When bills pile up and your spending is out of control it is time to take action to get your financial affairs back on track. People sometimes experience financial crises due to job loss, a serious illness, divorce or death of a spouse. Others simply fail to take control of their income and spending behavior. Either way, the problem seldom fixes itself, but with careful planning, you can manage a difficult financial situation. Danger Signals of Too Much Debt The following danger signals can indicate financial problems ahead. • Are you continually late in making your payments? • Are you near the dollar amount limits of your credit cards? • Do you make minimum payments on credit card balances? • Do you find it difficult to save? • Do you have to use savings to pay current bills? • Are you using a credit card because you do not have enough cash? • Have you been denied credit? • Do you use a credit line or cash advance from one credit card to make payments on another? How To Get Out of Financial Trouble If you answered yes to one or more of the danger signals, consider your options before creditors take legal action against you. Your wages could be garnished or you could be forced into bankruptcy. Some people resolve their financial problems with discipline and self control. Others seek help from non-profit financial counseling services. Whether you do it yourself or seek help from professional credit counselors, your debt management plan will include these steps. • Review your income and expenses. A careful analysis of your household income and expenses is the first step in digging out of debt. • Determine who and how much you owe. Assemble the following information for each of your loan accounts. o name, address and phone number of creditor o attorney or collection agency address and phone number o your account number o balance owed, monthly payments, payment due date o amount and date last paid o type of legal action taken, such as garnishment or repossession o co-signature or collateral securing the loan o annual percentage rate of interest on each loan • Set up a plan for paying your debts. Figure out how you can repay each creditor and how long it will take to repay the debt. The following options may help you decide when and how much you can repay: o Analyze your income and expense worksheet, looking for ways to reduce current expenses. Even small amounts will help. o Consider selling assets such as stocks, bonds, jewelry, antiques. o Consider ways to increase household income. o Consider a home equity loan. This option could put you further in debt unless income and spending habits are modified. o Consider loan consolidation. This option will reduce your monthly payments but will increase the length of the loan, usually at a higher interest rate. Financial advisors suggest that you prioritize debts, giving first priority to mortgage, rent and utilities. Second priority is credit cards, unsecured debts, and third priority is medical and hospital bills. Focus on your financial situation and decide how much money you can pay to each creditor. Keep expenses to a minimum. Avoid additional debt. The goal is to pay off your debts and get back on track financially. Inform Your Creditors Now, you are ready to talk to creditors. Contact each creditor before they contact you, and explain your financial situation. Most creditors will work with you if you give them a realistic repayment plan and follow through as promised. Some creditors may even refinance the debt to reduce the size of your monthly payments if they are convinced that you are seriously trying to resolve your financial problems. Creditors prefer to receive smaller payments rather than no payment, and they prefer not to repossess your goods. If you must send a smaller payment than promised, contact the creditor and explain why. If you keep in contact with them, they are more willing to cooperate. Loan Consolidation A debt consolidation loan allows you to pay most of your debts through one monthly payment. Even though the debt consolidation loan simplifies the monthly payment, you may have a larger loan with new credit costs for a longer period of time. This may not be the best solution for you. Ask yourself whether you can meet the terms and conditions of a consolidation loan. Some companies offer consolidation loans by giving you a second mortgage or home equity line of credit. In this situation you are using your home as collateral. The danger is that if you cannot make payments or are late paying, you could lose your home. Debt Management Services If you have serious financial difficulties and cannot find a solution, a non-profit credit counseling service may be able to help. Credit counseling services are provided by organizations designed to help persons with debt problems pay their bills. Some credit counseling services charge small or no fees for helping people develop a spending plan. Consumer Credit Counseling Services, credit unions, banks and housing authorities provide financial counseling. Credit counseling professionals can help you create and use a financial plan. If your income is not sufficient to pay all your debts, they can help you work out a debt repayment plan. With this plan, you deposit money each pay period with the credit counseling service and they pay your bills according to your debt repayment plan. They may also require that you not use any additional credit until you have repaid your present debts, unless approved by your credit counselor. Financial Recovery Learning to control credit use is not easy, but self discipline is the key. A general guide suggested by financial counselors is that your annual installment debt (excluding mortgage) should be no more than 20% of your take-home pay. Use credit as a convenience but not for impulse buying of things you cannot afford. Avoid using your credit card for cash advances except in an emergency, because you will pay interest from the date you received the cash advance. Pay the balance in full each month when possible, limit the number of cards you use, and keep expenses to a minimum. When your income in not sufficient to pay all your bills, consider using a credit counselor to help you develop a workable plan to pay your bills, control spending and avoid bankruptcy.