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May I Please Have a Financial Do-Over?

Posted by Michelle Gershfeld in Divorce and Money

“May I please have a financial do-over?”   Sometimes we get into situations and we feel we are trapped, smothered in distress, and we often cannot see a way out.  Wouldn’t it be great if we could do it all over again?  We would be so much smarter the second time around.

Financial stress can be emotionally and physically painful, frightening and all-consuming.  Many people fear “the fear,” do nothing to alleviate their situation, and hope for better times to come along.

What may have started as one credit card might now have grown to multiple cards, with high balances and increasing interest rates.  Are you always looking for a new offer to move debt from one source to another?  Are you in the never-ending circle of paying transfer fees to stay afloat?

The mortgage that once seemed manageable may now be beyond your ability to pay.  Maybe you now earn less, or have encountered some other unwelcome situation that has resulted in a predicament where your expenses exceed your income.

The question is: How do you get from where you are now, to where you want to be?  How do you manage your money and maintain a good quality of life (a/k/a not always worrying about money)?

First, let’s dispel a common misperception:  There is no debtor’s prison.  That means, if you don’t pay your bills, you will not be sent to jail.  If you incurred debt (credit cards, car loans, personal loans), with intentions of repaying, that are now beyond your ability to repay, not making payment on those debts is not illegal.  That does not, however, mean you can charge up expenses that you never intend to pay.  That is fraud, for which you can be legally prosecuted.

While there is no “debtor’s prison,” you can still be sued by the party to whom you owe the money.  Litigation is an expensive undertaking, and you want to know your rights so you can make the best possible decisions.

For all of the well-intentioned debt you incurred, how do you get to that fresh start?

To begin with, you need to understand the different priority classifications of debt.  Secured creditors have an interest in your assets.  That might be your mortgage holder, who has an interest and can collect by foreclosing and selling your home, which was/is the collateral for the loaned money.  The car dealership that extended you credit to buy your car is also a secured creditor.  In that scenario, your car is collateral for the loan, and it can be repossessed to cover payment of the outstanding loan.  In secured creditor situations, unless you are prepared to lose the collateralized item, you will want to make payments of such debts a priority.

While the balance of debt owed to your secured creditor (after sale of the collateralized item) can be discharged, other debt is absolutely non-dischargeable.  That means even if you file for bankruptcy protection, you will not be relieved of owing such debt.  These types of debt include tax debt, student loans and domestic support obligations.  Since these debts cannot be avoided, and will continue (in many instances) to accrue interest and penalties, you do not get a do-over.  Accordingly, when calculating how to start fresh, your computation must include getting these debts paid off as soon as possible.  Beware, our government deducts student loan debt from social security income.  There is no way to hide from government issued debt.

The least “scary” classification of debt is debt that is unsecured.  Those debts are incurred when you are offered credit/money for which the creditor/lender accepts only your promise to repay the debt.  There is no collateral on this debt and if you do not pay, the creditor has to take (and win) legal action to collect the amounts they claim you owe.  This is debt that can be discharged or reduced through a bankruptcy.  Or with a little grit and thick skin, you can negotiate with your creditors to pay significantly less in principal, interest or both.

Knowing your rights when the debt collectors call is likewise essential.  The Fair Debt and Collection Practices Act makes harassment illegal.  Specifically, debt collectors cannot abuse you by making repeated calls intended to annoy you.  They are prohibited from using obscene or profane language, or making any threats of violence or harm against you.

If a debt collector calls you, be sure to obtain (and record) identifying information, including the caller’s full name, and the name, address and phone number of the collection company.  Ask the caller to send you, in writing:

  • the name of the alleged creditor,
  • the amount claimed,
  • the date the debt became due, and
  • the specific process to dispute or verify the debt. Do not agree to anything until you receive this information.  

Before agreeing to or making payment for an older debt, determine if the statute of limitations has passed.  If the debt is too old for the creditor to legally pursue you in court, you do not want to reopen that deadline.

If you believe the debt collector has violated the Fair Debt and Collection Practices Act, submit a complaint to the Consumer Financial Protection Bureau at consumerfinance.gov/complaint.

Hindsight is a wonderful tool, but when we are moving in a million directions at once, making the best decisions we can in the moment and trying to survive and enjoy the ride, faced with a never-ending array of consumer goods, needs and wants, matched with pre-approved credit cards, greedy lenders and well-intentioned (maybe) neighbors named Jones, we sometimes get in over our heads. In fact, sometimes well over our heads.  Nevertheless, with a little ingenuity and courage, you can face the debt of yesterday and make a new plan for tomorrow.

It may take some time, and while you certainly do not get to do-over your past missteps, the debt you currently face does not define you.  It does not have to be a life sentence.  You have the power and ability to maximize the money you earn.  No one else is going to do this for you.  But, you can do it!  Today is the best day to start!

— Michelle Gershfeld  has spent nearly 30 years as a lawyer, specializing in bankruptcy law.  She has represented bankruptcy trustees and clients in more than 20,000 cases.  As an Accredited Financial Counselor and Financial Fitness Coach, she is an active member of the Association for Financial Counseling and Planning Education (AFCPE), the leader in financial counseling and education. Bridging the fields of law and financial counseling, Gershfeld uses her skills as a speaker and published writer to help clients on the road toward getting financially fit.  In her practice, Gershfeld seeks to empower clients in the area of personal finance and provide reliable, non-judgmental, practical solutions. Visit her website at www.GetFinanciallyFit.com or contact her at Michelle@GetFinanciallyFit.com

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