Working through Credit Problems

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Nothing is more upsetting than facing credit and financial problems.

Most individuals at some time in their life will experience financial hardship. The problem is that when you start experiencing a financial problem, you have no clue how long it will last. Your optimistic side will say, “This is just temporary.” But how temporary is anyone’s guess. Like many people experiencing financial problems, you may begin robbing Peter to pay Paul. In other words, you start taking cash advances from your credit cards to pay other credit card bills as well as your living expenses. The intent is to pay everything back once you get back on your feet. The reality, how ever, is that you will be soon maxed out on your credit limits and not be able to pay anything. Your intention is good, but the outcome rarely turns out how you want it to.

Once you are maxed out on your credit cards and can’t make any more payments, your creditors will begin calling and writing you letters wanting their payments. Your stress level will be at an all-time high. Most creditors are not very understanding. Their main concern is to update their computer files on your activity. Don’t take their representatives’ rude statements personally. They don’t know you and they are only trying to do their jobs.

To avoid running out of money, the best thing to do before running up more debt is to make a plan on how you are going to survive. Check you library for books like The Insiders Guide to Managing Your Credit for extensive information on handling all credit and financial problems.

When creditors are threatening you with lawsuits and poor credit ratings, your first reaction is to pay them first. That is your first mistake of buckling under from their intimidation.

Too often I hear from people who pay the credit card bills just to silence the creditors. Then they run out of money to pay their utility or housing expenses. The result may be their electricity, gas, and phone may be turned off. Or they may even become homeless.

Remember, when you are going through financial and credit problems and making your payments late, your credit report is already ruined. There isn’t a whole lot more that the creditors can do except sue you. It would be hard for the creditor to collect any money from you through a lawsuit if you have no money or assets. That is why lawsuits are not that common. Most of the time the creditor will just charge off your account—write it off their books as a loss.

Having a plan before you run out of money will enable you to make your money last longer. It will give you a chance to come up with a long- term solution rather than running around putting out fires.


Eric attended one of my seminars and afterwards stayed to discuss his situation. He said, “My income has dropped by 30 percent. I have fallen behind in making my house payment and credit card payments. The bill collectors are calling and writing to me demanding payments. I feel like I am paralyzed. I don’t know who to pay first. When I pay the credit cards, I can’t pay my house payment. I feel so out-of-control with this situation. It seems whoever is yelling the loudest is the company I pay first. How do I determine who to pay first?”

Eric was so stressed out that he was having trouble sleeping. His work was suffering because his mind would only stay focused on his financial problems.

The first thing I told Eric to do was to make a list of all his bills and expenses. This list needed to include the rent or mortgage payment, utilities, credit card and installment payments, food, transportation, and any other payments or miscellaneous items.

Once the list was complete, I had Eric separate his survival payments—food, house payment, utilities, and medical costs. These are essentials and must always be paid first. The remaining items on his list should once again be prioritized. Next may be a car payment, gasoline, and mandatory car insurance if he needs to drive to work.

The remaining bills would be credit card and installment loans. These are considered nonessential and should be paid only after the essential bills are paid. If there was not enough money to pay every thing, I instructed Eric to call the creditors and make special arrangements. I told Eric, “If there is not enough money left to pay the nonessentials bills, then pay them when you can. Be prepared for constant telephone calls and letters demanding payment, but stay firm and focused on paying your essential bills.”

Once Eric made this plan of attack, he was able to focus on the solution of making more money rather than drowning in stress.

Eric was able to pick up a part-time job to supplement his regular income and get back on track paying his bills.


Q. I was three weeks late in making my car payment. The bank repossessed my car. They are demanding $2,500 from me to get my car back. I don’t have the money. What happens if they keep the car?

First, know that “repo” laws vary from state to state. Check your state’s website for specific info on car repossession.

One of the first things you want to do is ask the bank to reinstate your loan contract. See if the bank will add the past due payment plus costs that resulted from the repossession onto your loan. If the bank agrees to this arrangement, you will not have to repay the balance in full immediately.

Most lenders do not repossess cars until at least two payments are missed. Legally the lender can take action when a payment is only one day late or if the lender feels there is reason to believe the borrower is unable to keep making regular payments. If your payments are consistently late, the lender will not have much tolerance and could deem that reason enough to repossess the car quicker than if you show an occasional late payment.

If the bank won’t rewrite your contract and is still demanding the full amount, the bank could sell the car at an auction to raise money to satisfy the debt. Usually at the sale the car is sold for less than the amount due on the loan. The amount remaining is called a “deficiency,” which you will be required to pay. If you don’t pay it, the bank can go to court and get a judgment against you.

Your credit report will reflect the repossession as well as any amount that is still owed on the account after the sale of the car. Having a repossession on your credit report will make it difficult to get another auto loan.

If you can resolve the repossession by getting the car returned, you might try to refinance the car for a longer term to get lower monthly payments.



Q. I signed a two-year contract with a fitness gym. The contract was set up to deduct the monthly dues automatically from my checking account. Six months before my contract expired with the gym, I closed my checking account. I never heard from the gym regarding any further payments. I recently got my credit report and discovered the gym had turned my account over to a collection agency. I want to settle this. If I pay this off in full, will the collection agency remove this from my credit report?

There is always a catch when getting a membership at a gym. I have seen many credit reports with collection accounts from gyms. Most people don’t read the fine print when joining a gym and end up paying for longer terms than they realized or being charged extra fees to cancel their memberships before the end of their contracts.

First I would recommend that you contact the gym and see if you can pay them directly. If they agree, have the gym contact the collection agency to delete the entry. Get everything in writing from the gym before you settle the account.

If the gym won’t work with you, contact the collection agency and see how much they will accept to settle the account. Ask the collection agency for a letter stating what they will accept and that the collection agency will agree to remove the entry from your credit report. The collection agency is under no obligation to remove this account or settle for anything less than what is owed.

If the collection agency will not cooperate with you, the Fair Credit Reporting Act will allow you to put a statement on your credit report explaining your side of the story.


Q. My bills are out of control. Every month I am going further in the hole. I have fallen behind on some credit card payments. I don’t own a home so I can’t get a home equity loan. I have heard of some debt consolidation companies who can help me. Is it better to go through a debt consolidation company or try and negotiate on my own?

Remember one thing. Your credit report is already damaged. Without owning a home it is difficult to get any cash from an unsecured loan.

A debt-consolidation company who would work with you could set up payments between you and the creditors. Some debt consolidation companies are nonprofit while others will make a profit. Nothing is free. There is always a way the companies will make money.

If you are set up making payments to the debt consolidation company, you are probably making interest payments with each payment to the company. Some of the nonprofit companies have special arrangements with the creditors where the creditors will pay the company a percentage of the debt. Either way the companies are being paid with your money.

If you decide to negotiate payments directly with the creditors you will be saving any cost that you would be paying the debt consolidation company. You would not be creating a larger bill. Make sure you can keep up the payment arrangements you make with the creditors and not fall behind.

Always prioritize your bills on which ones to pay first. Refer to Eric’s story at the beginning of the above.


Q. I am three months late on my mortgage. I have been in contact with the bank to try and work things out. They said that they were going to start foreclosure proceedings against me. How long does that give me to raise the money I need to bring everything current? Can they throw me in the streets?

The first thing the bank will do to begin foreclosure proceedings is to file a “Notice of Default” letter requesting all the back payments plus foreclosure costs. This is mailed by certified mail with a return receipt that will have your signature on it.

The notice of default will give you 90 days to bring all the payments current. If you don’t bring the payments current within the 90 days, the lender will set a date for a public sale of your property, which usually occurs approximately 30 days from the date of the first publishing of the sale. The published notice of the sale will list the address of the house, information about the loan, and the time and location of the sale. Some lenders will allow you to reinstate the loan before the sale: others may re quire a total payoff of the loan balance. Every state has its own policies.

At the end of the sale you must vacate the property; it no longer belongs to you.

The total process of the foreclosure is approximately 120 days from the date of the notice of default.


Q. Three years ago we refinanced our home. The market fell and now the loan is higher than the appraised market value. We are having problems keeping up our payments. We are trying to avoid a foreclosure. What will a foreclosure do to our credit rating?

A foreclosure on your credit report will hurt your chances of getting into another property. Most lenders are afraid to take a risk with someone who has had a foreclosure. Some subprime lenders will entertain the application only if the foreclosure is at least two years old.

There are three ways that you can fight a foreclosure.

1. Many lenders will consider a “hardship application” that would de scribe a borrower’s problem and be viewed as a temporary situation. If you can prove to the lender that the situation you are in is only temporary, many times it will work with you in setting up a repayment plan.

Possible solutions would be to change your loan terms such as lowering your interest rate, extending the loan period, or refinancing.

2. To avoid ruining your credit report, get the lender to agree to a short sale. If the lender sees that you can’t make the payments and the property value is less than your outstanding loan amount, it may agree to let someone purchase your property for less than the loan balance.

The only way a lender will entertain a short sale is to review your financial hardship. Most lenders won’t talk to you about a short sale if you are current on your payments and show no struggle. If you fall behind in your payments, then they will talk to you about your situation. The lender does not want your property. The cost of a foreclosure is costly and time consuming. The lender just wants to be paid. If it means taking a loss on the loan by a short sale and it is in its best interest, the lender will do it. You will then be released from the liability of the loan.

There are times that lenders will allow you to quit claim deed the property to the lender. That means you are deeding the property and title to the lender in exchange for closing the loan. This will avoid a foreclosure.

3. Bankruptcy is another option to stall a foreclosure. You should seek the advice of an attorney or accountant who can direct you and explain what your options may be should you seek bankruptcy.


Q. I keep getting letters from the Internal Revenue Service demanding payment for an old tax bill. I don’t have the money to pay them. The IRS put a tax lien against me and now it shows up on my credit report. What can I do about this? I keep getting turned down for credit because of the tax lien.

Whenever you fall delinquent on paying your taxes, if you have not set up some type of repayment arrangement the IRS will put a tax lien against you.

A tax lien is filed and recorded with the county clerk’s office. It then becomes a public record.

The credit reporting agencies will pick up the tax lien after it is recorded and list it on your credit report. Unless the tax lien is paid off this will be viewed as negative whenever you are applying for credit. This unpaid tax lien also will need to be paid off if you are trying to purchase a home, refinance your home, or sell your home. If you are selling, purchasing, or buying property, the tax lien could be paid off through your escrow.

I would suggest that you contact the IRS and make payment arrangements. The IRS will require a financial statement from you to determine what payments you can afford. Discuss with the IRS the possibility of removing the tax lien once you are set up with a payment schedule.

If you are trying to get new credit, unless the lien is removed or paid off it will be difficult. If you are applying for a car loan, many times the lender will overlook the tax lien if you can show them a written agreement from the IRS regarding payment.

If you are trying to refinance your home and you have an unpaid tax lien, contact the IRS and see if they will subordinate the lien. If the IRS agrees to this, you can complete your refinance.


Q. A year ago I fell behind in making my payments. One of the credit card companies that I never paid just served me court papers for a lawsuit. How can I solve this without going to court?

If you don’t respond to the papers you were served with within 30 days of receipt, you will automatically lose the case by default.

To settle this without going to court, contact the lender who filed the lawsuit. Offer to pay the lender whatever you can afford. Many times the lenders will settle for a less amount just to get your account off their books. If the lender agrees to settle the account with you prior to the court date, have the lender issue you a letter that they are withdrawing the lawsuit, and to indicate the terms of your agreement in the letter.

Lawsuits are costly and most lenders don’t want to pursue this form of collection. If the lender does get a judgment against you, it will appear on your credit report and hurt your chances of obtaining new credit.


Q. I am having trouble making my payments. Instead of sending the minimum payment on my credit cards I have been sending at least $10 per month for the past three months. I figured some thing was better than nothing. Now the creditors are screaming that I am behind and threatening to turn me over to a collection agency. What is their problem? I have been paying them something.

Always call the creditor first to find out if they will accept less than the minimum payment.

The problem with sending less than the minimum payment is that the difference between the amount you are sending and the payment required still leaves an unpaid payment.

What is happening is that the unpaid payment that is remaining is rolled into the next billing cycle. This will continue to happen every month that your minimum payment is not covered. It reflects as a late payment. It is called a rolling late payment because it rolls into the following month.

Because this has been going on for the past three months the creditor’s computer is signaling three months’ delinquency. Until you pay the whole payment required this will continue and the creditor will take steps to turn your account over to a collection agency.

I would suggest that you contact the creditor, explain your situation, and see if you can work out a reduced payment schedule, including no added late fees, until your finances are freed up. Until you do that your account and credit report will reflect a delinquency.

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