“Debt.” In today’s credit-crazy economy, this simple one-syllable word can take us on an emotional roller coaster that ranges from the highs of “easy money” to the lows of “hard times ahead.” So, let’s develop a constructive attitude toward personal finances, starting with these four critical questions:
Should I Co-Sign a Loan? Helping a friend or family member get back on their feet can be a worthy goal, but it also creates risk for your assets and credit rating. Take a reasonable set of precautions.
How can I develop responsible money habits? Unproductive spending routines can prevent you or a loved one from saving money, make you lose control of your budget and eventually leave you broke. What not to do.
How can I protect myself from predatory debt collectors? It’s not a crime to owe money. Don’t let unethical creditors, aggressive collection agencies and scam artists take advantage of your struggles with personal debt. Know your rights.
Can bankruptcy actually improve my financial life? If you can’t pay off your debts no matter how hard you try, throwing in the towel and starting from scratch might be your most profitable option. Explore how it works.
Should I co-sign a loan?
Is somebody who you know and care about having trouble getting a loan because of a low credit rating?
They might ask you — or you might offer — to “co-sign” the loan contract, which means that that you promise to re-pay it, should the actual borrower fail to do so. If your own credit is good, having your signature next to the borrower’s can make the difference between the lender accepting or rejecting the loan application.
This is a not uncommon method of helping struggling loved ones to obtain a college education, first car or starter home. One out of five parents who help their children buy a home do so by co-signing the loan, according to mortgage lender loanDepot LCC.
The good news is that most young adults who take out a loan with a co-signer — usually a parent — pay their bills on time, according to the credit rating agency Experian. Still, the same study reports that an estimated eight percent missed payments or went into default. This is when things can get sticky for the co-signer.
Risks of Co-Signing
It’s hard to back out. Once you guarantee a loan, the lender may be reluctant to let you off the hook if you change your mind later. For instance, ninety percent of co-signers on private student loans are unable to get the lender to release them from their obligations, according to the Consumer Financial Protection Bureau (CFPB).
The Borrower Can Take A Walk. Keep in mind that you’re taking a risk on a borrower that a professional lender isn’t willing to take themselves. If the borrower misses payments, loses a job, gets into an accident, or hops a night flight to another country, never to be seen again, the bill collector will show up at your door demanding their money.
It can harm your credit and finances. If neither party pays back the loan and it goes into default, that can end up as a negative item on your credit record. Depending upon the terms of the contract, the lender might also garnish your wages or confiscate your assets.
Even if the borrower pays on time, guaranteeing a large loan can make you a credit risk in the eyes of future lenders. Should you apply for another loan just for yourself, you might be rejected because you already “owe” too much money on the co-signed loan, according to the Federal Trade Commission.
Predatory loan contracts can victimize you. The CFPB study found that many private student loan contracts contain harmful clauses hidden in the fine print. In some cases, a lender can declare the loan in default just because the co-signer failed to keep a different, unrelated loan — such your car payments — in good standing.
Before signing anything:
- Determine whether or not you would be co-signing for a larger debt than you can repay all by yourself, should that become necessary. If yes, stop the process now and do not sign unless the loan amount can be reduced to a manageable level.
- Ask the lender for a “co-signer’s notice” that spells out your obligations regarding repayment of the debt.
- Read the loan contract thoroughly and obtain copies of all pertinent documents. It’s the signed contract, not the co-signer’s notice, that makes you liable for the debt.
- Negotiate with the lender to limit your obligations. For instance, they might agree that you won’t be liable for late fees or legal expenses.
- Get the lender to agree to contact you promptly if any trouble arises. Not all lenders will do this automatically. In the Experian study, seventeen percent of co-signers whose loans were in bad standing didn’t find out right away that a problem even existed.
- After negotiating any changes to amount and/or terms of the loan, re-read the revised notice and contract to ensure that all changes are properly reflected in them.
Also, consider alternatives to co-signing. For instance, you can take out the loan yourself, then make private arrangements with your loved one to pay you back later. This method won’t help them to improve their credit rating but, if you pay back the loan on time, it will protect yours.
Develop responsible money habits
If you’re qualified to co-sign a loan, then you probably already have your own spending under control. But the person for whom you are co-signing might not. In any case, even the best of us should stop for a periodic self-check, to make sure that the proverbial hole isn’t starting to burn through one’s pocket.
That’s because it’s just too easy to spend money these days. Conveniences like bank cards, online shopping carts, one-click purchases and auto-pay subscriptions encourage us to develop careless financial habits.
“It reminds me of the old joke, how can I be out of money when I still have more checks?” says Mitchell Weiss, an executive in residence at the University of Hartford and co-founder of the university’s Center for Personal Financial Responsibility.
Don’t spend impulsively
We live in a world of temptation, whether it’s food, drink or credit, according to Weiss. “But just because you can doesn’t mean that you should,” he says.
The typical American consumer makes approximately twelve impulse purchases totaling approximately $276 over the course of a month, according to a survey conducted by OnePoll and sponsored by the social commerce site Slickdeals.
If you find it difficult to avoid making impulse purchases, the University of Kentucky advises:
- Don’t visit stores or malls unless you absolutely need to make a purchase.
- If you need to make a purchase, don’t shop when hungry or depressed.
- Before you go shopping, make a list and stick with it.
- While shopping, stay away from product displays or areas within a store that are most likely to tempt you.
Don’t buy on credit
One of the most dangerous financial habits is running up credit card debt, then making interest payments over a long period of time, according to Barbara O’Neill, a professor and specialist in financial resource management at Rutgers Cooperative Extension.
“Research has shown that people spend more with a piece of plastic — debit or credit card — in their hand,” says O’Neill. “We don’t immediately feel the pain of spending money as we do when we take cash out of our wallets.”
or business might not always be there. Don’t base your budget on the assumption that you’ll always have the same level of income or personal health.
Weiss advises setting aside an “emergency stash” in case the conditions of your life suddenly change. “Budgets are only as good as the resolve of those who do the crafting,” he says. “If your budget is predicated on unchanging current-day circumstances, you could be courting disaster.”
Don’t pay yourself last
You’ll never build up a nest egg if the first thing you do with your money is spend it. Instead, practice Paying Yourself First, a financial planning concept reminiscent of the old sayings: “out of sight, out of mind” and “you don’t miss what you never had,” according to Pennsylvania State University.
The process is simple. Before shopping for clothes or paying the electric bill, set something aside for a rainy day, then forget about it. “I personally have no problem with someone buying a fancy five dollar cup of coffee every day, if they want to, but do it after you’ve put money into savings by paying yourself first,” says O’Neill.
Protect Yourself from Predatory Debt Collectors
OK, so you’ve done everything right — or not — but bad luck has a way of knocking the door just as we’re ready to go out to dinner. Struggling with personal debt is hard enough on hardworking individuals and families. The last thing that you need is an unethical debt collector preying upon you at a vulnerable time.
“Consumer debt collection is one of the most highly regulated industries, and the consumers have rights and protections under the law,” says Cindy Sebrell, Vice President of Public Affairs at ACA International, a trade group representing the debt collection industry.
Third Party Collection Agencies
Under the federal Fair Debt Collection Practices Act, collection agencies cannot engage in abusive, unfair or deceptive practice. For example, they:
- Can’t contact you at inconvenient times or places without your permission
- Can’t contact you at work if you tell them that you aren’t allowed to receive calls there
- Generally can’t talk anyone but your spouse or attorney about your debt, except to obtain your contact information
- Must talk to your attorney, not you, if you’re represented by one
Within five days after contacting you for the first time, they must mail you a “validation information” that shows how much you owe, who you owe it to and what to do if you don’t believe that you owe that debt.
If you want them to stop contacting you, mail them a certified letter with a return receipt requested. After that, they can contact you just one more time, to confirm that they won’t contact you again and to tell you if they plan a specific action, such as filing a lawsuit.
They’re also prohibited from:
- Lying, such as falsely claiming to be a government agent or lying about how much you owe
- Using obscene or profane language, repeatedly calling just to annoy you, or publishing your name (except to credit reporting agencies)
- Threatening you with violence or to have you arrested
- Threatening legal action or asset seizure, unless they can legally take those actions and intend to do so
If you want to file a complaint, the CFPB has an online form that allows you to provide them with details and attach copies of supporting documents. You can also call them at (855) 411-2372 or TTY/TDD (855) 729-2372.
You have the right to sue the debt collector in court, so long that it’s within a year of the date that the collector violated the law.
The Fair Debt Collection Practices Act only covers third-party collection agencies. It doesn’t apply to companies that are collecting debts from their own customers, or to business debts.
However, “a number of states have similar laws that apply to the original creditor,” says Ira Rheingold, executive director of the National Association of Consumer Advocates, an organization of attorneys and consumer advocates. “If an original creditor harasses a debtor, there might be laws in your state that protect you.”
“Our industry wants to get bad actors and scam artist away from the consumers and the industry,” says Sebrell. “If you believe your rights have been violated by an unethical debt collector, contact your state Attorney General’s office for assistance.”
To locate your state’s attorney general the National Association of State Attorneys General has a list of names and contact information.
Verify that you actually owe a debt before paying it. Even legitimate collectors might be working from incorrect information. “Oftentimes the record keeping by the original creditor or the purchaser of the debt is so bad that the debt collector often has no information about you, except for an electronic line of data that could be wrong,” says Rheingold.
Beware of the “phantom debt” scam. Here, a criminal who is not a real debt collector will either invent a phony debt and try to convince you that you owe them money, or try to convince you that you should pay your legitimate debts to them, instead of to the real creditor.
“Never provide your Social Security number, financial account number, or other sensitive personal information until you can verify the other party,” says Sebrell. “You should monitor financial accounts and immediately report any suspicious or unauthorized purchases to your bank or creditors.”
If you are feeling overwhelmed by debt, says Rheingold, “you shouldn’t feel alone. Debt is a gigantic issue in this country. There are a lot of people with a lot of debt and there are solutions, there are ways of getting out of debt.”
How bankruptcy can save your financial life
In some ways, we live in an unforgiving society. An unexpected medical crisis, a legal dispute with a deep-pocket adversary or a new economic recession can spell ruin for the most responsible family. So there is no shame in considering this last-resort method of getting out from under crushing debt and starting life anew.
When someone files for bankruptcy, they are asking a federal judge to cancel some or all of the debts that they are unable to pay. If the judge approves, then most or all it will either disappear or be reorganized for easier repayment.
Filing will reduce the pressure
Your peace of mind is just as important as your balance sheet. You’re afraid of the phone ringing and getting the daily mail makes you nervous. Your financial problems are putting stress on your family relationships.
Fortunately, once you file, most creditors must stop trying to collect debts from you while the case proceeds. They cannot sue you, garnish your wages or even call you on the phone to demand payment.
Although you may have to surrender some your possessions to pay off your debts, bankruptcy isn’t designed to strip you of everything that you own. Instead, it’s supposed to give you a “fresh start” with your finances. You should be able to keep some of your possessions, depending upon your specific case and the state where you live.
You also won’t have go to jail just because you can’t pay your debts. Creditors might take your property or income, but never your freedom. However, if you have committed a separate crime related to your debt, you can still be arrested and prosecuted for that crime.
…and help you to manage your money
One indirect advantage of filing for bankruptcy is that it forces you to consult with trained professionals about how to better manage your finances. The court will require that you undergo two sessions provided by government-approved vendors, according to the FTC:
- No earlier than 180 days before filing for bankruptcy, attend a credit counseling session with an expert who will discuss alternatives to bankruptcy and help you to develop a personal budget plan.
- After filing but before the court approves your petition, complete a debtor education course, which normally takes about two hours and teaches you how to better manage your money, credit and budgets.
You can complete both either in person, over the phone or online. You will pay approximately $50 for the credit counseling and perhaps twice as much for the debt education. If you can’t afford it, ask the vendors for fee waivers.
…but not give you a free pass
Bankruptcy can give you a fresh start, but only if you start with a fresh attitude toward money management. If you incur new debts after going bankrupt, it won’t protect you from them. Plus, you can’t file for bankruptcy again until a mandatory waiting period expires, which can last up to eight years.
Like any drastic measure, bankruptcy will cost you, on more than one level:
- There are court filing fees, plus you may want to hire an attorney
- The bankruptcy goes onto your credit record for up to ten years
- Not all debts can be discharged via bankruptcy. You will still owe child support, alimony, fines, taxes, and some student loans.
Choosing bankruptcy should not be thought of as a short-term solution. It should be part of a broader plan to create financial stability for years to come.