Ask Barbara Advice Column

"Ask Barbara" gives you the ability to ask and receive a personal answer to your questions. Barbara is our Education Manager and has years of experience in counseling and educating people in financial distress.

Please refer to the collection of responses below by clicking on them to expand the answers. If your question is not addressed there, fill out the "Ask Barbara" form.

• "What is a bankruptcy and how does it work?"

  The primary purpose of bankruptcy is to give a person, who is unable to repay their debts, a chance to start over financially. There are two (main) types of individual bankruptcy. Under Chapter 7, debtors are sometimes required to turn certain property that they owned when they filed their bankruptcy petition, over to a court trustee. This property is sold, and the proceeds are used to pay the creditors. Any remaining balance owed to the creditor is then discharged.

  In a Chapter 13 bankruptcy people may keep their property, but must commit to a court ordered repayment plan of their debt. The repayment plans typically last three to five years and at the end of that time any balance remaining is discharged.

  Anyone considering bankruptcy is required by law to receive pre-bankruptcy credit counseling

• "What is a settlement and how does it work?"

  In a settlement the creditor agrees to accept partial repayment of the debt you owe them and stop further collection efforts. Unfortunately, if the amount you did not pay is over $600 the creditor must report the amount to the IRS or the creditor may sell the remaining portion to another collection agency. Amounts reported to the IRS may increase your tax liability and amounts sold to another collection agency may do further damage to your credit report.

  If you are going to agree to a creditor settlement request that the creditor mark the accounts as paid in full on your credit report and that the residual on the account is not sold or forwarded to another collection agency. Also make sure to have the creditor put the negotiation agreement in writing before making the payment.

• "What is a debt negotiation company and how does it work?"

  These companies work with your creditors to try and reach a settlement agreement. The settlement company establishes a payment that you make each month directly to them. The payment goes into a savings account until the balance reaches a suitable amount that the creditor will accept as a settlement.

  While you are making payments to the debt settlement company, your creditors are not receiving any money. This means the creditor will continue to try and collect the debt from you. Steps may include sending the account to collections (negative mark on credit report) or proceeding with legal action which may include court judgments and wage garnishment. In addition, your credit report is continually being damaged by late fees and other derogatory marks.

  Before using any debt settlement or debt negotiation company check them out with the Better Business Bureau.

• "What is a home equity loan and how does it work?"

  Refinancing, 2nd mortgages, and home equity lines of credit are some methods people use to try and pay their unsecured debt. The person uses their property (home) as collateral for a loan and then uses the proceeds from the loan to pay off their unsecured debt. Payments may be lower than those of their credit cards because they are spread out over 10-30 years, but this process also turns low priority (unsecured) debt into high priority debt and could result in someone losing their home.

  This option is best for people who have the ability to stop incurring more unsecured debt and for people with good credit that qualifies them for a loan at a favorable interest rate.

• "What is a debt management plan and how does it work?"

  The DMP consolidates all of your unsecured accounts into one monthly payment which is then sent to each of your program creditors. All of the accounts on the DMP are closed or inactivated and a DMP may impact a your ability to open new types of credit while you're on the program.

  Because a DMP provides you the opportunity to repay your unsecured debts without taking on additional debt, many creditors are willing to provide benefits to help you pay off the debt and get back on track. Those benefits may include stopping late fees and/or over-the-limit fees, reducing or eliminating high interest rates, and stopping collection calls or court proceedings.

  DMP's typically last three to five years and can help you reestablish a consistent payment history.

• "What is a consolidation loan and how does it work?"

  Consolidation loans typically benefit people who have the ability to stop incurring more unsecured debt and want the convenience of one monthly payment. Unsecured consolidation loans typically have higher interest rates because there is nothing the creditor can take if the person fails to pay the loan as agreed.

  Most banks prefer to lend secured consolidation loans and therefore qualifying for an unsecured consolidation loan, at an interest rate better than what someone is currently being charged by their creditors, may be difficult unless they have good to excellent credit. Qualifying for an unsecured bank loan will also be difficult if they have any late, collections, or derogatory information on their credit report.

  Finance companies may provide unsecured consolidation loans to people with less than perfect credit but it will come at the cost of a higher interest rate. Higher interest rates equal higher payments which may make a loan a poor choice for getting out of debt.

• "I let my mother have 2 credit cards in my name about 5 years ago. She completely messed up my credit. I know that it is my name on the cards and I am responsible but I don't have the money to pay them. What can I do?"

  Unfortunately you are liable for the debt your mother accrued since you allowed her to use your credit cards. Unless you can come to an agreement with her to pay these back, you will have to make payment arrangements.

  I encourage you to call and speak to one of our counselors who may be able to assist you with this. They will take a close look at your budget and try to work out a way for you to set up payments. If you simply ignore the problem, you run the risk of the creditors taking you to court which could result in a judgment being placed against you and garnishment of your pay.

  Our counselors are available Monday - Friday from 6.00am - 9.00pm pacific time and Saturday and Sunday from 7.00am - 3.30pm. Please call 1-888-282-5899 for further assistance.

• "How can you re-establish/establish credit if no one will give you a credit card?"

  A secured credit card is ideal for those re-establishing credit. To get a Visa Secured card, you'll need to deposit money in a savings account or certificate of deposit (CD) in your name. Your money will earn interest, but it must remain in the account to serve as security for the card. This type of card is accepted for purchases everywhere that Visa credit cards are welcome, up to your deposited amount. You should contact your bank or credit union and find out if they issue secured credit cards. You can also apply for a secured card on line at www.usa.visa.com.