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.
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
_______________________________________________ |
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.
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.
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.
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.
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.
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.
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
|
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.
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.
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!
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.
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. |
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.
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.
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.
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.