Paul Ferraresi

Sometimes a variety of circumstances combine to cause a cash flow crisis and the result is an over-extension of credit. This can lead to emotional and marital problems in addition to the financial turmoil. When a person has reached this situation, there are several steps to be considered:

• Immediate cessation of the use of credit
• Evaluation of the extent of the problem – listing debts
• Consideration of declaring bankruptcy
• Seeking the services of a credit counseling service
• Developing your own workout resolution

Most persons recognize the problem long before it becomes serious enough to warrant that bankruptcy is the only viable option. However, because they are not aware of the fourth and fifth possible steps, they allow the situation to grow worse.

CREDIT COUNSELING SERVICES

In many areas there are credit-counseling agencies that can provide help. These are non-profit organizations, frequently affiliated with local United Way and other service coalitions. If you are not aware of them, simply call the local services organization and ask for a referral. Generally, these groups help the consumer straighten out the credit and budget situation for a nominal fee. The bulk of their compensation, which is used to offset the expense of operations, comes from the merchants as a percentage collection fee. What these groups attempt to develop is the following:

• Have merchants and creditors suspend collection efforts
• Have creditors suspend all interest charges
• Collect one check each pay period from the debtor
• Make monthly disbursals to the creditors

These organizations are quite distinct from the companies who market loan consolidation packages, which frequently increase the total interest expense, lower the monthly payment, all of which significantly prolongs the payout period. Their reputation can be easily confirmed by a few calls in the community, and their performance record nationally is quite good.

DEVELOPING YOUR OWN WORKOUT RESOLUTION

However, there are not always local agencies available, and some people are reluctant to use the services of an organization. In those situations, the best technique is to try and negotiate the same arrangement. Here are the steps to follow:

1. Develop a complete list of all debts. This includes the names and addresses of the creditors, account numbers, the current amount owed, and the monthly payment expected.
2. Prepare a budget, allocating income to cover fixed monthly expenses, variable monthly expenses and a sinking fund for the periodic expenses that come up annually or semi-annually.
3. Cease using credit cards and charge accounts entirely. If you are concerned with temptation, then destroy the cards.
4. Send a letter to all creditors requesting a special payment arrangement. If they do not respond in writing, insist that they do so. Otherwise, you may be hit much later with a staggering amount of accumulated interest.
5. Make the monthly payments on schedule.
6. If some crisis causes you to have to temporarily suspend payments, contact the creditors in writing immediately. Explain the situation frankly and send some payment, however small. Do not leave them in the dark. Communicate each month. Resume full payments as originally agreed as soon as possible.
7. Do not open any new accounts or incur new debt.
8. Start saving some money so that you will have some financial resiliency. The best way to do this is through payroll deduction to a savings institution or credit union. Try to increase the amount of savings as your creditors are paid off and should you get any pay raises or bonuses. Just getting out of debt is not enough – you have to feel that you are making progress.

SAMPLE LETTER TO A CREDITOR

As one of my creditors, I am asking for your help in order that I can pay all accounts in full and avoid bankruptcy. As the result of significant medical bills, coupled with a temporary reduction in income, a negative financial condition has developed. Here is a summary of my financial circumstances:

My net take home pay is $ ______ per week. My rent and fixed utilities total $______ per week. (or per month)

Attached is a list of all my accounts payable.

I have instituted a rigid budget, but without the help of my creditors, it is impossible for me to make the payments that are being requested of me. As part of my financial rehabilitation, I have decided to totally cease using all charge accounts and credit cards until all have been paid in full.

What I am asking you to do is to suspend all interest charges and accept a payment of 1/24^th of your current balance of $ ______ each month for the next 24 months. If this is acceptable to you and each of my other creditors, I will be sending you a check each month in the amount of $______ until the account is paid in full.

Please acknowledge in writing your willingness to accept this debt workout plan. Thank you for your help and cooperation.

(You may want to explain more about how the debts happened.)