You Can Do It

Managing Debt, Building Wealth - Leader's Guide

CBO leader's guide to accompany 'You Can Do It: Managing Debt, Building Wealth' fact sheet A guide for CBO staff and other community leaders to help clients learn how to better manage their money. Topics include budgeting, bankruptcy, warning signs of too much debt and how to increase your bottom line.

Using the Leader's Guide

You may not be a financial counselor, but you may be in a position to help someone who has come to you with a financial problem. You can't wave a magic wand and make someone's serious financial difficulties go away. But you can provide encouragement and teach people how they can resolve their financial issues.

Whether you are a caseworker, a consumer educator, a member of the clergy, a personnel administrator or a community volunteer this Leader's Guide is designed to help you help others begin the road to financial recovery.

This guide provides a basic overview of money management techniques, and lists a few credible places that people can go to for help when their debts seem overwhelming. However, this guide is not intended to replace the services provided by legitimate, non-profit credit counseling agencies and organizations, which offer counseling and assistance.

Start by listening.

Most people don't like to talk about financial worries. If people come to you with concerns that involve money, let them tell you about their problems without judgment or interruption. Once you've heard the concerns and understand them, you will be in a better position to offer alternatives.

Determine whether you have the expertise to assist someone with the complexity of financial issues being presented. Financial problems often invlove other issues, such as marital problems, job loss and medical costs. Unless you are a professional or have extensive training in counseling, you may need to refer thoise who need such assistance to a legitimate educational or counseling services.

Discuss an action plan.

Discuss some of the ways suggested in this guide to start getting out of debt. Bring up the positive and negative aspects of each course of action. If you don't have the answers or are not sure, suggest some of the other sources in this guide for further information.This may be the end of your involvement. Your listening skills and encouragement are key in helping the person reach a responsible, educated decision, but you can't do all the work.

Provide credible referral sources.

Offer assurance that help and information are readily available. Explain that many other people have had money problems and overcome them to build savings, become homeowners and fulfill other financial dreams.

Refer persons needing professional assistance to a legitimate educational or financial counseling organization. Some credit card issuers offer assistance to their customers who seek debt repayment assistance for their delinquent accounts. Be sure that your referrals are not to illegitimate debt consolidators or credit repair companies, which can make the debt problems worse.

Budgeting

I'd like to have a budget, but creating one seems overwhelming. How do I begin ?

Creating a budget is the first step in managing your finances more responsibly. Budgeting helps you track how you spend your money. You can use the information to decide how to spend your money and to set some basic financial goals, such as saving more and spending less.

Gather your bank or credit union statements, canceled checks and credit card statements to help you start the budget process. Categorize your expenses for two or three months so that you know what you are spending on housing-related expenses (including maintenance), food and household necessities, clothing, transportation and entertainment. Review the list and pinpoint any areas where you could save money. If you are covering your expenses but living from paycheck to paycheck, simply cutting down on non-essential food, clothing and entertainment might be enough to begin to build savings.

Include some money in your budget for emergency savings in case you get sick or laid off from your job. Financial advisors suggest that you keep three to six months worth of income in your emergency fund. Having such a fund can help you weather temporary financial setbacks.

The cost of food, clothes and other daily necessities is threatening to bury us in debt. How can we reduce these expenses ?

The first step to financial recovery is reducing expenses and cutting unnecessary spending. Sit down with family members and explain that reducing your spending will benefit everyone in the household, but that some tough decisions and occasional sacrifices might have to be made. For instance, at the grocery store and pharmacy, buying generic items or in bulk can cut costs. When you need clothing, furniture and cars, consider buying good quality used items instead of new ones.

I don't have enough money to cover my expenses. What can I do ?

If you have already reduced your expenses and concluded that you need more income, you might want to consider:

Moonlighting. To help make ends meet, many people take a second job. This can be a temporary solution, or you might find that you enjoy having a second job. Many businesses look for employees who can work on weekends, when full-time staffers prefer to be off, or during holidays or other times of the year when business is brisk. Perhaps you have some special skills that would allow you to take on extra work at home when you are not at your full-time job.

A second income. Can your spouse find a job to help increase the family's income? If your teenagers or other family members who live with you have jobs, ask them to contribute to living expenses.

Improve your skills. Consider taking a course that can make you more valuable in the job market. Many community colleges offer low-cost, short duration courses in computer or bookkeeping skills that might jump-start your career and allow you to move to a better paying position.

Rent out a room. Many single individuals are looking to rent a room or share living quarters to cut down on expenses. The additional income from such an arrangement can help you make ends meet.

Cooperative living arrangements. Investigate cooperative living arrangements. When two or more adults share a living space, the cost of preparing meals, child care and a car, it can cut down drastically on expenses.

Increasing Your Bottom Line

What's the first thing I can do to get back on my feet ?

Start by setting a goal to pay off your debts as quickly as you can. Don't be discouraged if it will take a year or two, or several years. Depending on how much you owe, a realistic time frame will help you stick to your resolution to get out of debt. When you are debt free, start putting the money you were using to pay off your debts into a savings account with the goal of setting up an emergency fund that could cover your expenses for three to six months. When your emergency funds are in place, keep saving, but investigate safe ways to make your money grow faster than in a passbook savings account.

I wish I had savings and other assets to fall back on. How can I start saving and building wealth ?

One of the most effective ways to begin a savings program is with automatic deposits into a savings account. Many people who save this way find they don't even miss the money. Look carefully at your budget so that you can decide how much is comfortable for you. Then call your bank and ask to have funds transferred automatically to a savings account once or twice a month.

I started an automatic savings plan two years ago, but the money doesn't earn much interest at my bank. Are there any safe ways I can make my money earn more?

Yes, you have several options, but always make sure that some of your savings is available for emergencies. Keep some money "liquid," meaning that you can get it easily when you need it. Savings accounts are insured by the federal government, and are a very safe way to increase your money. Other liquid investments include money market funds—but these are not insured by the government. Although they are considered quite safe, there is always the chance you could lose some of your original investment. Many money market funds pay more than double the interest paid on savings accounts.

Like savings accounts, bank certificates of deposit (CDs) are government-insured investments that often pay double the interest of savings accounts. But you may have agree to leave your money for six months or longer to get the best CD rates. If you take your money out early, you will pay a penalty and lose interest income.

You also can invest in mutual funds, stocks or bonds. However, the value of these investments may go down, and if you have to sell them in a hurry because of an emergency, you could lose money.

Warning Signs of Too Much Debt

What are the warning signs of having too much debt ?

You may have too much debt if you have to borrow to pay current bills, are frequently late paying your bills, can't avoid using credit during the holidays or for your children's birthdays, need to use credit to buy necessities such as groceries or are being contacted by bill collectors.

If you can't seem to save enough to meet expected expenses, and find yourself time and time again turning to your credit cards, it may be a sign that you are not managing your money well and might face serious debt problems if you don't take your finances in hand.

Is there a rule of thumb for gauging how much debt is reasonable ?

According to the National Foundation for Consumer Credit, a guideline is to spend no more than 15%-20% of your net income (after taxes) on short term credit purchases. For example, a person with an income of $1,000 per month after taxes should pay no more than $200 per month on credit purchases.

After we pay our bills, we have very little money left over for groceries, gas and clothing. How can we save more money ?

If most of your monthly income is going toward the combination of housing costs and credit card payments, put your resources into paying outstanding credit balances. If you have extra money, it can go into your savings account.

If you do not have unnecessary debt, but are often short of funds, you might have a money management problem. Improving your money management skills can help you stretch your income and plan for short- and long-term financial goals. The first step in gaining control of your finances is to prepare a budget to help you manage your money more wisely and stretch your current income. Budgets are not only for people with financial problems—budgeting can help anyone to meet his or her current needs and save for future goals. You can have a better lifestyle if you manage your money wisely.

Options to Avoid

Is there any reason I shouldn't take advantage of an offer that I saw on TV to borrow money quickly with no credit check ?

Many companies offer "quick money" to people in desperate circumstances. But some of those may be bad deals. Some of the loans offered by walk-in store-front lenders have interest rates above 20% and high late fees that can drastically increase the amount you owe if you miss even one payment. Do not enter into any loan without reading all the fine print and asking what will happen if you can't pay the loan back as agreed. The answers should convince you to stay away from high-interest loans.

Other types of high-cost loans include:

• Payday loans. Check-cashing stores and banks offer to make short-term loans or cash advances secured by post-dated personal checks or your next direct deposited benefits check or paycheck. The price of such loans is very high. According to the Consumer Federation of America, check cashers are making payday loans at effective annual interest rates that start at more than 250%.
• Pawnshops. These companies accept personal property, such as jewelry, electronics, cameras, musical equipment or guns, as collateral for loans based on the value of the goods. Most pawnshops will lend you less than half an item's resale value. You have several months to repay the loan and are charged very high interest rates until you do so. Many pawnshops also charge storage costs and insurance fees. If you do not repay the loan, or if you default on interest payments, the pawnshop can keep and resell your things.
• Car title pawn. These companies ask you to sign over the title to your auto as security for a loan representing only a fraction of its value. Interest payments, storage cost and insurance fees quickly add up, making it hard or impossible to repay the debt. If you default, the company takes your car and sells it.
• Debt consolidation. In return for giving you a loan to pay off a few of your creditors, some of these companies may charge outrageous interest rates and fees that will jeopardize your limited resources.
• Any loan that jeopardizes your home. Banks and other reputable companies allow you to borrow money against your home's equity (the estimated value of your house minus the amount you still owe). But there are unscrupulous lenders who might give you a loan they know you can't repay just so they can take your home. Your home is the collateral to guarantee that you pay the loan, and if you are unable to make the payments, you are likely to lose your home.

Is it advisable to take a cash advance on my credit card when I'm low on funds?

In most cases, borrowing money to cover day-to-day living expenses is not advisable. You might get trapped on what os often called the debt treadmill. Credit card cash advances, usually subject to transaction fees and higher interest rates, are a covenient, but very expensive way to borrow money—especially if you do not pay off the debts quickly.

Tackle outstanding credit card balances by paying as much as you can comfortably afford each month—not just the required minimum payment due. Even a few dollars more each month considerably reduces the life of the loan and the total interest paid. Consider the following illustration of the potential cost of repaying a $1,000 loan at a 19% annual interest rate (depending on how much you pay per month):

Monthly payment	Years to repay	Interest
$92	1 year	$106
$50	2 years	$210
$37	3 years	$320
$30	4 years	$435

I'm looking for money to consolidate my loans and do some much-needed home repairs. How can I make sure I'm getting a fair deal ?

The best defense against fraud, or unrealistic loan terms, is to shop around with several lenders. Compare the terms offered by banks and credit unions. Be sure that you will be able to comfortably meet the payments you will be required to make.

Your Credit History

What is a credit history ?

Your credit history is a record of your payments on such obligations as charge cards, credit cards, car loans, student loans, or home mortgages. It gives lenders, landlords, insurance providers, employers and others an indication of how you handle credit. Companies that have granted you credit or loaned you money—such as banks or credit card companies—supply information about your accounts on a regular basis to credit reporting agencies and these facts make up your "credit report."

National credit reporting agencies—also called credit bureaus—keep computer libraries of credit histories on 170 million individuals in the U.S. Anyone who has ever used credit to buy anything probably has a credit report. Your credit report may also contain information about you from public records, such as overdue property taxes or bankruptcies. Some states allow information about overdue child support payments to be included. Your report does not contain any information about your race, religion, political party, medical history, lifestyle or criminal record.

The people who do not have a credit history are generally those who have never had a loan or a credit card. Those who recently entered the work force or are new to the country may not have credit histories. Married persons who acquired credit solely under their spouse's name may not have a credit history, either.

How can I get a copy of my credit report ?

You can get a free copy of your credit report if you have been turned down for credit, insurance, employment or a rental dwelling because of information supplied by the credit bureau within the last 60 days. Otherwise, in most states you will be asked to pay a small fee, usually $8 per report. There are three large companies that supply credit reports: Equifax (1-800-685-1111), Experian (1-888-397-3742) and Trans Union (1-800-916-8800). Call each company for tape-recorded instructions on how to order a copy of your credit report. Check your credit report at least once a year to make sure the information is accurate and that no one is using your name and credit for fraudulent purposes.

Why is it important to have a positive credit report?

Your credit report is used by banks, stores and other companies to evaluate the risks of lending you money or giving you credit based on your history of making payments. Potential landlords and employers may use your credit file to evaluate how responsible you are with your personal finances. The decision on whether to rent you a place to live or give you a job could be based on whether you pay your bills on time.

I messed up my credit a few years ago—what's the best way to get it back on track ?

If you have a steady income and have lived in the same area for a year or more, try applying for credit with a local business. Or, if you have had a good relationship with your bank or credit union for several years, try applying for a credit card there. Make sure the information on your new credit account is being reported to one or more credit reporting agencies.

Another way to begin to repair a poor credit history—even if you had a bankruptcy—is to acquire a secured credit card. A secured credit card is a bank credit card backed by money you deposit and keep in a bank account. The account serves as security for the credit card. If you don't pay off your credit card bill, the money in your account may be used to cover that debt. In choosing a secured card, avoid banks which charge an application fee. Also stay away from any company that guarantees to get you credit—for a fee.

Another possibility is to ask a relative or friend with good credit to co-sign your credit application. A co-signer promises to pay if you don't and puts his or her own good credit on the line for you. If you don't repay the loan, the co-signer can be forced to do so. After you have used the credit account responsibly for one year, apply for credit on your own.

I damaged my credit rating when I missed several credit card payments. I'd like to get a better paying job so I can get out of debt. Will potential employers turn down my application when they see I have poor credit ?

Not all employers check credit ratings. Many people's credit has been negatively affected by problems outside their control, such as job layoffs, divorce or illness. If you believe a potential employer might rely heavily on credit reports, ask for a chance to explain your situation. If you are turned down, keep looking for a position that does not rely on your credit rating.

Our debts are out of control—is there somewhere we can go for help ?

Start by contacting your credit issuers to see if they will provide repayment assistance. You may also want to get help from a credit counselor. However, there are some unscrupulous companies that advertise themselves as credit counselors. Beware of companies that offer quick and easy solutions to your debt problems—there is no easy or quick fix to controlling debt.

One reputable national organization is the National Foundation for Consumer Credit. Many non-profit member agencies operate under the name Consumer Credit Counseling Service (CCCS). A counselor can work with you to set up a budget and a plan for paying your bills. There may be a small fee for this service. Call (800) 388-2227 for the office near you.

Finding Assistance

Should I contact a company that offers credit repair for a fee ?

Approach such offers with caution. So-called credit repair companies claim they can remove negative information from credit reports. (They also call themselves credit advisors, credit rating correction services or credit consultants.) Many of these companies charge hundreds if not thousands of dollars, for the promise to "clean up" bad credit reports. But the truth is, these companies can only do what you could do yourself—at no charge. You have the right to obtain a copy of your credit report on your own. If you believe any of the information in your report is inaccurate, you have the right to dispute those entries or provide a brief statement to be filed with the report. Nobody can remove negative information that is accurate from your credit report. No company has a "secret" ability to remove all negative information.

I saw an ad that promised it could stop bill collectors from harassing me and also wipe out all my debts. Is this offer too good to be true ?

Yes. Many such ads turn out to involve bankruptcy, a legal proceeding often advised only as a last resort for people who are in extreme debt.

Should you Consider Bankruptcy?

What is bankruptcy ?

Bankruptcy is a legal proceeding that eliminates your legal responsibility for your debts and allows you to get a fresh start. Bankruptcy laws provide an important safety net for people with serious debt problems. Bankruptcy laws may vary from state to state.

What is the difference between Chapter 7 and Chapter 13 bankruptcy ?

Chapter 7—sometimes called "liquidation"—wipes out unsecured debts (such as credit cards). Secured debt (household goods financed by a retailer, auto loans and home mortgages) and "priority" debts (child support, criminal penalties, income taxes) usually are not discharged. Certain property you own is considered "exempt" and cannot be sold if you own it outright. Exemption laws vary from state to state. While your house is often considered to be an exempt asset, a mortgaged house is considered a secured debt. This means that a liquidation bankruptcy does not erase the right of a bank to foreclose on your home.

Chapter 13—also called "debt adjustment" or "reorganization"—is primarily used by people who have enough income to repay their debts over three to five years. Some debtors prefer Chapter 13 because it allows them to voluntarily repay a portion of their debt. If you have a good income and have filed for Chapter 7, the court may require you to convert to Chapter 13 or face having your case dismissed. Under Chapter 13, debts are paid back in full over a period of three to five years and back taxes and missed home loan payments are spread out for 36 to 60 months, which allows you to keep your bank accounts and home.

How can I decide whether or not to file for bankruptcy ?

To assess if bankruptcy is right for you, ask whether or not it will discharge enough of your debts to make the process worthwhile. Dischargeable debts include back rent, utility bills, credit card bills, loans from friends and relatives and legal, medical and accounting bills. Also consider that you might have to give up certain property you would like to keep, such as a second home, collections of art, stamps and coins, valuable family heirlooms or furs and jewelry.

Bankruptcy is reported on your credit history for 7-10 years. While most people who file for bankruptcy already have spotty credit, bankruptcy makes it challenging to get new credit. If you are approved for credit following a bankruptcy, you might be charged higher interest rates than people with good credit since you are considered a higher risk.

Other considerations are your privacy and autonomy. When you file for bankruptcy, a person is appointed by the court to approve all financial transactions you make while your bankruptcy case is open. Bankruptcies are also a matter of public record, so anyone who wants to look into your situation can do so.

Do I need a lawyer to file bankruptcy ?

Bankruptcy laws are complex, and it's probably a good idea to be represented by an attorney. Even if you decide to represent yourself, you should at least consult a bankruptcy attorney—a consultation should cost less than $100 and can help you to understand what the procedure is all about and whether there are any difficult areas in your case. "Bankruptcy petition preparers," who are paralegal workers, can prepare forms for you but are not allowed to give you legal advice. If you have a problem after the forms are filed, you won't have anyone to turn to.

Be aware that there are many bankruptcy-related scams that take advantage of people in financial trouble. Check out lawyers before you hire them by calling your state or local bar association.

Multiple-Choice Test

1. The federal agency that enforces consumer credit laws and investigates consumer complaints is the:
   1. Federal Communications Commission.
   2. Federal Trade Commission.
   3. Department of Justice.
2. You can get a free copy of your credit report if you:
   1. Are behind with your bills.
   2. Are over 21.
   3. Have recently been denied credit.
3. People can get low-cost assistance in managing their debts by contacting:
   1. An accredited non-profit credit counseling service.
   2. A pawnshop.
   3. A payday loan company.
4. The National Foundation for Consumer Credit suggests that your debt-to-income ratio, not including your mortgage payment, should not exceed:
   1. 36 percent.
   2. 20 percent.
   3. 25 percent.
5. Which of the following federally insured accounts pay the highest interest?
   1. Savings accounts.
   2. Interest-bearing checking accounts.
   3. Certificates of deposit (CD) accounts.
6. Financial experts advise that your emergency savings should contain enough to cover your living expenses for:
   1. One month.
   2. One year.
   3. Three to six months.
7. If you paid $50 per month instead of $30 on a $1,000 loan at 19% interest, you would save approximately this much in interest:
   1. $500.
   2. $225.
   3. $100.
8. Which of the following is not a good way to rebuild a poor credit history?
   1. Getting a secured credit card.
   2. Filing for bankruptcy.
   3. Applying for a loan from a local bank, credit union or retailer.

Answers. 2 | 3 | 1| 2 | 3 | 3 | 2 | 2

Consumer Rights

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Web site : www.ftc.gov

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Published / Reviewed Date

Published: April 02, 2000

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