Chapter 9

Financial CPR: When things get really bad

 

 

 

By now, your plan for a lifetime of riches should be well on track.  You’ve worked hard to bring your money into balance.  You’ve created a plan to make your money last a lifetime.  You are building a Security Fund and moving towards a future that will be richer and more secure.

But sometimes things don’t go according to plan.  Sometimes, even when you are doing your best to put everything together, the pieces just don’t work.  You get laid off, and it takes months to find another job.  You get divorced, and your ex- leaves you with a cranky cat and a pile of bills.  Your business partner takes off to get in touch with his inner wildebeest or a refrigerator falls on your foot.  In short, there are times when bad things happen to good people.  And sometimes the bad things keep on happening, and it seems like you just can’t catch a break.

This is why it pays to know some financial CPR.  Just like real CPR, we hope you’ll never have to use your financial CPR training.  But we want you to have the knowledge, just in case.  We want you to know, somewhere in the back of your mind, that if things ever go really, really wrong, you are ready to handle whatever life throws your way.

 

 

Your Emergency Back-up plan

 

Any CPR instructor worth her salt will tell you that the most important step in saving someone is to prepare for an emergency before someone.  Know how to recognize the danger signs, learn the steps, and run through some practice drills.  There may not be time to get out the instruction manual when a person is turning blue, so it is a good idea to give it some thought now, when everyone is breathing just fine.  This same lesson holds true for financial protection. 

Financial CPR is about creating a strategy for what you will do if things go wrong.  It boils down to one question: What will you do in a financial emergency? 

Here are four steps to create  your own emergency back-up plan:

 

 

1.      Spot the vulnerabilities. 

 

It’s time to think about those places where you may be vulnerable.  If you are like most of us, you know those vulnerabilities are there--but you would rather think about something else.  Maybe you worry about your health, or maybe you worry about your job.  Now is the time to look those worries square in the face, and think about the actions you can take to make things better (and to worry a little less!). 

So, for example, suppose you worry that your job could disappear.  That may just be a fact of life, but there are things you can do now to prepare yourself.  Do a little online job hunting, and dust off your resume and send it out to a few places, just in case.  Or perhaps you are concerned about your parents’ health.  Now is a good time to talk with them about their wishes, and maybe help them get long-term care insurance.  Spot the vulnerabilities and think about them now when you have plenty of time to take steps to protect yourself.

If you see some real dangers lurking in your future, there is something else you can do now:  Don’t make it worse.  Maybe you can’t find a better job right now, but you also know that this isn’t a good time to take on a brand new car loan.  If your folks are getting along in age, this might not be the time for you to move.  We hope things will stay perfect, but life isn’t always so smooth.  So find the time to review the possibilities, so you can protect yourself—just in case. 

Jot your ideas down on a sheet of paper.  Include the possible vulnerabilities and your ideas for what you might do.  Writing it down will make it real. 

 

 

2.      Make a list of Wants you could cut.

 

Start with your Wants, which is always the easiest place to trim.  Ask yourself: If something went wrong, which Wants would I cut first?  The point here is not to get rid of the Wants spending right this minute.  Just the opposite; as long as you’re working and everyone is healthy, you should keep enjoying your Wants to the fullest.   Just be prepared, so that if the need ever arises, you’ll be ready to move fast. 

This is where all the hard work you put in to getting your money in balance pays off.  You’ve broken the credit card habit, and you’ve gotten really, really clear on what you need and what you can live without.  So, take a moment to think it through. What would you cut first?  What would you cut second?   For example, you might decide that at the first sign of trouble, you would start cooking every night and skip the trips to Taco Bell.  Or maybe you would cancel your cell phone, or get rid of cable TV. (Who needs 154 channels, anyway?)  Ultimately, if things ever got really tough, you would probably cut all of your Wants.  But for now, think of the cuts that hurt the least, so you’re ready to trim if the need ever arises. 

This is also a good time to make sure that you can make these cuts.  If you think you could live without your cell-phone, then make sure that you aren’t trapped into a two-year contract.  Likewise, find out if there is a penalty for canceling your satellite dish.  With a little preparation now, you’ll be able to respond lightning-quick if the need ever arises.    

 

 


3.      Make a list of Must-Haves you could cut.

 

The next step is to look for places where you could trim your Must-Haves IF you ever need to.  You are probably thinking, “Are these people crazy, there’s nowhere left to cut!”  But hold your horses; we’re not asking you to make more cuts.  We’re just asking you to think about the cuts you could make if you absolutely had to. 

It’s time for some creativity.  If things got tough and you couldn’t manage your Must-Haves, what steps might you take?  Could you move in with your parents—maybe just until you get back on your feet?  Could you sell the car and take the bus for a while?  Could you pull the kids out of preschool or after-school activities?  Could you rent out the house and move into an apartment?   We ask these questions for a very specific reason:  Sometimes decisions you make now can preserve options for the future.

Jessie Nowland is living proof.  Four years after buying her own little bungalow, she decided to remodel.  Her builder tried to talk her into getting rid of the second bedroom so she could make a single, larger master bedroom suite with double walk-in closets and a spa bath.  He sketched out pictures and urged her to “go for it.”  But Jessie hesitated, deciding to keep the two smaller bedrooms and add a second small bathroom instead.  Seven months after the renovations were complete (and long before they were paid off), Jessie took a hard fall at work.  Even with worker’s compensation, she was out of money in about five months,  and she was looking at least five more months of rehab before she could return to her job as a cardiac nurse.  So Jessie invited her mom to move in.  “It was a godsend.  Mom drove me around, did the shopping.  And she helped out with the mortgage, the utilities, that kind of thing.  If I had remodeled my house to fit only one person, this never would have worked.”  Think now about preserving your options if things go wrong.  You may end up keeping some flexibility that could be important later on.

Make a list of possible cuts you could make if you ever need to.  We’ve started the list with a few common answers; check those that apply to you.


 

Emergency Targets:  If an emergency struck, where could you cut your spending?

 

 

Wants

q  Restaurant meals

q  Cable TV

q  New clothes

q  Cell phone

q  ________________________________________

q  ________________________________________

q  ________________________________________

q  ________________________________________

Must-Haves

q  _______________________________________________

q  _______________________________________________

q  _______________________________________________

q  _______________________________________________

 

 

4.      Practice every year and before any major purchase

 

It is good to practice a CPR drill every year or so.  Do the same with your money.  Once a year, set aside an hour or so to think about what you would do if your finances took a tumble.  Pick a special day—the day before your birthday or January 1. (We had a friend who said she always did this on Halloween—the scariest day of the year!)

And then do a little planning.  Update your list of places where you might be vulnerable, and make sure you’ve done your best to address them.  You should also update your list of Emergency Targets, so you’re ready to cut your spending if you ever need to. 

Once your CPR drill is over, file away the papers and put the worries out of your mind, secure in the knowledge that you have planned ahead and done your best.  Then give yourself a treat.  You deserve it. 

And remember, this isn’t about walking around with a black cloud over your head.  This is about taking sensible, positive action when you have time to plan it out.  Think of yourself as an optimist with a parachute. 

 

 

What to do when bad things happen 

 

No time for the drill; this is a real emergency.  You’ve run through your Security Fund and money is getting tight.  What should you do?  We can’t promise that things won’t get tough, but we can give you some tools to help you stay calm, and to keep you in charge of your own future. 

 

 

1) Stay in control.  

 

Don’t panic.  This is important.  We once saw a man slump to the floor in an airport, his face rapidly turning purple and his eyes fluttering closed.  The woman closest to him shrieked loudly, “Help this man!” then bolted for the women’s room.  A few minutes later she came back looking wild-eyed and carrying a single paper towel.  Fortunately, other folks in the airport hadn’t panicked, and CPR was well underway by the time she came back. 

Panic can happen any time.  A pink slip may leave you pacing the floor all night.  A collection notice may leave you speechless.   That is when you need to repeat to yourself,  “No matter how bad things get, I always have options.”  But to weigh your options carefully, you will need a clear head.  Keep your wits about you, and don’t panic.

 

 

No matter what happens, you always have options.

 

 

First, you need to understand that when you are in financial trouble you are still in control.  Yes, creditors have rights.  But you have rights too.  More importantly, you are the one who earns the money.  And you have control over the bank account, the house and everything else in your name.  This means that you are the one who decides which creditors get paid, and you are the one who decides whether to sell something, to give it back, to work out a payment plan, or to file for bankruptcy.  These are your decisions, and you are still in the driver’s seat. 

So keep calm.  You may be forced to make some tough choices, but these are still your choices.  If you keep your head, you’ll get through this. 

 

 

2) React Quickly

 

The corollary to “Don’t panic” is “Move fast.”  When something goes wrong, you need to create a plan, and you need to do it quickly. (Which is why you practiced the Financial CPR drill at the front of this chapter).  Just like when someone starts choking, the time it takes to respond can make a huge difference. 

It may seem obvious that you need a quick response, but in fact, many people delay.  The greatest danger when you get into financial trouble is not bill collectors—although they can be the most annoying.  The greatest danger is misplaced optimism.  We’ve heard it over and over again: “I’m sure I can find another job right away.”  “Surely Tim will be feeling better soon.”  “My wife and I will patch things up after a little time apart."  Many job counselors tell people who have lost their jobs to keep up their lives just as before—hit the credit cards and keep everything “normal.”  Well, things aren’t normal.  The speed with which you react may make the difference between survival and collapse.

 

 

When you get in financial trouble, respond quickly.  

 

 

If a crisis comes your way, the first thing will be to stop as much spending as you can.  Go back to your CPR drill, and look at the list of cuts you decided you could make if you had to.  Now is the time to start cutting—fast.  When rumors of pink slips start flying around the office, that’s the time to eat dinner at home and cancel the cell phone. 

What’s the point of cutting your spending?  If you’ve lost your job, the answer is pretty obvious: Make sure you have enough to pay your Must-Haves.  But if the bad news is still just a rumor, that’s the time to fatten up your Security Fund a little more.  It’s also a good time to stop investing in your retirement fund or putting extra payments into the mortgage; you can resume just as soon as the crisis passes.  You already know this instinctively; after all, you wouldn’t open an IRA or go on a shopping spree the day after you lost your job.  But if you take the time to think about this now, you’ll be ready to react more quickly if the need ever arrives.

Give yourself a timeline.  Since you don’t really know when the crisis will end, you should create a schedule for yourself.  So, for example, you might decide that if you haven’t found a job within three months, it will be time to move to a smaller apartment and take a job waiting tables on the weekends while you continue to job search during the week.  The point here is to be proactive, so that you stay in charge of your life. 

 

 

3) Call your creditors.

 

If you are in trouble and you know you’ll miss a payment, get on the phone.  Sure, it may be embarrassing, but your creditors will be much more willing to work something out if you call them before they have to call you.  Explain what has happened—you’ve lost your job or a refrigerator fell on your foot—and tell them you want to make good.  Some creditors, such as student loan issuers and utility companies, have special provisions to accommodate people who are facing a serious illness or a job loss, so be sure to ask.  You are much less likely to get hammered with late fees and collection notices if you make the first call.  And if you think you may not be able to pay your rent or mortgage, be doubly sure to get in touch with the landlord or mortgage company; the last thing you need is the added worry that you may get kicked out of your home.

Ask your creditors if they will work out a repayment plan for you—perhaps just a token payment for a few months until you get back on your feet.  (Be sure to keep a record of whatever you agree on; you may need this later on.)  But remember this hard-and-fast rule:  Don’t agree to anything unless you are absolutely certain that you can meet your end of the bargain.  If you are out of work and you don’t yet have a regular job, just tell them what is wrong and that you’ll try to work out a plan as soon as you can.  Don’t commit to anything yet.  Be completely honest, and never make promises you can’t keep.

 

 

4) Pay the bills that matter most.

 

If things get really tight and you don’t have enough to cover all your expenses, then pay the most important bills first.  For most people, the home comes first, and then maybe the car or the health insurance policy.  Figure out your priorities.  Sure, you want to pay everything, but this is a little like deciding what to save in a fire.  Save the most important things first, then save what you can.  Don’t try to save everything at once, because it just may be too much to handle. 

 

 

When trouble strikes, decide which things you treasure most, and pay those bills first.

 

 

After her divorce, Antoinette Ameren was determined to keep everything the same for her two daughters—the house, the SUV, the ballet lessons.  She felt like her girls were bruised enough when their daddy left, and they shouldn’t have to pay any more.  Before long, she found herself choosing which bills to pay and which to put off another month. 

It was a call from a collection agent that finally shook Antoinette out of her fog.  The bill collector was really aggressive, calling her “a cheat” and “a stupid cow.”  She slammed down the phone, her hand trembling and her heart racing.  “I thought, is this where I’m headed?  People think they can treat me like this?”  And that was the moment she decided it was time for a change.  She put all her expenses on paper, and realized there just wasn’t enough to keep going the same way.  Her first priority was to own a home, so she sold the big house she had shared with her husband and bought a smaller place—then she let the rest go.  She sold the Ford Explorer and switched the girls to a tumbling class at the local YMCA.  Antoinette told us:

 

It took me seven months to find a decent full-time job.  And then my knee went out, and I had to get surgery, and that cost a lot.  But we’ve done all right.  I look at our little house—the girls and I have painted and stenciled every room, we even painted frogs in the utility room!… I think about how I could have waited [to move] and ended up in some cheap apartment in [a bad section of town].  I saved what I could, and I’m proud the girls and I are making it okay.

 

If you have one or two particularly noisy creditors, it may be tempting to send them some money just to get them to leave you alone.  This is a mistake.  You need to work out the payment plan that makes sense for you. 

It doesn’t matter who makes what demands or what the bill collectors threaten.  If serious trouble comes your way, you should be fighting for the things you care about, not trying to quiet down the most aggressive bill collector.

 

5) Borrow money if you absolutely have to--but do it as safely as possible

You have cut out the fun spending, you have drained your Security Fund, and there still isn’t enough.  What then? 

If you don’t have enough money to keep bread on the table, to get medical care and keep the lights on, then go ahead and borrow the money.  Go into debt—but do it carefully.  This is desperation borrowing, the kind you do when nothing else will let you live in safety and dignity. 

The first rule of desperation borrowing is to make absolutely certain that you are desperate.  Are there any ways for you to earn a little extra cash?  Is there still a little something in the piggy bank?  If you haven’t exhausted every possible reserve, if you aren’t spending money for something that is truly necessary, then don’t do it.  This borrowing will cost you big-time in the future, so break the glass and pull the alarm only when you are sure that there is no other option. 

The second rule is:  Safety is more important than interest rates.  A home equity loan or a car title loan may seem attractive, since the interest rate is lower and the advertisements are coming thick and fast.  But the last thing you should do when you get in trouble is put your treasures on the line.  After all, it will be tough enough to keep up with your mortgage and your car loan, so you shouldn’t make the payments even bigger when you are staring trouble right in the teeth! 

 

Safety is more important than interest rates.  If you need to take on debt, use a credit card instead of a home equity loan. 

 

What should you do?  Start by stringing out your payments.  Request a deferment on your student loans, and hold off on paying the cell phone, the dentist, the doctor, and other outstanding bills for anything besides your utilities, home, and car payment.  You may get some dings on your credit report and your cell phone may get shut off, but these creditors probably won’t charge you exorbitant interest (especially if you call ahead of time) and they won’t kick you out on the street. 

Next, take the lowest-interest credit card you can find, and charge the necessities.  Yes, credit cards are dangerous, and yes, we told you to cut up your cards.  But we also said that the cards are for emergencies, and this is an emergency.  Put the groceries on the MasterCard, and make the minimum payments as best you can.  The bad news is that you may pay more for this kind of debt than you would for a home equity loan (although not always, if you shop carefully).  But the good news is that you won’t risk losing the place where you live.  If push comes to shove, you can discharge your credit card, medical debt, and so forth by filing for bankruptcy. 

What about that money sitting in your retirement account?  Should you cash it out?  No!  The law puts special protection on your retirement accounts so your creditors can’t get to that money.  Those protections are strong for a very good reason—you will need that money later on, maybe more than you need it today.  Moreover, cashing out your retirement account is the most expensive kind of borrowing, since you get hit with extra tax penalties.  So don’t cash out your retirement account, and don’t borrow against it, either.  Hold onto this money for your future. 

          And beware of the debt peddlers.  When you get in financial trouble, the offers come flying for all sorts of new debt you can take on.  It may sound crazy, but bill collectors routinely call to offer more debt in the same breath they demand payment on your old bills.  They try to convince you that taking out a consolidation loan will somehow solve your problems.  Hospitals and other medical providers increasingly collect their fees by trying to steer you to high-interest loans so be especially leery of their offers.  When you owe someone money and they are offering to put you in touch with a finance company or to give you more money, run the other way—fast!  

Collection agents can be really persistent about pushing these offers.  We knew a man in Tennessee who got behind on his mortgage after he had a heart attack.  When the mortgage company called, he figured they would give him a hard time about the missed payments, telling him he had to pay up or else.  But they didn’t even ask him for a single dollar.  In fact, they just wanted him to take on a second mortgage.  Wisely, the man refused to put his home under even greater risk.  But the mortgage company wouldn’t take no for an answer.  They called day after day, rousing the man from his sick bed.  When he finally told them not to call back any more, the company started pestering his wife, calling her at the office to tell her that she should “make him sign”, since she “deserves a break.”  Be prepared to say no, and to keep saying it.  And don’t be surprised if a bill collector tries to put a wedge between you and your spouse.  When it comes to collecting money, nothing is sacred.  Just hang up the phone, and make a pact with your spouse to do the same.

 

 

6)  Negotiate like crazy. 

 

Earlier we suggested that you call your landlord or your credit card company if you were going to miss a payment.  Now it is time to think about what happens when if you fall way behind on all your bills, and there doesn’t seem to be any quick way out of the hole.

If you are behind on your bills and your credit score is lower than room temperature, then there is no point in trying to hide it.  Your creditors already know.  Which means they also know also know that you may be thinking about filing for bankruptcy—a situation where they might not get a dime.  There is a good chance that if you are in that much trouble with your bills, at least some of your creditors will be willing to negotiate. 

          Try calling your creditors to see if they are willing to deal.  The key is to be firm: Tell your creditor you simply do not have the money to pay in full.  Come clean with your creditors, telling them what went wrong and how you’ve turned the corner.  Tell them you hope to avoid bankruptcy, but only if they’re willing to work with you.  If the creditor agrees to deal, make very certain that if you pay, they will erase the debt completely.  Get it in writing.  Some creditors may offer to put you on a monthly payment plan with no intention of ever wiping out the debt.  If you get that kind of offer, just walk away.  Remember, you don’t want to spread out your payments; you want to get rid of your debt completely.

If you are on the verge of bankruptcy, you may be able to negotiate yourself back off the cliff by getting all (or most) of your creditors to take less.  But be realistic: Don’t agree to a payment plan that you can’t afford, and don’t expect miracles.  Some creditors are not reasonable, and some are not even polite.  So if you run into a brick wall, don’t keep banging your head against it.  Pick up the phone and call a bankruptcy attorney, comforted by the knowledge that you’ve done your best. 

 

 

7) If push comes to shove, call a bankruptcy attorney. 

 

          We know it hurts to think about it, but at some point bankruptcy may be the right choice.  More than a million and a half families file for bankruptcy every year, and nearly every one of them would tell you that going bankrupt was one of the lowest points in their lives.  Even so, bankruptcy can be the best step to get you back on the right track.  We’ll talk about the ins and outs of bankruptcy toward the end of this chapter.  

 

 

The Human Side to Money Troubles

 

When you get in financial trouble, your wallet isn’t the only thing that suffers.  Look out for yourself, and look out for your loved ones.

 

 

Be kind to the people you love.   

 

Financial trouble is one of the most stressful things in life, right up there with divorce and the death of a loved one.  So no matter how frightened or exhausted or frustrated you get, you need to follow a basic rule:  Be kind to the people you love.

That starts with being honest.  Be honest with your mate, and be honest with your kids.  Kids are a lot smarter than we give them credit for, and they know when Mom and Dad are worried.  But they have active imaginations, which means they can dream up something a lot worse than whatever is really going wrong.  When Lupe and Jack Randall finally sat down with their nine-year-old son to explain that they needed to cut expenses because Lupe had lost her job, the boy asked solemnly, “Will I be living with Dad or with Mom?”  Lupe and Jack were stunned by the question; divorce wasn’t anywhere on the radar screen.  But the boy knew something was wrong, and in his world, the worst that he could think of was divorce.  When they reassured him that they were all in this together, he cried so hard that Lupe and Jack could barely hold it together. So come clean with your kids.  They deserve it.

And be kind to your mate.  Consider this: If your family is like most, your marriage is more vulnerable when you get in financial trouble than at any other time in your life.  Financial calamity is one of the most frustrating, humiliating, and exhausting experiences a couple can go through.  Husbands may feel shamed by their inability to provide, and wives may feel overburdened by the demands of bill collectors, bosses, and children. And if your boss makes you furious or a bill collector calls you ugly names, you may not be able to spit back.  Your mate is always nearby, however, and it can be tempting to lash out in that direction instead.  Be kind. You are both under enormous strain right now, and taking it out on each other will only make things worse.

Your spouse can be your greatest source of comfort.  And you should be the same for your spouse.  So make an effort.  Do some nice things together.  Take a walk.  Sneak away for a Big Mac and a Coke.  Turn the lights down low and dance to your favorite CD.  Promise yourself, that at least once a day, you will have a conversation that isn’t about money.  Talk about the weather or something funny the dog did.  Anything but money.  Remember that financial difficulty should not consume your life or your relationship.

And don’t develop 20/20 hindsight.  When you get in financial trouble, it is tempting to beat up on yourself (and your mate) about the smarter choices you might have made.  Maybe you shouldn’t have bought a new car, maybe your mate should have applied to more jobs, maybe you should never have tried sky-diving.  That 20/20 hindsight can keep you up all night, endlessly reliving past mistakes.  In the end, second-guessing leaves you with nothing but bleary eyes and a sore heart.  So get over the past mistakes, and focus on making smart decisions now.  Go easy on yourself and the people you love.

 

 

Never trust a bill collector. 

 

If your financial problems get really bad, you may find yourself at the center of a lot of attention—phone calls, letters, even visits to your home—all from the people you least want to hear from, your bill collectors. 

Bill collectors have a lot of different approaches.  Some are friendly and sympathetic, some are cold and clinical, and some are downright scary.  No matter what tactic they use, they have only one goal.  They want to get paid.  Period.  You can make deals with them if you have to, but don’t forget that they are not on your side. So don’t ever, ever take their advice. 

 

 

Bill collectors have only one goal: To get your money.

Don’t ever take their advice.

         

 

If you have never been late on your bills, you may be shocked by just how nasty bill collectors can be.  We’ve heard some stories that would straighten your hair and curl your toes.  Bill collectors may call late at night, on weekends, and even on Christmas morning.  They may call you at work, and they may try to embarrass you by pestering your co-workers or your extended family.  Bill collectors will threaten to garnish wages, freeze checking accounts, show up with the sheriff at your house, or even have you arrested.  We were told of one debt collector who actually threatened to repossess a woman’s mattress and set it on fire in the middle of the street!  If you get these kinds of threats, ask for a written letter outlining what action the creditor plans to take.  If the bill collector won’t write the threat down, then he is probably just blowing smoke—and he knows that if he puts it in writing his company could get sued.  So get it in writing.   

Many of the practices bill collectors routinely use to intimidate people are outlawed by the Fair Debt Collection Practices Act, and you have a right to defend yourself.  For example, the law says that debt collectors are not allowed to call before 8 am or after 9 pm, and they’re not allowed to contact you at work if you tell them your employer disapproves.  Most creditors count on the fact that people don’t know their rights, and many people who owe money are too ashamed to ask for help.  You can do better.  Read up on your rights at www.ftc.gov, or call the hotline at 877-FTC-HELP.  Don’t become another victim. 

          If you have children, you need to be doubly careful about bill collectors.  This may sound shocking, but it’s true:  There are bill collectors who routinely hassle little kids.  Many companies make a practice of starting their collection calls in the mid-afternoon, when Mom and Dad are still at work and the kids are home alone.  We have talked with people whose children—some as young as nine or ten years old—were told that Mommy would go to jail if she doesn’t pay the bill collector.  “Just tell her to pay up, and we won’t call the police.”  Never mind that the threats were untrue; the bill collector figured that if he scared the kids enough, Mom would borrow the money from someone else and make a payment just to make the calls stop.  So protect your kids, and never, ever let them answer the phone when they might be talking to a bill collector.

 


Stay Away from Credit Counselors

 

          Remember what we said back in Step Five:  Credit counselors sound oh-so-friendly, but most are just slick operators who just want to wring every last penny out of you—then toss you on the credit trash pile when they finally decide that they can’t get any more.

          Until the industry is regulated, just stay away.  Even some of the non-profit counselors have been exposed as shams.  Right now, you can’t tell the dolphins from the sharks, so stay out of the water. 

 

 

NOTE:  This chapter was written before the 2005 Amendments to the Bankruptcy Code were adopted.  Those amendments will require you to go to a credit counselor before you can file bankruptcy.  But don’t go find a credit counselor on your own.  If you need bankruptcy, see an attorney and let the attorney direct you to a credit counselor.  The sharks are still out there.

 

 

 

Don’t hide in shame.         

 

If financial troubles come your way, you may find yourself feeling isolated, overcome with feelings of embarrassment and shame.  In a society where people speak publicly about everything from their struggles with alcoholism to their efforts to get pregnant, financial trouble remains the last great taboo.  Ordinary, hard-working people just don’t talk about overdue bills and repo men.  This can leave you feeling like you are all alone, like you are the only one in the world facing hard times. 

We’re here to tell you that if you find yourself in financial trouble, you are not alone.  In fact, one in seven families is in serious financial trouble.  That’s right, one in seven.  A person is now more likely to file for bankruptcy than to file for divorce!  You may not know it, but scattered among the folks in your grocery store, your office, your church or synagogue, and even your own family, are men and women just like you—people who have done their best and who are now in financial trouble.  If you find yourself at the end of your financial rope, you are not the only one.  Plenty of other hard-working, decent people have found themselves in exactly the same spot.

So don’t hide in shame.  Find someone you can trust—a family member, your best friend, your minister—and talk about it.  Financial trouble can be a giant weight on your shoulders.  Don’t try to carry it alone.

 

 


The Bankruptcy Option

 

When we told Emily and Travis that they needed to file for bankruptcy, there was dead silence in the room.  Travis looked as if someone had just slapped him, and for an instant it looked like he might try to hit back.  Emily looked a little lost, and it was several minutes before she seemed to notice that she needed to blot her eyes.  We had gone over the numbers in painful detail, and we all knew that Emily and Travis couldn’t even cover the interest on their debts—much less begin to pay down the loans.  The conclusion was obvious.  But it still stung to hear it.

Travis eventually stopped clenching and unclenching his fists, and Emily finally reached for a tissue.  After a few hours of talking, they were still a little shaky.  Emily said:

I was raised right, to go to church and pay my bills.  But good Lord, it’s like I’m choking to death every single day.  I can’t even drive to work without worrying, how am I gonna pay for the gas for my car?  Maybe [bankruptcy] will give us a little air.  Maybe we can do it. 

 

 

That is what bankruptcy is all about—hope for the future.  Bankruptcy may sound like the end of the line, and it certainly can be a gut-wrenching experience, one we hope you never have to face.  But if you do, you won’t be alone.  Every fifteen seconds, someone makes the decision to walk into a bankruptcy court.  In fact, more people file for bankruptcy each year than graduate from college.  If you think you don’t know anyone who has gone bankrupt, guess again; bankruptcy is now more common than cancer.

If your financial situation gets really bad, filing for bankruptcy may be your best option.  One of us (Elizabeth) has taught thousands of students the laws of bankruptcy, and co-authored one of the nation’s leading textbooks on bankruptcy;  I have also testified before Congress and the President about the intricacies of the Bankruptcy Code.  After more than twenty years of teaching and writing about bankruptcy, I can tell you this: By and large, knowledge about bankruptcy is limited to a small number of highly sophisticated lawyers and bankers.  Meanwhile, the people who most need to understand bankruptcy—ordinary people who are in deep financial trouble—are left to grope in the dark.  If I had a dollar for every person who makes a giant, costly mistake about filing (or not filing) for bankruptcy, I would be a very rich woman.  And so I want to share what I know about bankruptcy, so that if you ever find yourself at the end of your financial rope, you can make the smartest possible decisions. 

 

 

What bankruptcy can (and can’t) do for you

 

Bankruptcy is essentially a one-time get-out-of-jail-free card that lets you erase many of your debts.  The bankruptcy code is designed to achieve two goals.  First, when you have reached the end of your financial rope and there is no hope of repaying all your debts in a timely way, the bankruptcy process is designed to treat your creditors fairly (or at least as fairly as possible).  Bankruptcy prevents a particularly aggressive bill collector from pushing aside the other people you owe money to.  The judge makes sure that when you don’t have enough money to pay all your debts in full, then the back-payments to your landlord or your dentist get the same treatment as your old bills from Citibank and Ford Motor Credit. 

Second, bankruptcy is designed to give you a fresh start.  The founding fathers inserted a bankruptcy provision into the Constitution (before they added the Bill of Rights!) because they wanted Americans to have an alternative to debtors’ prisons and a lifetime of debt.  Bankruptcy is based on the principle of second chances.  Filing for bankruptcy wipes out many of your debts, giving you a second chance at getting back on your feet financially. 

When you file for bankruptcy, the courts take legal control over all your assets—the bank accounts, the house, the car—everything right down to the jar of pennies and the old bike with a flat tire.  You can get bankruptcy relief no more than once every seven years (a period drawn from a passage in the Bible), so think hard before filing. 

There are two kinds of bankruptcy: Chapter 7 and Chapter 13. 

 

 

Chapter 7

 

If you are like about 70% of all people who are in trouble, you would file under Chapter 7 or “straight” bankruptcy.  Chapter 7 is essentially a “clear the slate” bankruptcy:  You may lose almost everything of value that you own, but then most of your debts will be erased completely.  Under Chapter 7, you might have to sell your jewelry or your newer appliances, like a big-screen TV.  You will have to empty your bank accounts and sell any stocks or bonds you might own.  But you can usually keep your clothes, your furniture and your household goods; you also get to keep your retirement fund.  You can also keep your car, assuming it isn’t too valuable (and assuming you keep up with your car payments).  Your house is trickier; we’ll explain that later. 

Of course, by the time you hit the bankruptcy courts, you may not have any assets worth selling.  That’s usually the case; most bankrupt people don’t have any cash, stocks, bonds or much of anything else.  If you do have something worth selling, the judge will appoint a trustee to oversee the sale of your stuff.  The trustee will then liquidate your bank accounts and distribute any cash to your creditors.  Then, whatever is left of your consumer debts—your credit cards, medical bills, payday loans, old phone bills, and so forth—will be wiped out.      

If you rent an apartment, you will be excused from paying the old, past-due rent payments, and the landlord won’t be allowed to evict you.  (Of course, you will have to keep up with your rent after the bankruptcy.)  The same is true for utilities—you don’t have to pay the past-due amounts, but after the bankruptcy you must stay current on your bills or they can shut off your services.  You also have to keep up with your car payments or the bank will be allowed to repossess it. 

If you own a home, in most cases you can keep it if you keep up with all your mortgage payments.  The rules about home equity (the value of your home that exceeds the mortgage) vary from state to state.  A few states, such as Florida and Texas, permit you to keep your home, no matter how much equity you have built up.  (That’s why OJ Simpson said he was leaving California and moving to Florida when his in-laws threatened to sue him; in Florida he could buy a mansion and then file for bankruptcy, and no one could take it away from him!)  Other states, such as Delaware and Maryland, force you to sell your home if you have any equity at all. 

Some debts are never forgiven, no matter what.  Taxes, student loans, alimony, and child support must be paid in full, regardless of how long it takes; bankruptcy offers almost no relief.  And the interest keeps on ticking on those debts.  But your other debts—the credit cards, the medical bills, and so forth—are wiped out, so that at the end of Chapter 7, you get to start with a (mostly) clean slate. 

If you don’t have much stuff, the whole Chapter 7 process—start to finish—is usually over in a few weeks.  The collection calls stop, the debts are erased, and you get a fresh chance to put together a new financial life.

 

 

Chapter 13

 

The other kind of bankruptcy is called “Chapter 13,” and it accounts for the other 30% of people who go bankrupt.  Under this option, you file for bankruptcy in order to gain some time to pay down your debts, rather than to get rid of your debts altogether.  When you file for a Chapter 13 bankruptcy, you and your lawyer work out a repayment plan.  The plan lasts for three to five years.  During that period, you commit to live on a sharply restricted budget so you can put as much money as possible toward repaying your debts.  Your goal is to repay all your old debts during that period, but if you can’t get them all paid, any remaining debts will be wiped out at the end of the repayment period (with a few exceptions).

Chapter 13 has one special advantage:  If you are behind on your mortgage, you will get a few years to catch up through your repayment plan.  This means that if you are behind on your mortgage, Chapter 13 may be a better bet than Chapter 7.  But if you don’t own a home or if your mortgage payments are up to date, Chapter 13 probably doesn’t offer any special benefits.   

 


Chapter 7 and Chapter 13, in a Nutshell

 

Chapter 7

Chapter 13

What it does for you

Erases most consumer debts

Gives you extra time to repay your debts

Which debts are erased

Most consumer debts, such as:

 Credit cards

 Medical bills

 Payday loans

 Back-payments on rent,

 utilities, cell phone, etc.

No debts are erased when you file for bankruptcy.

After your 3-5 year repayment plan, any unpaid consumer debts are erased.

Which debts are never erased

Child support / Alimony

Taxes

Student loans

Mortgage (unless you give up your home)

Car payment (unless you give up your car)

Child support / Alimony

Taxes

Student loans

Mortgage (unless you give up your home)

Car payment (unless you give up your car)

Biggest advantage

Erases most consumer debts quickly, so you get a fresh start in just a few weeks.

Gives you time to catch up on past mortgage payments.

Biggest drawback

No time to catch up on the mortgage, so you could lose your home.  (If you don’t own a home, this isn’t a problem).

Most people don’t make it through the repayment plan, so the debt piles back on.

 

 

At first, Travis and Emily wanted to file for Chapter 13 even though they didn’t own a home.  Travis thought Chapter 13 sounded more honorable because it involves repaying some bills rather than just getting rid of the debts:  “I’m not looking to walk out—I just need some time to turn things around.”  But we cautioned them that the ideal often doesn’t match with reality.  About two-thirds of the people who file under Chapter 13 never make it through the repayment process.  Typically, they hit another setback, and they just can’t keep up with the payments.  In that case, all the debts—plus interest and penalties—pile back on.  Emily’s eyes widened when she heard that, and she quietly reminded Travis that he was still on probation at his new job.  “You mean to say we could do all this bankruptcy business and land right back in this same boat?  No thank you.”  They decided to file under Chapter 7. 

As a general rule, if you are caught up on your mortgage payments or if you don’t own a home, you are usually better off filing for Chapter 7.  If your attorney gives you contradictory advice, ask for a specific explanation.  If you are not persuaded, get a second opinion.  Attorneys’ fees are larger in Chapter 13, and a few attorneys have been known to steer people into Chapter 13 even when it isn’t in the client’s best interests.  Most bankruptcy lawyers are salt-of-the-earth, good people who genuinely care about families in financial trouble, and they would never deliberately steer you the wrong way.  But, like anything else, there are a few bad apples, so if something smells funny, seek help elsewhere. 

 

 

How it works

 

If you think bankruptcy is your best option, start by hiring an attorney.  In theory you can go it alone or use a “filing service,” but filing services cannot provide legal advice (even though they often charges as much as a lawyer!).  The laws have a zillion unexpected traps in them, so you are much safer if you hire an attorney. 

Unfortunately, the best attorneys don’t usually wear ruby slippers and go by the name “Glynda.”  But there is another good way to distinguish a good bankruptcy attorney:  Look for a specialist.  Stay away from small outfits that advertise bankruptcy along with divorce, immigration, car accidents, and a bunch of other stuff.  Instead, look for someone who does a lot of bankruptcy work and not much of anything else.  You can call the county bar association for a referral or check the yellow pages. 

Once you have chosen your attorney, don’t be surprised if you don’t see him or her again until your hearing date.  Most of the preparation for filing bankruptcy is filling out forms—lots and lots and lots of forms—a task which is generally handled by a paralegal or one of the attorney’s assistants.  The forms will ask a lot of questions:  What do you own, when did you get it, how much debt do you owe, whom did you pay, what is your income.  The list goes on until you think they will ask about your brand of underwear!  Save your bills, statements, mortgage papers, and all your other financial papers; you may need them for those forms.  It may be tedious, but the paperwork is important.  These aren’t just a bunch of papers filed away where no one ever reads them.  You must sign your forms under penalty of perjury—just like testifying in court—so you want to get the answers exactly right.

Your attorney will file the papers for you, usually a day or two after you finish the paperwork.  Relief is immediate.  Once the papers are filed with the court, all efforts to collect from you—telephone calls, car repossession, mortgage foreclosure, wage garnishment—all have to stop.  Your attorney will make sure that every creditor is notified about the bankruptcy, and you can call your lawyer if anyone tries to hassle you after the filing. 

You will get a notice in the mail to appear at a meeting with the bankruptcy trustee.  You and your lawyer will show up, typically at an office building near the courthouse.  (Court time is usually reserved for serious problems, and most bankruptcy cases are handled as routine affairs.)   The usual gathering place is a big hallway, where lots of people are milling around--husbands looking for wives who are parking the car, mothers trying to quiet crying babies, people glancing furtively at everyone else who showed up on the same day.  Lawyers always stand out; their suits and briefcases give them away.  Every few minutes an assistant to the trustee will call out another name, but it barely makes a ripple. 

When your name is called, you and your attorney will go into a room with the trustee (usually a lawyer) who has been appointed by the judge to review your case.  You will be sworn in (“Promise to tell the truth,” etc.), and the trustee will make a big show of turning on a tape recorder to record the questions and your answers.  For most people, the questions are fairly routine—are these all of your assets, did you leave anything out, etc.  Your creditors may show up to ask questions, but most of the time they don’t bother.  If something unusual happens, (“Oh, yeah, I have $10,000 in bearer bonds tucked under my mattress” or “Uh, my wife couldn’t make it, but she wants to be included in the bankruptcy too”), you may be held over for further examination.  But if you are like about 99 percent of the cases, when the questions are over, the trustee will recommend to the court that you receive a “discharge” of your debts.  The whole process should take roughly fifteen minutes.  About six weeks later, you will receive a discharge document in the mail, which you can show to any creditor who continues to bother you. 

Most people are amazed by how fast it all is.  Others remark on how the court people were nice folks.  But don’t kid yourself—this may look like the waiting room at the Trailways Bus Station, but it won’t feel like it.  A master sergeant who had served in both Iraq wars told us he cried so hard during the questioning by the trustee, that they stopped the proceeding and told him to come back in an hour after he had calmed down.  He isn’t alone; trustees tell us that the same thing happens several times a day.  Even when there are no tears, most people cannot make eye contact, and the smell of sweat is always heavy in the air.  This is a moment when people have to face up to financial failure, and the pain can be sharp.   

 

 

What it costs to go broke

 

Emily and Travis were surprised to learn that they couldn’t afford to go bankrupt—at least not right away.  Their bank account was empty, and their attorney wanted $825 in cash before he would process their paperwork. 

Attorneys’ fees vary depending on where you live and how complex your case is, but a typical Chapter 7 costs about $800 and a typical Chapter 13 will run about $1600.  You will also have to pay a filing fee to the courts, currently about $200. 

Where do you get that kind of money if you are on the edge of bankruptcy?  Emily and Travis decided to skip the car payment and stop making payments on all their credit cards and personal loans.  When they freed up some cash, they paid the lawyer, then caught up on their car loan after the bankruptcy.  Their approach was pretty risky, since they got even more behind on some important bills, but lawyers tell us it is pretty common.  Only in America would so many people be saving up to go broke! 

 

Not a secret

 

You may hope to keep your bankruptcy a secret; most people do.  But bankruptcy is not a very private affair.  If you file for bankruptcy, all of your financial dealings—your debts, your income, your budget—become part of the public records, available at the courthouse (and now on the Internet in some states) for anyone who wants to look at them.  The bankruptcy will remain in your credit report for ten years, raising the cost of everything from car insurance to house payments.  Future employers will discover the bankruptcy if they run a credit check (now a routine screening process for many jobs), which can lead to embarrassing explanations or, worse, a lost chance for a job.  Your name may be published in the newspaper under “legal notices,” and the fact of your bankruptcy may pop up whenever someone searches for your name via the Internet. 

As a practical matter, however, if you aren’t a rock star and you haven’t flimflammed everyone in town, most personal bankruptcies don’t attract much attention.  In all likelihood, most of your friends, neighbors, and co-workers won’t learn that you filed for bankruptcy unless you decide to tell them. 

 

 

What the creditors do

 

For most people, the best thing about filing for bankruptcy is that the phone finally stops ringing.  Once you file, creditors are legally prohibited from calling you, sending you bills or adding interest on your loans.  Basically, they can’t even talk to you about your debts.  If you file for Chapter 7, they have to write off the debt and walk away.  If you file for Chapter 13, they have to deal with your trustee and your lawyer for their share of the payments.  Either way, they have to leave you alone.  If you’ve been dealing with bill collectors for months (or years), the ensuing silence may seem like a gift from Heaven.

But the peacefulness isn’t guaranteed.  The law also has a loophole. (Why should bankruptcy laws be any different?)  During a Chapter 7 bankruptcy, a creditor can ask you to “reaffirm” a debt.  “Reaffirm” is just a fancy legal word for agreeing to pay a debt that you were about to get rid of in the bankruptcy.  It’s basically a “Treat me special, don’t make the bankruptcy apply to me” deal.

If you go to a bankruptcy court, you may notice people working the crowd—often friendly, gray-haired ladies—who call out various names.  Don’t let their smiles fool you; these are the representatives from Citibank, MBNA, Sears, BankOne, and other major creditors, and they are on the lookout for people who owe them money.  They are hoping they can convince you to reaffirm debts that the judge is about to wipe out. 

As nice as these people may seem, some will try to bully you by threatening to repossess your furniture or your appliances unless you reaffirm your debt.  (We’ve even heard of one who threatened to repossess the kids’ old swing set!)  Except for the house or the car, this is nearly always an empty threat.  It costs several hundred dollars to send a truck to your house and cart something away, and most used goods just aren’t worth that much. 

Other companies try the we’re-your-friend tactic by offering to sign you up for another credit card.  As if you need more of the poison that you already choked on!  If you file for bankruptcy, hang tough.  Do not reaffirm your consumer debts, and don’t take on any more credit cards.  Don’t get tricked or bullied into signing away your future before the ink is dry on your bankruptcy petition.

 

 

Do not reaffirm any consumer debts, such as your credit card, medical debt, or back-payments on your utilities or cell phone.

 

 

Credit after bankruptcy

 

Do people who file for bankruptcy ever get credit again?  Do they ever!  Within six months of filing for bankruptcy, 84 percent of people had already received unsolicited offers for new credit.  Many had received more than thirty offers!  If you file for bankruptcy, you will discover that you are more popular with credit card companies than ever before.  Banks know that you cannot declare bankruptcy again for at least six years, and they believe there is a good chance that you could still be so strapped for cash that you will soon end up carrying a balance and making minimum monthly payments—rocketing you to number one on their list of favorite customers. Once again, stay away from credit card companies and all the other debt peddlers.

 

 

Why people go bankrupt

 

          Does it matter why you go bankrupt?  Not to the bankruptcy court—or at least, not usually.  If you defrauded people out of money, the bankruptcy courts won’t let you escape your obligations.  Likewise, if you stole or embezzled money, you still have to repay the money you took.  But if you promised to try to pay and just didn’t come through, the bankruptcy courts don’t really care what went wrong.  Maybe you got sick, maybe you had a gambling problem, maybe you just made some really stupid decisions.  Other people might feel sympathy for you or they might call you a low-life, but the bankruptcy laws don’t distinguish whether you have a good reason or a dumb reason for getting into trouble.  Bankruptcy is about getting a capsized boat back upright and letting it sail on, without worrying about why the boat turned over in the first place.   

          That said, you might be surprised by how many bankrupt families tell roughly the same story.  Nearly 90 percent of people who file for bankruptcy cite just three reasons for going broke:  1) job loss 2) serious illness or 3) divorce.  That means that all the other reasons combined—natural disaster, victim of crime, gambling problems, drug addiction, identify theft, shop-aholisism, called up for the National Guard, or plain old bad judgment—account for only about 10 percent of bankruptcies.  In other words, the overwhelming majority of people are using the bankruptcy courts exactly as the Founding Fathers intended—as a second chance after something bad happens. 

 

 

Is it honorable?

 

You may be wondering:  Is it right to file for bankruptcy?  Is it honorable?  After all, these companies lent you money.  You made a promise, so aren’t you obligated to pay what you owe?  Of course you are, and you should do your very best to pay all your debts.  But you are also obligated to keep a roof over your head, to put food in your mouth, and to get medical care when you need it.  When push comes to shove, you must take care of yourself and your family first.  The big banks have proven that they can take care of themselves. 

If you find yourself considering bankruptcy, reflect on the fact that most of those lenders knew you would have a tough time paying them back. They had your credit reports. They knew how much money you earned, and they knew how much you owed.  They took a calculated risk.  It’s not so different from auto insurance.  If your car was stolen, would you hesitate to ask your insurance company for a check?  Of course not!  You didn’t plan on getting your car stolen.  Likewise, you didn’t plan to lose your job or to come down with foot-and-mouth disease.  If things had gone according to plan, you would have paid your debts, and the bank would have made a big profit. 

Whenever a bank makes a loan, it hopes to make money, but lenders know that there is some chance that the money will never be repaid.  The interest charges and penalty fees are designed to cover those risks.  Remember Josephine McCarthy from Step Five?  She borrowed $2,223, paid back $2,008, and Providian said that she still owed more than $2600!  The way we see it, she had almost paid her way clear, even if Providian was claiming they “lost” $2600 in bankruptcy.  As we write this, a record number of people are filing for bankruptcy--at the same time that lenders are reporting record profits off their interest charges and high fees. 

Still not convinced of the morality of bankruptcy? Consider this:  Businesses file for bankruptcy all the time.  Indeed, sophisticated business people chat about bankruptcy as a “financial reorganization” and a “litigation strategy.”   In other words, they look at bankruptcy as just another tool for smart business management.  Do you imagine the CEO of United Airlines and the president of Kmart were wracked with guilt when they took their companies to the bankruptcy courts?  We doubt it.  They did what they thought best for their shareholders and customers.  A If that meant that some creditors ended up with the short end of the stick, then so be it. They saw it as simply a smart business decision.  And when your survival is on the line, so should you.

You made promises, and so did the bank.  The bank promised to lend you the money, but it didn’t promise to give you the best possible price.  It didn’t promise to go easy on you if you got in trouble, and it didn’t promise that its collection agents would be honest and polite.  The bank promised nothing more than to lend you the money and to maximize its profits within the four corners of the law.  You made the same promise—to pay back if you could within the four corners of the law.  Bankruptcy is there to help if your debts get overwhelming.  Don’t take it lightly, but don’t avoid it if you need the help.

 

 

When to file for bankruptcy

 

Bankruptcy helps the most if you can wait until the crisis has passed before you file.  If you are out of work, wait until you have found a new job. If you have a child who is seriously ill, wait until he recovers and the health insurance pays its share of the bills.  It can be extremely tough to hold on that long, especially if collection notices are stacking up and creditors are calling you every night.  But if you wait, you cut down on the risk that you will file for bankruptcy and then find yourself in trouble just a few months later. 

 

 

Bankruptcy helps the most if you wait until the crisis has passed before you file.

 

 

Unfortunately, there are no do-over’s in bankruptcy.  It isn’t like standing in the supermarket checkout line and saying, “hold on, I need to add something else.”  Any debt you take on after you file for bankruptcy stays with you—no matter what.  The bankruptcy system gives an extraordinary opportunity for a second chance. If you wait to file until the worst of your problems are over, you will have the best odds of getting exactly what you need from the bankruptcy judge—a fresh start.

How do you decide if bankruptcy is right for you?  You can start by taking a realistic look at your overall situation.  If you owe more than a year’s salary in Steal-from-Tomorrow debt, you may never be able to pay it back..  If your mortgage lender refuses to negotiate and you get a foreclosure notice, filing for bankruptcy may be the only way to hold onto your home.   If bankruptcy is the only way, then go ahead and file. 

 

 

Getting back on your feet

 

What happens when it’s all over?  You have filed for bankruptcy (or negotiated yourself back from the brink), you are back at work, a paycheck is coming in, and the crisis has passed—what then?

Just get back to balancing your money.  Stick to the plan like white sticks to rice.  Pay your Must-Haves first, set aside a little something for Wants, and get started on rebuilding your future.  Set aside 20% for tomorrow—or a little more, if you can swing it—and use that money to dig your way out of debt and rebuild your Savings, one dollar at a time.

Here are some steps to help you rebuild:

·    When the crisis passes, do an honest assessment of your financial circumstances.  If there have been permanent changes in your money—if your new job pays less, or if you’ve lost your health insurance, or if the divorce is now final—then you need to make some permanent changes in your life.  So ask yourself the tough questions.  Is it time to downsize the house?  The car?  The kids’ activities?  Watch out for the temptation to look backwards.  People who evaluate their life in terms of “but we always did XYZ” will stay stuck in financial trouble.  If your circumstances have changed permanently, then put the past behind you and get on with building a new life on solid financial footing.  Get your money back in balance, and get on with building the wealth you deserve.

·    Be alert to the cheats.  Keep in mind that even if your neighbors don’t read your credit report, there are vultures who do.  They will try to sell you instant cash, credit repair, or new credit cards (as if more debt is what you need!).  They don’t have anything you need, so just stay away. 

·    Stick with cash.  If your credit is in the toilet, what do you do?  Use cash.  Stay away from credit, and just say no to those who want to push it on you.  There are some extra-bad deals out there for people with bad credit, so just say no.  We’ve seen credit cards that charge you $176 in fees—for a card that maxes out at $200!  If you need to buy a car, stay away from the car salesmen who specialize in selling to people with bad credit; these guys will stick with you with a car loan as high as 25%.  If you really need to buy a car, try getting an old clunker for cash; you can replace it as soon as you get a little more cash and a little better credit rating. 

·    Don’t be shy.  If you are looking for a new place to live, tell the landlord up front that you’ve had credit problems, but your life is now straight and you can pay your rent on time.  The same advice holds true for anyone else likely to run a credit check: Come clean.  If you ‘fess up ahead of time rather than shuffle around after it is discovered, they will be a lot more likely to listen to you. 

·    Rebuild your credit the old fashioned way—pay for things.  Don’t try short-cuts because there aren’t any.  Just pay your bills on time, and check your credit report to be sure it is accurate.  Most important, don’t lose sleep over it.  Over time your credit rating will improve, but in the meantime you are gaining something much more important—a solid financial future.   

 

 And through it all, keep living your life all the way to the limit. Abraham Lincoln went broke.  So did Harry Truman.  But they pulled up their socks and did pretty well for themselves.  Going broke is hard, but there is still a lot of living to do.