Knee Deep in Debt

Having trouble paying your bills? Getting dunning notices from creditors? Are your accounts 

being turned over to debt collectors? Are you worried about losing your home or your car?

You’re not alone. Many people face a financial 

crisis some time in their lives. Whether the crisis is 

caused by personal or family illness, the loss of a job, 

or overspending, it can seem overwhelming. But 

often, it can be overcome. Your financial situation 

doesn’t have to go from bad to worse.

If you or someone you know is in financial hot 

water, consider these options: realistic budgeting, 

credit counseling from a reputable organization, debt 

consolidation, or bankruptcy. Debt negotiation is yet 

another option. How do you know which will work 

best for you? It depends on your level of debt, your 

level of discipline, and your prospects for the future.

Self-Help

Developing a Budget: The first step toward taking 

control of your financial situation is to do a realistic 

assessment of how much money you take in and 

how much money you spend. Start by listing your 

income from all sources. Then, list your “fixed” 

expenses — those that are the same each month 

— like mortgage payments or rent, car payments, 

and insurance premiums. Next, list the expenses that 

vary — like entertainment, recreation, and clothing. Writing down all your expenses, even those that 

seem insignificant, is a helpful way to track your 

spending patterns, identify necessary expenses, and 

prioritize the rest. The goal is to make sure you can 

make ends meet on the basics: housing, food, health 

care, insurance, and education.

Your public library and bookstores have information about budgeting and money management 

techniques. In addition, computer software programs 

can be useful tools for developing and maintaining 

a budget, balancing your checkbook, and creating 

plans to save money and pay down your debt.

Contacting Your Creditors: Contact your creditors 

immediately if you’re having trouble making ends 

meet. Tell them why it’s difficult for you, and try to 

work out a modified payment plan that reduces your 

payments to a more manageable level. Don’t wait 

until your accounts have been turned over to a debt 

collector. At that point, your creditors have given up 

on you.

Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates 

how and when a debt collector may contact you. A 

debt collector may not call you before 8 a.m., after 

9 p.m., or while you’re at work if the collector knows 

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that your employer doesn’t approve of the calls. Collectors may not harass you, lie, or use unfair practices 

when they try to collect a debt. And they must honor 

a written request from you to stop further contact.

Managing Your Auto and Home Loans: Your debts 

can be unsecured or secured. Secured debts usually are tied to an asset, like your car for a car loan, 

or your house for a mortgage. If you stop making 

payments, lenders can repossess your car or foreclose 

on your house. Unsecured debts are not tied to any 

asset, and include most credit card debt, bills for 

medical care, signature loans, and debts for other 

types of services.

Most automobile financing agreements allow 

a creditor to repossess your car any time you’re in 

default. No notice is required. If your car is repossessed, you may have to pay the balance due on the 

loan, as well as towing and storage costs, to get it 

back. If you can’t do this, the creditor may sell the 

car. If you see default approaching, you may be 

better off selling the car yourself and paying off the 

debt: You’ll avoid the added costs of repossession and 

a negative entry on your credit report.

If you fall behind on your mortgage, contact 

your lender immediately to avoid foreclosure. Most 

lenders are willing to work with you if they believe 

you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your 

payments for a short time. When you resume regular 

payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage 

by extending the repayment period to reduce the 

monthly debt. Ask whether additional fees would be 

assessed for these changes, and calculate how much 

they total in the long term.

If you and your lender cannot work out a plan, 

contact a housing counseling agency. Some agencies 

limit their counseling services to homeowners with 

FHA mortgages, but many offer free help to any 

homeowner who’s having trouble making mortgage 

payments. Call the local office of the Department of 

Housing and Urban Development or the housing 

authority in your state, city, or county for help in 

finding a legitimate housing counseling agency near 

you.

Credit Counseling and 

Debt Management Plans

Credit Counseling: If you’re not disciplined enough 

to create a workable budget and stick to it, can’t 

work out a repayment plan with your creditors, or 

can’t keep track of mounting bills, consider contacting a credit counseling organization. Many credit 

counseling organizations are nonprofit and work 

with you to solve your financial problems. But be 

aware that, just because an organization says it’s 

“nonprofit,” there’s no guarantee that its services are 

free, affordable, or even legitimate. In fact, some 

credit counseling organizations charge high fees, 

which may be hidden, or urge consumers to make 

“voluntary” contributions that can cause more debt.

Most credit counselors offer services through 

local offices, the Internet, or on the telephone. If 

possible, find an organization that offers in-person 

counseling. Many universities, military bases, credit 

unions, housing authorities, and branches of the 

U.S. Cooperative Extension Service operate nonprofit credit counseling programs. Your financial institution, local consumer protection agency, and friends 

and family also may be good sources of information 

and referrals.

FTC Facts For Consumers 2
Reputable credit counseling organizations can 

advise you on managing your money and debts, help 

you develop a budget, and offer free educational materials and workshops. Their counselors are certified 

and trained in the areas of consumer credit, money 

and debt management, and budgeting. Counselors 

discuss your entire financial situation with you, and 

help you develop a personalized plan to solve your 

money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions. 

Debt Management Plans: If your financial problems stem from too much debt or your inability to 

repay your debts, a credit counseling agency may 

recommend that you enroll in a debt management 

plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should 

sign up for one of these plans only after a certified credit counselor has spent time thoroughly 

reviewing your financial situation, and has offered 

you customized advice on managing your money.

Even if a DMP is appropriate for you, a reputable 

credit counseling organization still can help you create 

a budget and teach you money management skills.

In a DMP, you deposit money each month with 

the credit counseling organization, which uses your 

deposits to pay your unsecured debts, like your 

credit card bills, student loans, and medical bills, 

according to a payment schedule the counselor 

develops with you and your creditors. Your creditors may agree to lower your interest rates or waive 

certain fees, but check with all your creditors to be 

sure they offer the concessions that a credit counseling organization describes to you. A successful DMP 

requires you to make regular, timely payments, and 

could take 48 months or more to complete. Ask the 

credit counselor to estimate how long it will take for 

you to complete the plan. You may have to agree not 

to apply for — or use — any additional credit while 

you’re participating in the plan. 

Protect Yourself

Be wary of credit counseling organizations that:

 charge high up-front or monthly fees for enrolling in credit counseling or a DMP.

 pressure you to make “voluntary contributions,” 

another name for fees.

 won’t send you free information about the 

services they provide without requiring you to 

provide personal financial information, such as 

credit card account numbers, and balances.

 try to enroll you in a DMP without spending 

time reviewing your financial situation.

 offer to enroll you in a DMP without teaching 

you budgeting and money management skills.

 demand that you make payments into a DMP 

before your creditors have accepted you into the 

program.

Debt Consolidation

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. Remember that these 

loans require you to put up your home as collateral. 

If you can’t make the payments — or if your payments are late — you could lose your home.

What’s more, the costs of consolidation loans can 

add up. In addition to interest on the loans, you may 

have to pay “points,” with one point equal to one 

percent of the amount you borrow. Still, these loans 

FTC Facts For Consumers 3
may provide certain tax advantages that are not available with other kinds of credit.

Bankruptcy

Personal bankruptcy generally is considered the debt 

management option of last resort because the results 

are long-lasting and far reaching. People who follow 

the bankruptcy rules receive a discharge — a court 

order that says they don’t have to repay certain debts. 

However, bankruptcy information (both the date of 

your filing and the later date of discharge) stay on 

your credit report for 10 years, and can make it difficult to obtain credit, buy a home, get life insurance, 

or sometimes get a job. Still, bankruptcy is a legal 

procedure that offers a fresh start for people who 

have gotten into financial difficulty and can’t satisfy 

their debts.

There are two primary types of personal bankruptcy: Chapter 13 and Chapter 7. Each must be 

filed in federal bankruptcy court. As of April 2006,

the filing fees run about $274 for Chapter 13 and

$299 for Chapter 7. Attorney fees are additional 

and can vary. 

Effective October 2005, Congress made sweeping changes to the bankruptcy laws. The net effect 

of these changes is to give consumers more incentive to seek bankruptcy relief under Chapter 13 

rather than Chapter 7. Chapter 13 allows people 

with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose 

through the bankruptcy process. In Chapter 13, the 

court approves a repayment plan that allows you to 

use your future income to pay off your debts during a three-to-five-year period, rather than surrender 

any property. After you have made all the payments 

under the plan, you receive a discharge of your debts. 

Chapter 7 is known as straight bankruptcy, and 

involves liquidation of all assets that are not exempt. 

Exempt property may include automobiles, workrelated tools, and basic household furnishings. Some 

of your property may be sold by a court-appointed 

official — a trustee — or turned over to your creditors. The new bankruptcy laws have changed the 

time period during which you can receive a discharge 

through Chapter 7. You now must wait 8 years after 

receiving a discharge in Chapter 7 before you can 

file again under that chapter. The Chapter 13 waiting period is much shorter and can be as little as two 

years between filings.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, and debt collection 

activities. Both also provide exemptions that allow 

people to keep certain assets, although exemption 

amounts vary by state. Note that personal bankruptcy usually does not erase child support, alimony, 

fines, taxes, and some student loan obligations. And, 

unless you have an acceptable plan to catch up on 

your debt under Chapter 13, bankruptcy usually 

does not allow you to keep property when your creditor has an unpaid mortgage or security lien on it.

Another major change to the bankruptcy laws 

involves certain hurdles that a consumer must clear 

before even filing for bankruptcy, no matter what the 

chapter. You must get credit counseling from a government-approved organization within six months 

before you file for any bankruptcy relief. You can 

find a state-by-state list of government-approved organizations at www.usdoj.gov/ust. That is the website of the U.S. Trustee Program, the organization 

within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Also, before you 

FTC Facts For Consumers 4
file a Chapter 7 bankruptcy case, you must satisfy a 

“means test.” This test requires you to confirm that 

your income does not exceed a certain amount. The 

amount varies by state and is publicized by the U.S. 

Trustee Program at www.usdoj.gov/ust.

Debt Negotiation 

Programs

Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long 

term negative impact on your credit report and, in 

turn, your ability to get credit. That’s why many 

states have laws regulating debt negotiation companies and the services they offer. Contact your state 

Attorney General for more information.

The Claims

Debt negotiation firms may claim they’re nonprofit. 

They also may claim that they can arrange for your 

unsecured debt — typically credit card debt — to be 

paid off for anywhere from 10 to 50 percent of the 

balance owed. For example, if you owe $10,000 on a 

credit card, a debt negotiation firm may claim it can 

arrange for you to pay it off with a lesser amount, say 

$4,000.

The firms often pitch their services as an alternative to bankruptcy. They may claim that using their 

services will have little or no negative impact on your 

ability to get credit in the future, or that any negative 

information can be removed from your credit report 

when you complete their debt negotiation program. 

The firms usually tell you to stop making payments 

to your creditors, and instead, send payments to the 

debt negotiation company. The firm may promise to 

hold your funds in a special account and pay your 

creditors on your behalf.

The Truth

Just because a debt negotiation company describes 

itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. 

There also is no guarantee that a creditor will accept 

partial payment of a legitimate debt. In fact, if you 

stop making payments on a credit card, late fees and 

interest usually are added to the debt each month. 

If you exceed your credit limit, additional fees and 

charges also can be added. This can cause your original debt to double or triple. What’s more, most debt 

negotiation companies charge consumers substantial 

fees for their services, including a fee to establish the 

account with the debt negotiator, a monthly service 

fee, and a final fee of a percentage of the money 

you’ve supposedly saved.

While creditors have no obligation to agree to 

negotiate the amount a consumer owes, they have a 

legal obligation to provide accurate information to 

the credit reporting agencies, including your failure 

to make monthly payments. That can result in a 

negative entry on your credit report. And in certain 

situations, creditors may have the right to sue you to 

recover the money you owe. In some instances, when 

creditors win a lawsuit, they have the right to garnish 

your wages or put a lien on your home. Finally, the 

Internal Revenue Service may consider any amount 

of forgiven debt to be taxable income.

Damage Control

Turning to a business that offers help in solving debt 

problems may seem like a reasonable solution when 

your bills become unmanageable. But before you do 

business with any company, check it out with your 

state Attorney General, local consumer protection 

agency, and the Better Business Bureau. They can 

tell you if any consumer complaints are on file about 

FTC Facts For Consumers 5
the firm you’re considering doing business with. 

Ask your state Attorney General if the company is 

required to be licensed to work in your state and, if 

so, whether it is.

Some businesses that offer to help you with your 

debt problems may charge high fees and fail to follow through on the services they sell. Others may 

misrepresent the terms of a debt consolidation loan, 

failing to explain certain costs or mention that you’re 

signing over your home as collateral. Businesses 

advertising voluntary debt reorganization plans may 

not explain that the plan is a bankruptcy filing, tell 

you everything that’s involved, or help you through 

what can be a long and complex process.

In addition, some companies guarantee you a 

loan if you pay a fee in advance. The fee may range 

from $100 to several hundred dollars. Resist the 

temptation to follow up on these advance-fee loan 

guarantees. They may be illegal. It is true that many 

legitimate creditors offer extensions of credit through 

telemarketing and require an application or appraisal 

fee in advance. But legitimate creditors never guarantee that the consumer will get the loan — or even 

represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who 

guarantees or represents a high likelihood of your 

getting a loan or some other extension of credit may 

not ask for or accept payment until you’ve received 

the loan.

You should be cautious of claims from so-called 

credit repair clinics. Many companies appeal to consumers with poor credit histories, promising to clean 

up credit reports for a fee. But you already have the 

right to have any inaccurate information in your file 

corrected. And a credit repair clinic cannot have accurate information removed from your credit report, 

despite their promises. You also should know that 

federal and some state laws prohibit these companies 

from charging you for their services until the services 

are fully performed. Only time and a conscientious 

effort to repay your debts will improve your credit 

report.

If you’re thinking about getting help to stabilize 

your financial situation, do some homework first. 

Find out what services a business provides and what 

it costs, and don’t rely on verbal promises. Get everything in writing, and read your contracts carefully.

For More Information

For more information, see Fiscal Fitness: Choosing a 

Credit Counselor, at ftc.gov/credit.

The FTC works for the consumer to prevent 

fraudulent, deceptive, and unfair business practices 

in the marketplace and to provide information to 

help consumers spot, stop, and avoid them. To file a 

complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP 

(1-877-382-4357); TTY: 1-866-653-4261. The FTC 

enters Internet, telemarketing, identity theft, and 

other fraud-related complaints into Consumer Sentinel, a secure online database available to hundreds 

of civil and criminal law enforcement agencies in the 

U.S. and abroad.

For The Consumer Federal Trade Commission

www.ftc.gov 1-877-ftc-help

Federal Trade Commission

Bureau of Consumer Protection

Office of Consumer and Business Education

FTC Facts For Consumers 6