on your checking account. Don't write checks that exceed the balance in your account.
• Return unused items you have purchased for which you can receive a full refund. Apply the refund to your debts.
• Sell items you could live without and apply the money toward your debt.
• Allow items that you do not need to be repossessed. Remember that this option may be reported to a credit bureau and will affect your credit record for up to seven years.
• Contact your creditors. Do not ignore bills or other communication from them. Explain the situation and send them a written summary of what actions you are taking to deal with your debt. Tell them when they can expect payment and how much you will be able to pay on a regular basis. Don't promise what you can't deliver. Keep a copy of all letters. Keep a record of calls to and from creditors. Record the time, date, the name of the person with whom you spoke and details of the conversation.
• Get a copy of your credit report using the credit-file request on page 12. There are four major credit bureaus. Since every creditor does not report to every credit bureau, you would need records from each in order to have a complete credit record. Your credit record includes debt repayment history, total debt, and employment and residence information. Your record will include instructions to help you read the report. Be sure your credit report is accurate. Take steps to have errors corrected.
• Find an evening or weekend job or accept more overtime work.

• Section 2: When collectors start calling
• Section 3: Self-directed repayment plans
• Section 4: Credit counseling services
• Section 5: Consolidation and other repayment strategies
• Section 6: Bankruptcy
• Glossary: Financial terms

* Secured and unsecured debt

Secured debt is "backed" by collateral. Collateral is the property a creditor has the right to seize if you do not pay a debt. The most common forms of collateral include your home, a car, or household goods. When a creditor has collateral for your loan, he has a "lien" on your property. Creditors who have security can repossess the collateral and sell it to get their money. This kind of loan is referred to as a secured loan. Loans without collateral are called "unsecured" loans. It is usually more difficult for a creditor to collect an unsecured debt unless the borrower pays it back voluntarily.

Equity

Equity is the amount you have already paid on the principle of a loan. This amount reflects the "equity" you have in the property.

APR- Annual Percentage Rate of interest

Interest is the money you pay to the lender for the privilege of using his money. The APR may be different from the stated interest rate because it includes the full cost of the loan which may include fees or other charges. The APR tells you the true cost of the loan. You will find the APR on the disclosure statement you were given when you signed papers for the loan or on the disclosure statement which came with your credit card application.

Company address and phone number

When listing your creditor's address and phone number, check the statement you receive or the original credit contract for the correct information. The address you send your payment to is not necessarily the same address you would write to if you can't make a payment or have a problem with your bill. Also check for the correct phone number. If your account has been sent to a bill or debt collector, that address and phone number is different from those listed on your account statement. Make sure you are contacting the correct party when trying to negotiate a new interest rate or make other payment arrangements.