Ask Liz Weston

Get smart with your money

credit counseling

Thursday’s need-to-know money news

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Today’s top story: Credit counseling for housing. Also in the news: What happens to your debt after you die, how to benchmark your net worth, and how to navigate five embarrassing money situations.

Credit Counseling for Housing: What It Is and What to Expect
You don’t have to go it alone.

Will Your Heirs Have to Pay Up When You Die With Debt?
Your creditors will be waiting.

How to Benchmark Your Net Worth In 3 Easy Steps
Taking stock.

How to Navigate 5 Embarrassing Money Situations
It happens to everyone.

Huge debts? Where to find help

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Dear Liz: My husband and I are in a huge amount of debt. I understand that there are nonprofit agencies that can sit down with us and help us develop repayment plans and strategies. How do I find a reputable one?

Answer: Contact the National Foundation for Credit Counseling at (800) 388-2227 for a referral to a legitimate, accredited, nonprofit credit counseling agency in your area. A counselor can review your financial situation, help you with budgeting and see whether you’re a candidate for a debt management plan, which would allow you to pay off your credit card debt over time, perhaps at a lower interest rate.

You also should consider making an appointment with an experienced bankruptcy attorney. You can get referrals from the National Assn. of Consumer Bankruptcy Attorneys at http://www.nacba.org. A credit counselor may try to steer you away from bankruptcy, whereas an attorney can let you know if it might be a better option.

Unfortunately, many people wait too long before they contact a credit counselor. They may be approved for a debt management plan but find themselves unable to stick with the plan long enough to pay off their debt. In other words, they continue to struggle with debt that they ultimately can’t pay. Understanding all your options, including bankruptcy, can help you make a better choice about what to do next.

How to help a friend with big debts

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Dear Liz: I have a friend who owes $30,000 in credit card debt. I suggested he see a financial advisor who can help him to get out of this situation, but he never finds the time to do it. He pays all his bills on time, but only the minimum required, and there’s nothing left for him to save for his old age. He has a good-paying job but still struggles financially. How can we help him?

Answer: If your friend can pay only the minimum on his debt and can’t save for retirement, he’s in a deeper hole than he probably realizes. Many people in his situation wind up filing for bankruptcy, often after years of throwing money at impossible-to-pay debt.

Your friend should make two appointments: one with a legitimate credit counselor (referrals from the National Foundation for Credit Counseling at www.nfcc.org) and another with an experienced bankruptcy attorney (referrals from the National Assn. of Consumer Bankruptcy Attorneys at www.nacba.org).

The credit counselor will review his financial situation and see whether he qualifies for a low-interest repayment program that would allow him to pay off his debt within five years. The bankruptcy attorney will let him know whether bankruptcy might be the better option.

As a friend, you can pass these suggestions along to him, and even offer to go with him to one or both appointments if he’s comfortable with that idea. But you can’t force him to face reality or take any action until he’s ready to do so. One thing you definitely shouldn’t do is lend him money. He’s not managing the debt he has, and you don’t want your loan winding up with the rest of his bills in Bankruptcy Court.

When you should consider bankruptcy

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The conventional wisdom—that people who file for bankruptcy are deadbeats who choose not to pay their debts—is typically dead wrong.

Ask any bankruptcy judge or trustee. Most people who file for bankruptcy don’t do it as a first resort. Most people, in fact, put off filing for far too long. They struggle for years with impossible debts, often draining retirement funds or home equity in vain attempts to satisfy their creditors. The tragedy is that the money they’re pulling from their IRAs or their homes would be protected from those same creditors if they had filed for bankruptcy sooner. But they try to do the right thing, and as a result wind up far worse off than they might have been.

Add up all your unsecured debts. Unsecured debts include:

  • Credit card debt
  • Medical bills
  • Unsecured personal loans
  • Loans from friends and family

Unsecured debt does not include auto loans, mortgages or student loans.

If your unsecured debts equal half or more of your current income, then you should make two appointments:

  1. Visit the National Foundation for Credit Counseling and set up an appointment with a legitimate credit counselor. These folks can tell you if you may qualify for a debt management plan that would allow you to pay off your credit card debt within three to five years. Credit counselors try to help you avoid bankruptcy, so to get a complete picture of your options you should also:
  2. Visit the National Association of Consumer Bankruptcy Attorneys and get a referral to a nearby experienced bankruptcy attorney. The attorney can review your situation and let you know your options in bankruptcy court. Many of these attorneys offer free or discounted initial sessions.

Even if you’re determined to avoid bankruptcy, you should consult with a bankruptcy attorney about your situation if you’re being sued over your debts or your wages have been garnished to pay your debts. Once the courts are involved, you need a lawyer’s help.