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Steps You Can Take
If, like thousands of others, you are having trouble paying your debts, it is important to take action. Doing nothing can lead to much larger problems in the future—even bigger debts, the loss of assets such as your house, and a bad credit record. This Financial Guide suggests how you can help improve your relationships with creditors, reduce your debts, better manage your money and get a fresh start.

Getting Started
Credit Counseling Agencies
Personal Bankruptcy
Scams And Pitfalls

How can you tell when you have too much debt? What if bill collectors are not calling yet, but you are having difficulty paying monthly bills? If these problems seem familiar, you should take action.

  • Have you run several credit cards up to the limit?
  • Do you frequently make only the minimum monthly payments on your credit cards?
  • Do you apply for almost any credit card you are offered—without checking out the terms?
  • Have you used the cash advance feature from one card to pay the minimum payment on another?
  • Do you use cash advances (or use a credit card) for living expenses such as food, rent, or utilities?
  • Are you unaware of what your total debt is?
  • Are you unaware of how long it would take you to pay off all your current debts (excluding mortgages and cars) at the rate you are paying?

If you find any of these statements apply to you, you may need to learn more about managing debt before you try to reestablish credit.


Here are some specific steps you can take if you are in financial trouble:

1. Review each debt that creditors claim you owe to make certain you really owe it and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.

2. Contact your creditors to let them know you are having difficulty making your payments. Tell them why you are having trouble—perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.

TIP TIP: Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.

3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and health care) and optional expenses (such as entertainment and vacation travel). Stick to the plan.

Related FG

Related FG:  For some guidance in this regard, please see the Financial Guide: BUDGETING: How To Prepare A Workable Plan.
TIP TIP: Try self-budgeting before taking more extreme measures.

4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Consider substituting a debit card for your credit cards.

5. Use your savings and other assets to pay down debts. Withdrawing savings from low-interest accounts to settle high-rate loans usually makes sense.

TIP TIP: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.

6. Look for additional resources from governmental and private sources for which you may be eligible. Government assistance includes unemployment compensation, Aid to Families with Dependent Children (AFDC), food stamps, low-income energy assistance, Medicaid, and Social Security (including disability). Other resources may be available from churches and community groups. Often these sources are listed in the Yellow Pages of your phone book.

7. Try to consolidate your debts. There are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage.

Caution CAUTION: Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
Caution CAUTION: Second mortgages greatly increase the risk that you may lose your home.

8. Prepare a financial plan that can alleviate financial worries about the future and ensure that you will meet your financial goals—whether they relate to retirement, asset acquisition, education, or just vacations.

Related FG

Related FG: For guidance on how to begin the financial planning process,  please see the Financial Guide: YOUR FINANCIAL PLAN: Getting Started On A Secure Future.


If you are unable to make satisfactory arrangements with your creditors, there are organizations to help you accomplish this. For instance, Consumer Credit Counseling Service (CCCS) agencies, which are local, non-profit organizations affiliated with the National Foundation for Consumer Credit (NFCC), provide education and counseling to families and individuals. For consumers who want individual help, CCCS counselors with professional backgrounds in money management and counseling can provide support.

To promote high standards, the NFCC has developed a certification program for these counselors. A counselor will work with you to develop a budget to maintain your basic living expenses and outline options for addressing your total financial situation.

If creditors are pressing you, a CCCS counselor can also negotiate with these creditors to repay your debts through a financial management plan. Under this plan, creditors often agree to reduce payments or drop interest and finance charges and waive late fees and over-the-limit fees. After starting the plan, you will deposit money with CCCS each month to cover these new negotiated payment amounts. Then CCCS will distribute this money to your creditors to repay your debts.

With more than 1,100 locations nationwide, CCCS agencies are available to nearly all consumers. Supported mainly by contributions from community organizations, financial institutions, and merchants, CCCS provides services free or at a low cost to individuals seeking help. To contact a CCCS office for confidential help, look in your telephone directory white pages, or call 1 (800) 388-2227, 24 hours a day, for an office near you. Or write to the National Foundation for Consumer Credit, 8611 2nd Ave., Suite 100, Silver Spring, MD 20910.

Planning Aid

Planning Aid: Contact the NFCC’s web site for local credit counseling agencies.   


Bankruptcy is a legal proceeding that is intended to give people who cannot pay their bills a fresh start.

TIP TIP: A decision to file for bankruptcy is a serious step, which should be taken only if it is the best way to deal with financial problems.

There are two types of bankruptcy available to most individuals:

  • Chapter 13 bankruptcy allows debtors to keep property which they might otherwise lose, such as a mortgaged house or car. Reorganizations may allow debtors to pay off or cure a default over a period of three to five years, rather than surrender property.
  • Chapter 7 or "straight bankruptcy" involves liquidation of all assets that are not exempt in your state. The exempt property may include items such as work-related tools and basic household furnishings, among others. Some of your property may be sold by a court-appointed official or turned over to your creditors. You can file for Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts (those where creditors have no rights to specific property), and stop foreclosures, repossessions, garnishments, utility shutoffs, and debt collection activities. Both types also provide exemptions that permit most individual debtors to keep most of their assets, though these "exemption" amounts vary greatly from state to state.

Bankruptcy cannot clean up a bad credit record and will be part of this record for up to ten years. Thus, filing bankruptcy will make it more difficult to get a mortgage to buy a house. It usually does not wipe out child support, alimony, fines, taxes, and some student loan obligations. Also, under Chapter 13, unless you have an acceptable plan to catch up on your debt, bankruptcy usually does not permit you to keep property when the creditor has an unpaid mortgage or lien on it. Bankruptcy cases must be filed in federal court.

TIP TIP: Be cautious when choosing a bankruptcy lawyer. Some of the less reputable lawyers make easy money by handling hundreds of bankruptcy cases without adequately considering individual needs. Get recommendations from those you know and trust, and from employee assistance programs.

Related FG

Related FG: For information on making sure you pick the right lawyer, please see the Financial Guide: LAWYERS:  How To Choose The Right One.

Some public-funded legal services programs handle bankruptcy cases without charging attorney fees. Or these programs may provide referrals to private bankruptcy lawyers. Keep in mind that the fees of these attorneys may vary widely.


Consumers with credit problems have paid millions of dollars to firms that claim they can remove negative information, clean up credit reports, and allow consumers to get credit no matter how bad the credit history.

These credit repair clinics charge consumers anywhere from $50 to $2,000, and often use questionable methods. Most clinics make misleading promises to consumers, and charge high fees for doing what you yourself could do.

TIP TIP: Do not confuse the for-profit credit repair clinics discussed here with the non-profit Consumer Credit Counseling Services (CCCS) discussed earlier.

Here are some common promises made by credit clinics, and the reasons consumers should beware of such claims:

"Based on little-known loopholes in Federal credit laws, we can show you how to clean up your credit report!"

The loopholes are merely the provisions of the Fair Credit Reporting Act (FCRA), under which you have the right to challenge information in your credit report you believe incorrect. We discussed these provisions before in the section on "What To Do If You Have A Bad Credit Report." Credit repair clinics often flood credit bureaus with requests to check whether or not all negative data is correct. Credit clinics hope creditors will not be able to verify the information in a reasonable time period, causing the negative information to have to be dropped under the FCRA. Some credit clinics even tell consumers to challenge neutral information (e.g., name and address), hoping to distort file data so that the old, negative file will no longer be identifiable when a creditor asks for a consumer's file. Creditors and credit bureaus have become familiar with such tactics, and they have sought to use the provision of the FCRA that allows them to dismiss "frivolous" disputes of file information and to refuse to respond to repeated disputes of the same data.

"We can show you how to remove negative information from your file—including judgments."

Some clinics tell consumers to pay off any bills outstanding with the creditor in exchange for removal of negative information. Or, they may tell a consumer who has an account in collections to pay part of the balance with a check. The check is to carry a disclaimer saying that, by cashing the check, the creditor agrees to remove the account from collections and remove any negative information about the account from its files. Creditors are under no obligation to agree to such measures, and the fees paid to clinics for such advice is wasted.

"We can get you a major credit card—even if you've been through bankruptcy!"

What you are not told is that you will have to "secure" the card first. Most credit cards are unsecured; that is, you are not pledging any of your assets as collateral for any credit you may use. A card is secured when a consumer puts a deposit in the bank and gets a bankcard with a credit limit based on a percentage of that deposit. While a secured card can be an excellent tool for rebuilding credit, why should you pay the credit clinic just to provide an application and deposit slip?

Often for-profit or non-credential counseling organizations make promises that they cannot or do not keep. Be especially careful when asked for a large sum of money in advance.

TIP TIP: Several states have enacted laws to protect consumers against the deceptive practices of many credit clinics: Arkansas, California, Connecticut, Florida, Georgia, Louisiana, Maryland, Massachusetts, Nevada, New York, Oklahoma, Texas, Utah, Virginia and Washington. These state laws generally require credit clinics to: inform consumers of their rights under the FCRA; be bonded (hold a type of insurance to protect consumers who may sue) if they accept payment in advance of services; accurately represent what they can and cannot do; and offer a cancellation period before any contract for services the consumer may sign takes effect. Check with your state attorney general's office to determine if there are any regulations for credit clinics in your state.
TIP TIP: To check an organization's reputation, contact your state Attorney General, consumer protection agency, or Better Business Bureau.


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A Final Word: Don't lose hope, even if you despair of ever recovering financially. You can regain financial health if you act. The options presented here can put you on the road to financial recovery.  Professional financial guidance can get you off to the right start.























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Related FGs

Financial Calculators

Personal Financing

Books And Other Publications

Government And Non-Profit Agencies

The following agencies are responsible for enforcing federal laws that govern credit card transactions. Questions concerning a particular card issuer should be directed to the enforcement agency responsible for that issuer.

  • State Member Banks of the Reserve System:

Consumer & Community Affairs
Board of Governors of the Federal Reserve System
20th & C Sts., N.W.
Washington, D.C. 20551

  • National Banks:

Comptroller of the Currency
Compliance Management
Mail Stop 7-5
Washington, D.C. 20219

  • Federal Credit Unions:

National Credit Union Administration
1776 G St., N.W.
Washington, D.C. 20456

  • Non-Member Federally Insured Banks:

Office of Consumer Programs
Federal Deposit Insurance Corporation
550 Seventeenth St., N.W.
Washington, D.C. 20429

  • Federally Insured Savings and Loans, and Federally Chartered State Banks:

Consumer Affairs Program
Office of Thrift Supervision
1700 G St., N.W.
Washington, D.C. 20552

  • Other Credit Card Issuers (includes retail gasoline companies):

Division of Credit Practices
Bureau of Consumer Protection
Federal Trade Commission
Washington, D.C. 20580

  • The U.S. Postal Inspection Service:

This office covers mail fraud, sexually offensive materials, solicitations that look like government materials but are not. If you suspect such violations, contact your local Postmaster or Postal Inspector or:

Chief Postal Inspector
U.S. Postal Service, Room 3100
475 L'Enfant Plaza SW
Washington, D.C. 20260-6444
Tel. 800- 654-8896


The Consumer Advocate
U.S. Postal Service
Washington, D.C. 20260-2200
Tel. (202) 268-2284

The Federal Trade Commission does not handle individual complaints, but reporting failure to deliver, late delivery, unordered merchandise, misrepresentation or fraud helps uncover widespread abuses that the FTC might take action to stop.

Division of Enforcement
Federal Trade Commission
Washington, DC 20580
Tel. (202) 326-3768

The Federal Communications Commission will handle requests for action on suspected violations of the Telephone Consumer Protection Act, such as persistent sales calls after the seller is told to stop.

Informal Complaints and Public Inquiries Branch
Enforcement Division
Common Carrier Bureau
FCC, Mail Stop 1600A2
Washington D.C. 20554

Mail and Telephone Preference Services should be contacted if you wish to have your name removed from mail or telephone lists of many companies. You may also contact the Direct Marketing Association.

Telephone Preference Service
Direct Marketing Association
P.O. Box 9014
Farmingdale, NY 11735-9014


Mail Preference Service
Direct Marketing Association
P.O. Box 9008
Farmingdale, NY 11735-9008

Low-Cost Credit Cards: Bankcard Holders of America lists banks charging no fees and low interest rates for their conventional credit cards. To obtain a copy of the list, write to:

Bankcard Holders of America
524 Branch Drive
Salem, VA 24153





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