B   M   W   E
JOURNAL
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ONLINE VERSION VOLUME 107 - NUMBER 5 - JUNE/JULY 1998
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Breaking Free From Debt
By Union Privilege



Feeling overwhelmed by debt? If so, you're not alone. Millions of Americans have money problems. And most are middle-income wage earners, with jobs and families, who simply want to pay off what they owe.



The good news is that there are ways of digging out of financial difficulties without resorting to drastic measures. The trick is to act before you're too deeply in debt.

A Financial Check-Up



How do you know whether you're headed for financial trouble? If you answer yes to three or more of the following questions, you most likely do have a debt problem that will require action on your part:



  • Do you routinely spend more than you earn?
  • Can you afford to pay only the minimum, or less on your credit cards each month?
  • Do you juggle other bills to keep up the minimum monthly payments on credit cards?
  • Have you reached the credit limit on your credit cards?
  • Do you find yourself borrowing for regular day-to-day expenses like groceries?
  • If you lost your job, would you have difficulty paying next month's bills?
  • Would you have a tough time getting by if you didn't have credit cards?

Healthier Alternatives



To gain better control of your finances, consider the following options:



  • Take inventory. The average American carries month-to-month balances on five to six credit cards. With that many credit cards, it's easy to lose track of how much you owe. To find out your total debt, gather copies of your most recent statements and make a list of all your cards, total balances dues, interest rates and required minimum monthly payments. If you owe money on a car or student loan, call your lender for a current balance. And be sure to find out what interest rate you're paying, if you don't already know.
  • Devise a payment plan. Add up the minimum required monthly payments on all your debts, then total the total amount, including any amount above and beyond your required payments, which you can afford to pay each month on all your bills. Then start paying as much as you can afford each month to get your debt level down.
  • Consolidate your debt. Millions of Americans are still paying interest rates of 18 to 21 percent on their credit cards and similar amounts on bank loans. To avoid paying extra interest, you might want to consider consolidating your debt by transferring higher-rate balances to a lower-rate credit card or by combining them all into one low-interest loan. This will leave you with just one payment each month and you'll save money in finance charges.
  • Seek debt-management counseling. If you're feeling overwhelmed by your financial troubles and need advice as to how you might best pay off your bills, counseling may be the answer. Nonprofit organizations such as the Consumer Credit Counseling Service can offer advice and may be able to help you and your creditors arrange a payment plan that you can handle. Call 1-800-388-2227 to find the office nearest you.

Understanding Bankruptcy



A final solution to financial troubles -- and one that is on an upswing -- is to file for bankruptcy. In fact, a record 1.35 million Americans filed for bankruptcy last year.



But even though declaring bankruptcy may seem like an easy way out, it is still considered a drastic measure that is reserved for drastic circumstances. Plus, it can be costly and complicated, which is why professional counseling is advised.



Two kinds of bankruptcy exist. The first is Chapter 7 bankruptcy, also known as "liquidation"; the second is Chapter 13 bankruptcy.



Under Chapter 7 bankruptcy, you lose all assets that are not exempt in your state, including your home in most states. Exempt property may include such items as work-related tools and basic household furnishings, among others. The rest of your property may be sold by a court-appointed official or turned over to your creditors. This filing stays on your credit report for 10 years.



Chapter 13 or "reorganization" bankruptcy allows you to keep most of your assets by paying your debt back through a court-approved payment plan. But this declaration still shows up on your credit report for seven years.



Neither form of bankruptcy is a desirable alternative and neither erases debts such as taxes, alimony or child support. You're still obligated to pay those items, regardless of the state of your finances.



Bankruptcy and Credit



There are several drawbacks to declaring bankruptcy, but the most important is that it gives you a bad credit rating. Put simply, a bankruptcy notation on your credit report means you most likely won't be approved for a standard bank loan, an auto loan or a home mortgage -- at least for the 7 to 10 years that a bankruptcy filing remains on your credit record. and you probably won't be considered a good candidate for renting or even some forms of employment until the bankruptcy notation is gone, either.



Of course, if you're like most people, you probably would not feel comfortable living without most forms of credit for as long as 10 years. But even if you do choose to tough it out through bankruptcy, it still doesn't guarantee freedom from money troubles afterwards. You'll still most likely have to pay higher rates for lower loan amounts, at least until you re-establish your credit record.



Finally, since many people who file for bankruptcy often find themselves back in the same place within a few years, only without bankruptcy as an option (Chapter 7 bankrupts must wait six years before they can file again), it's often better to learn how to avoid running into money problems in the first place.



Additional organizations and resources you can turn to for help include:

  • Bureau of Consumer Protection Office of Consumer & Business Education, which features advice for consumers at the Web address http://www.pueblo.gsa.gov. Phone (202) 326-3650.
  • National Center for Financial Education (NCFE), which offers the Do-It-Yourself Credit Repair and Improvement Guide for $10 plus $2 postage and handling. To order, send a check to NCFE Credit Guide, Box 34070, San Diego, CA 92163. To order by credit card, call (619) 239-1401.
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