Photo: danaspencer

Just a few years ago when Melody Brooke applied for credit in anticipation of co-signing a loan for one of her adult children, she was told she had such good credit that she could buy a jet.

Today, she couldn’t buy a toy truck. The combination of a weak economy, which forced her to close her private counseling practice and caused her husband to lose a lucrative contract, has taken her family from a six-figure income to barely any income at all. To add to the constant barrage of debt collectors calling them, her husband hasn’t been able to obtain a job. “He’s only gotten two interviews and one offer,” says Brooke, who lives in the Dallas area with her husband. “But when they ran our credit, they told him they couldn’t hire him.”

The current financial crisis has brought about many economic anomalies, including throwing a whole new subset of the population on the radar of debt collectors – upper-middle class and affluent consumers like Brooke.

No More Easy Street

“We are seeing people who’ve never been down this road before” says Phill Hudson, a partner for the law firm of Arnstein & Lehr, with offices in Chicago, Ill., Milwaukee, WI., and throughout Florida. “Most people in this situation haven’t focused on what they’re facing, and the first thing we tell them is don’t ignore it and don’t become paralyzed.”

“Most people are in shock and they’re entering a world they’ve never dreamt of,” says Robert Markoff, president of the National Association of Retail Collection Attorneys, based in Washington, D.C. “The first thing consumers must do is talk to whoever is calling you.” Financial experts agree that speaking to debt collectors, especially in the early stages of delinquency, can go a long way in assisting a consumer’s cause.

According to Cena Valladolid, chief operating officer with Consumer Credit Counseling of Southern Nevada (CCCS), a non-profit organization that offers budget education, debt counseling, and elimination programs to consumers, talking to creditors can afford you an opportunity to become educated on special programs and repayment terms.

Part of honestly assessing your situation is looking at your assets that possibly can be sold such as a vacation home, timeshares, recreational vehicle, or non-essential vehicle. Also examine your savings, says Brooke. While she didn’t have anything with equity to sell, she used what small savings she had to settle three loans with a bank willing to work with what she could offer.

Don’t Panic

Perhaps just as bad as ignoring debt is getting into further trouble when trying to eliminate it. Sending all of your money to one creditor won’t make your problems go away, and can get you in deeper with other lenders. “People have a tendency to send the creditor who is making the most noise all of their money,” says Hudson, “but consumers need to make arrangements with all of their creditors.”

The priorities start with the essentials first, says Markoff. “It’s clear that you will need to provide shelter and food for yourself and your family,” says Markoff. “If you don’t have anything left, then you cannot work out plans.”

Markoff also advises consumers against falling into the trap of believing that if a payment plan cannot be worked out, an unsecured creditor can take their home or other property. “Generally, we don’t usually see a company taking property,” he says. If the problem seems overwhelming, he says, law firms that specialize in debt management and bankruptcy may be able to help consumers work with creditors.

“We eventually act as more than lawyers,” says Hudson of the services his firm offers. “We know the banks and lenders and the ins and outs of what they’re doing and accepting,” says Hudson. “Our clients may not always be happy about the options, but if we can get past the initial hurdle, we can help them move forward.”

Seek Extra Help

In addition to seeking paid counsel, there are also non-profit financial counseling alternatives. Services such as those offered by CCCS provide assistance with setting up budgets to accommodate precarious financial positions, and negotiating with creditors.

“Many creditors will reduce or eliminate penalties and interest,” says Valladolid. “We hope to put people in a situation to eventually help maintain or rebuild their credit.”

But, debtor beware. Valladolid cautions against companies that promise to help you immediately increase your credit score or rebuild your credit, or companies that offer to settle debts for very low amounts. “Anytime there is a public financial crisis with long-stretching arms, it always leaves room for scams,” says Valladolid. “I’ve heard of companies say they can eliminate debts up to 80 percent and settle them… we’ve never seen that here at CCCS.”

Additionally, Valladolid says legitimate non-profit credit counseling agencies will not charge a fee for their services. “We don’t charge because there’s nothing we do that the consumer cannot do for themselves for free, including negotiating settlements,” he says.

Markoff also cautions against companies that ask for fees in return for negotiating payment arrangements and settlements. “I see consumers daily who come to me saying they’ve sent all of their money to a company, and when they get sued they realize the company didn’t help them,” says Markoff.

When Should Bankruptcy Be Considered?

Before you consider bankruptcy as an option, speak with an attorney or credit counselor, says Markoff, as it might give you a different perspective. “If there’s a judgment entered, it doesn’t mean a person needs to file bankruptcy,” says Markoff. “It’s a black market on the credit, but the credit reports are already not looking good.”

Chatz says speaking to an expert in bankruptcy is a must. “There are different types of bankruptcy that are best for different people,” he explains. “And people need to realize that you cannot file bankruptcy on government debts such as IRS debts or student loans, as well as on child support debt.”

Markoff says if a bankruptcy isn’t right for you, more often than not, creditors will usually just sit on a judgment until the consumer’s situation improves, at which time, the consumer can then make arrangements for payments or settle the account.

“The most important thing to do is to not panic and focus on the future,” says Chatz. “Accept it and work through it. Things will turn around, they always do.”

For Brooke, she and her husband are still both seeking employment, as well as trying to take destiny into their own hands by starting another business. “We are launching an Internet business that uses his technical skill and the model I developed as a counselor and an author, but who knows how long that will take to go to fruition,” says Brooke. In the meantime, they move forward with credit lessons learned.

“Think Debt Can’t Bury You? Think Again” is provided by Experian.com

Photo: wallyg

Painting: The Story of the Recorded Word, Edward Laning

Forget making changes to your credit card usage – it’s what you don’t do that can increase your credit score (or at least keep it from going south).

Just as you can’t buy happiness, you can’t buy a high credit score – the only way to get one is to demonstrate financial responsibility. “Creditors don’t care about how many millions you may have in your investment account, it’s how you use your credit,” says Maxine Sweet, vice president, public education for Experian.

Steer clear of these 10 things experts say can mangle your score.

1. Thou Shalt Not Avoid Using Credit. If you don’t use credit, you won’t have much of a credit score. “A credit score is an important tool companies use to protect themselves,” Sweet says. The lower the score, the higher the risk, and this can affect whether or not a loan is approved.

2. Thou Shalt Not Miss Payments. Paying a bill late will hurt your credit, but missing a payment will damage it even more. “If you do so, you can’t make it up,” Sweet says. In other words, making two payments in the next billing cycle will not remove the blemish from your credit history. Whether or not you pay your bills on time determines 33% of your score.

3. Thou Shalt Not Limit Loan Types. Despite what your bank account may think, a car payment and a mortgage may not be enough. Also managing an installment debt, such as a credit card, is a good indicator of credit savviness. There are five elements to the credit score model and revolving credit, which allows consumers to charge and owe different amounts each month, is one of them. “It’s 10% of the score,” says Gail Cunningham, vice president of public relations for National Foundation for Credit Counseling.

4. Thou Shalt Not Close Unused Credit Card Accounts. Actually, just use caution, says Sweet. A factor in credit score models is your utilization, which is your debt vs. how much is available. For instance, if you owe $4,800 on a card with a $5,000 limit, you’re using most of your available credit and this “utilization” will have a negative impact on your score. Counting toward 30 percent, your utilization is the second highest factor in your credit score. You should charge no more than 30% of your available credit, recommends Cunningham.

5. Thou Shalt Not Be A Credit Tease. Don’t run up charges all over town or apply for several cards at once while looking for the best rewards program. Recent inquiries means that you have accessed your credit and this can affect your score negatively. “This signals that you’re desperate for credit and don’t have enough cash available for your purchases,” says Cunningham. She adds that if you are shopping for a major purchase, such as a mortgage or car loan, the inquiries will usually roll together into one.

6. Thou Shalt Not Rob Peter To Pay Paul. Don’t charge anything unless you know how and when you are going to pay it back. One of the benefits of credit is the ability to spread out payments on a big purchase, not to delay paying with hopes that the money will come in – from somewhere. If you need to use a credit card for convenience, use a prepaid card or a secured card that enables you to make payments to your own line of credit.

7. Thou Shalt Not Get On The Call List. When a debt turns into a collection account, it’s an indication that you got yourself in hot water. Once a collection agency jumps into the arena, it becomes the owner of the debt, which will show on your credit history. Trying to make payments to the original debtor will not make the collection agency or the negative mark on your credit go away.

8. Thou Shalt Not Forget The Little Things. That library fine you didn’t pay or the health club contract you signed but didn’t honor can show up on your credit report. Any debtor has the right to report unpaid bills to the credit bureaus, and many of them exercise that right.

9. Thou Shalt Not Negotiate. On paying less than what you owe, that is. If you cannot repay a debt in full and a creditor agrees to settle for less than you owe, you haven’t won the battle. The transaction will be reported as a settled account and this will hurt your credit score. Instead of negotiating to lower the overall amount of the debt, ask to have your interest rate or monthly payment lowered so that you can continue to pay the debt off in full.

10. Thou Shalt Not Give Up. If you have late payments, missed payments, defaulted loans, and similar credit mess-ups in-between, don’t give up and think that your credit history is ruined. Although offenses like these generally stay on your credit history for seven years, the recovery clock doesn’t start ticking until you have one full month of paying all of your debts on time, says Sweet.

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