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Five Critical Mistakes People Make When in Debt of $15,000 or More

1.     Using crisis management to deal with debt issues-Robbing Peter to pay Paul.

The first and biggest mistake people in debt make is that they make decisions in a reactive/crisis management mode.  For example, the credit card company is calling repeatedly demanding immediate payment.  Getting these calls makes you frustrated, embarrassed and stressed, and finally you agree to take the money you need to make the car payment or the house payment, and you pay the credit card bill.  This is the classic “robbing from Peter to pay Paul.”  Now, you still have the issue of ultimately paying the credit cards and in addition, you have jeopardized your car, which you need to get to work, or your home, which is the roof over your head.

You need to step back and decide on your priorities.   For most people in debt, their car is critical to their ability to get to work and thus sustain their ability to support themselves and their family.  Second, if their house payment is cheaper or, at least not more than renting, then making the house payment would likely be the next priority payment.  You need to create a budget.  Figure out how much money you have coming in each month and what expenditures you need to survive.  Create an overall plan.  If your budget and plan show no money for credit cards, then it may be time to consider bankruptcy as an option.

2.    Using retirement funds to pay credit cards.

This is a classic mistake people in debt make all the time.  Retirement funds are protected from creditors in or outside of bankruptcy.  Society realizes that it is important for you to save for retirement because the needs you will have in retirement will be things for your very survival-food, shelter, and medical care.  These “future creditors,” as I like to call them, will likely be compelled to provide you with these survival services.  They will not have the benefit, like the credit card companies, to consider your credit and ability to repay, when they provide their help and services.  Who do you think should get the greatest protection-the credit card companies or your future creditors providing you with life sustaining services?  I think you would agree that your future creditors should get your retirement savings.  It does not matter whether you take a retirement loan or withdraw the funds to pay credit cards-both are a big mistake.

3.    Getting a second mortgage to pay credit cards.

In Upstate New York, you can protect $75,000 equity for you and $75,000 equity for your spouse (assuming the home is jointly owned) from creditors.  For example, if your jointly-owned home was worth $200,000 and you had a $50,000 mortgage, you can protect your home and the $150,000 equity from creditors in or out of bankruptcy.  New York State has decided that you should be able to make sure you can retain your home, even if you owe credit cards and they have even taken a judgment.  Do not make this mistake and jeopardize your home.

4.    Believing the lies of the debt reduction companies.

You have heard the commercials-Reduce the amount of your debt to just a fraction of what you owe-pay just 30-50% of the balance!  The actual success rate of this strategy is about the same as playing the lottery.  There is a very small fraction of creditors willing to negotiate with debtors.  However, most creditors will actually become more aggressive in pursuing lawsuits against anyone using these debt reduction companies.  The credit card companies know when you need to file bankruptcy.  They can just look at your credit report.  So if you choose not to file bankruptcy when you should, the credit card companies assume that you cannot file bankruptcy.  They think, “this person must have more income than we thought or valuable assets which cannot be protected in bankruptcy.”  The credit card companies also want to send a strong message that they are not interested in debt settlement offers.  Also, for the few credit card companies willing to settle with the consumer, the consumer must be in serious default on the payments (enough to destroy the credit score) and the consumer will need the entire amount of the settlement to be paid in one payment (i.e. no payment plans).  The other surprise consumers get when using this method, is that if you successfully negotiate and pay a reduction, the credit card company will notify the IRS of the amount the credit card company “wrote off” and the IRS will now consider the “saved” amount to be income.  You will be required to pay income taxes on the “saved” portion. In bankruptcy, you don’t have to worry about this problem.

5.    Borrowing money from relatives to pay credit cards.

If you want to find a great way to destroy your family relationships, borrow money from relatives to pay credit card debt.  Obviously, your relatives are not responsible to pay your credit cards.  Your creditors cannot look to your relatives to pay your debt.  Just don’t do it.  One of the best things about bankruptcy is that the cost of getting legal help to file a bankruptcy is so low and most lawyers have payment plans, it makes it possible for you to get the help you need without asking your relatives for help.

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Two Things You Can Do To Alleviate Your Anxiety, Fear and Frustration, and Take Advantage of Your Options.

1.    Add up your unsecured debt, decide on your priorities and then be honest with yourself and decide to get out of debt-one way or another.

If you have over $15,000 in unsecured debt, it is time to get really honest about your finances.  Sit down (with your spouse, if you are married) and figure out exactly how much you owe.  You can get a free credit report from all three credit reporting agencies, once a year.  Go to http://www.annualcreditreport.com/.  Most medical bills will not show up on these reports, so make sure you add those to your balance.

Decide which bills should be paid first and which bills have a lower priority.  Generally, you want to pay the expenses which are required for survival-your car payment and gas for the car, your house payment, your utilities, food and medical expenses.  Make sure your income is used first for these expenses.  If you have money left over, then consider paying your unsecured debt.

Assuming you have a low interest rate of 15% on your unsecured debt, your payment would need to be at least $360/month to pay back $15,000 over 5 years (add an additional $120/month for each additional $5,000 over $15,000 that you owe) or $540/month to pay this back over 3 years (add an additional $180/month for each additional $5,000 over $15,000 you owe).  If your interest rate is higher, then these payments would need to increase.  This is also assuming you don’t take on more debt in that period of time.  If you do a budget, do you have the $360-$540 left over each month to pay this debt off in 3 to 5 years?  If so, get started with the payments.

If you don’t have the income to pay your creditors right now but expect to in the future (such as a layoff from work), then politely tell your creditors your situation.  If the creditors continue to call, ignore them.  However, at least once a month, talk with them, tell them your situation, again, and then tell them you are going to hang up.  Do not otherwise talk with them.  It will only get you frustrated because there is nothing more you can do.  Never promise to pay a creditor unless you absolutely know you can keep the promise because this is how they manipulate you.

2.    Call for a free bankruptcy consultation.

If you have over $15,000 in credit cards, personal loans and/or medical bills, you should at least consider bankruptcy as one of your options.  You might argue that bankruptcy is on your credit report for 10 years, which is correct, but if you are careful, it only takes about 2 years after a bankruptcy filing to recover most of your credit to qualify for a regular interest home loan.  It does not cost anything to get some advice and learn your options.  Our office does offer a free phone consultation at 888-588-3328.

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