The FTC Offers Four Debt Strategies

Many families and households are struggling with daunting debt digits. The Federal Trade Commission offers four proactive steps you can take to begin building your ladder out of the debt ditch.

Keep in mind that the following steps are not one-size-fits-all-depending on the severity of your debt, your ability to make payments, curtail spending and your financial goals, you should identify which of the following potential rungs of the ladder best suits your needs.

The first recommendation given by the FTC is to develop a budget. The purpose of a budget is to identify realistic spending habits in terms of your income. By setting a system of financial guidelines in place, you can keep your spending on track so as not to spend money you don't have and also perhaps save a portion for use towards paying off your debt. The central idea when forming a budget, according to the FTC, is "to make sure you can make ends meet on the basics: housing, food, health care, insurance, and education."

Your budget should first state your total income. From there, list your "fixed" expenses-those costs that don't fluctuate from month to month, including rent, car payments, and insurance payments. Next make a separate list of variable expenses: entertainment, clothing, and utilities. It is also a good idea to include a miscellaneous category for unexpected expenses, like a flat tire, hospital visit, or school field trip.

In addition to formulating a spending plan, it is also recommended by the FTC that you contact your creditors and inform them of your financial circumstances. Many times creditors will work with you to create modified payment plans to make payments more manageable. In some cases, this will save you from being reported to collection agencies.

If, however, you are handed over to debt collectors, the FTC reminds you of your rights under the Fair Debt Collection Practices Act that states, "A debt collector may not call you before 8 a.m., after 9 p.m., or at work if the collector knows that your employer doesn't approve of the calls. Collectors may not harass you, make false statements, or use unfair practices when they try to collect a debt. Debt collectors must honor a written request from you to stop further contact."

The second step in the FTC's guide to dealing with debt is credit counseling. By entering into a payment program with a counseling agency some of your creditors may be more willing to set up modified repayment plans. Through this option, it is typical that you would deposit money on a monthly basis to the counseling service, which then pays your creditors according to a payment plan arranged by your counselor. It is also not unusual to be restricted from additional credit use while engaged in a counseling program.

While your credit report will show your involvement with a financial counseling agency, the FTC reminds that, "A debt repayment plan does not erase your negative credit history. Accurate information about your accounts can stay on your credit report for up to seven years."

Besides forming a budget and entering into counseling, the FTC lists debt consolidation as another possible option. While it is a fairly common practice for those in debt more than $10,000.00, the FTC cautions, "You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Think carefully before taking this on. These loans require your home as collateral. If you can't make the payments-or if the payments are late-you could lose your home."

At the bottom of the list of suggested options is bankruptcy. Bankruptcy has a 10-year shelf life on your credit report, which has a negative impact on your ability to obtain credit or anything requiring strong credit-like a house, for instance. The FTC details two different types of personal bankruptcy: Chapter 7 and Chapter 13.

According to the FTC, "Chapter 7 (otherwise known as straight bankruptcy) involves liquidating all assets that are not exempt. Exempt property may include cars, work-related tools and basic household furnishings." This property can then be sold by court officials or given over to creditors.

Chapter 13, on the other hand, allows you to retain your property while entering into a repayment plan agreed on by the court and lasting anywhere from three to five years. When entering into bankruptcy, a ratified repayment program under Chapter 13 is the only near-guarantee of retaining your property.

With a reported 1.5 million consumers filing for bankruptcy in 2001, the FTC reminds consumers that, "Although bankruptcy is one option to deal with financial problems, it's generally considered the option of last resort. The reason: it has a long-term negative impact on your creditworthiness."

By: Kate Ellis

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