New Year’s resolution No. 2: Pay off your debts

On the Money
From the January 5, 2007 print edition

New Year’s resolutions are a tradition dating back to the early Babylonians. The early Babylonians’ most popular resolution was to return borrowed farm equipment.

According to the U.S. General Services Administration, the top three New Year’s resolutions are to lose weight, pay off debt and save money.

[While there may be a relationship between numbers 1 and 3 as it applies to the weekly grocery bill,] let’s look more closely at number 2– paying off debt.

The first step toward taking control of any financial situation is to create an accurate picture of the fiscal landscape. Start by listing income from all sources. Then record fixed expenses, such as mortgage payments or rent, car payments and insurance premiums, followed by expenses that vary, such as entertainment, recreation and clothing.

The best course is to contact creditors directly and immediately if expenses exceed income. Explain the cause of the difficulties, and try to work out a modified payment plan that reduces monthly payments to a more manageable level. Don’t wait until the accounts have been turned over to a debt collector.

Consider credit counseling. If a workable budget is hard to create and follow, creditors are unwilling to accept repayment plans or bills continue to multiply, consider contacting a credit counseling organization. Many of them are nonprofit, and they’re dedicated to solving financial problems.

The best sources for credit counseling services are universities, military bases, credit unions, housing authorities and branches of the U.S. Cooperative Extension Service — not the Internet or a telemarketer.

Be wary of credit counseling organizations that:

• Charge high up-front or monthly fees for enrolling in credit counseling or a debt-management program (DMP).
• Pressure clients to make “voluntary contributions,” which is another name for fees.
• Require personal financial information, such as credit card account numbers, and balances, before sending out any information.
• Demand payments into a DMP before creditors have accepted the program.

In a DMP, clients deposit money each month with the credit counseling organization, which uses those deposits to pay unsecured debts, such as credit card bills, student loans and medical bills, according to a payment schedule the counselor develops with the debtor and creditors.

Creditors often agree to lower interest rates or waive certain fees. But the debtor should personally check with each creditor, ensuring that they offer the concessions that the credit counseling organization describes. A successful DMP requires regular, timely payments, and could take 48 months or more to complete.

There also are debt negotiation programs, which differ greatly from credit counseling and DMPs. They can be very risky and have a long-term negative impact on credit reports and, in turn, the ability to obtain credit in the future. Many states have laws regulating debt negotiation companies and the services they offer. Contact the state attorney general for more information.           In Colorado, visit www.ago.state.co.us/index.cfm.

Debt negotiation firms often pitch their services as an alternative to bankruptcy. They regularly claim that using their services will have little or no negative impact on the ability to acquire credit in the future, or that any negative information can be removed from credit reports when their debt negotiation program is completed.

The firms encourage debtors to stop making payments to creditors, and instead, send payments to the debt negotiation company. They promise to hold funds in a “special account” and pay creditors on behalf of debtors.

If this isn’t suspicious enough, remember that there are no guarantees a creditor will accept partial payment of a legitimate debt. In fact, if payments aren’t received on a credit card account, late fees and interest usually are added to the debt each month.

What’s more, most debt negotiation companies charge consumers substantial fees for their services, including one to establish the account with them, a monthly service fee and a percentage of the money it estimates supposedly was saved.

Watchfulness is important when considering debt negotiation. In 2004, the Federal Trade Commission charged an operation that billed itself as a debt negotiation company with pocketing the fees, thus plunging customers deeper into debt. The operation had promised to reduce consumers’ debt, negotiate with creditors and stop harassment from debt collectors in exchange for various fees.

Credit-report repair is another entity. It’s not the same as satisfying debts; it’s usually just an attempt to make it appear as though debts are less of a problem than they are. Be very vigilant when companies promise “credit-report cleanup.”

In December 2005, the Federal Trade Commission published a report titled “Credit Repair: Self Help May Be Best.” Find it at www.ftc.gov/bcp/conline/pubs/credit/repair.htm. It’s worth the read.

Hopefully this information will enable you to meet your resolution to pay off debt — and prove Oscar Wilde wrong when he said, “Good resolutions are simply checks that men draw on a bank where they have no account.”

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.