By ALLISON KADE
If you're secretly struggling with financial stress, you're probably less alone than you think. And if you're making ends meet, there's a good chance you have friends or family who aren't. In fact, almost half of all Americans don't have enough savings to cover a $400 emergency.
Admitting that you're treading water can be hard. As financial psychologist Brad Klontz told The Atlantic, "You are more likely to hear from your buddy that he is on Viagra than that he has credit-card problems . . . Much more likely." All the same, simply asking for help can save your finances in a big way.
Signs you may want to ask for help
"Sometimes people don't reach out for medical attention until their health problems are severe and difficult to resolve," says Bruce McClary, vice president of communications at the National Foundation for Credit Counseling (NFCC). "When it comes to financial issues, the scenario can be very similar."
Here are some warning signs that it may be time to reach out:
- You have no money left over in your budget. If you have so little wiggle room in your budget that you can't afford to pay more than the minimums on your debts or save anything for later, something might need to change.
- You don't have any savings at all. When you have barely any savings, even a minor financial emergency can spiral your finances into a dark place, McClary says.
- You're behind on your debt repayments. Ideally you'd reach out before the bills start catastrophically stacking up, but never feel that you're too far gone to ask for help. Once your financial burden starts to feel unmanageable, start exploring your options.
Don't wait until your financial situation is so dire that you can't keep it to yourself anymore. McClary says that the earlier you reach out for help, the more options you may have, as the more delinquent you become, the less access you may have to options like credit card balance transfers, which generally require pretty good credit.
Where to turn for financial support
Unfortunately, there are some people who prey on consumers in dire financial straits, like some for-profit credit counselors and payday lenders.
Certified Financial Planner™ Cary Carbonaro recommends only working with nonprofit credit counseling agencies. "I have seen negative consumer experiences with for-profit agencies," she says. "They sometimes try to make money off the back of people in debt rather than helping them change behaviors and trying to make sure this debt doesn't happen again."
Jim Wang, founder of WalletHacks.com, notes that it isn't enough to simply verify that an agency is a nonprofit. He recommends considering "other factors, like their programs, services, fees and qualifications" as well.
To help you determine whether you're speaking to a legitimate agency that charges reasonable fees and has your best interests at heart, the Federal Trade Commission offers a list of questions to ask.
"Look for an agency that offers a complete budget review and a review of all your credit," McClary says. "Some can help you work with your creditors to find a repayment plan. And many nonprofit agencies also offer student loan and housing counseling services in a way that's confidential and objective."
Nonprofit credit counseling sessions generally last about an hour and could be free or low-cost for consumers. When agencies do charge a session fee, it's usually no more than $20 or $30, McClary says.
However, if you participate in a debt management plan (in which your credit counselor negotiates with your creditors directly to figure out a payment plan for you), you could face an initial fee of about $50 and a monthly fee that hovers around $30 or so, depending on the agency and your situation.
How to negotiate your bills successfully
After facing a layoff and under-employment in 2008, former customer relations manager Thomas Nitzsche was nervous about how he'd continue to pay his mortgage. He applied for and received a HAMP home loan modification that reduced the interest on his mortgage to 2.1 percent for five years and lowered the monthly payment by about $300.
Then, four years ago, Nitzsche incurred about $3,000 in medical bills, so he again applied for financial aid. "I explained that money was tight," he said. "I submitted my financial information to the hospital billing department and was awarded a 60 percent reduction of the bill."
He was also given a payment plan with a 0 percent interest rate for a full 24 months. Because he reached out immediately instead of waiting until the balance was sent to a collection agency, the debt was never reported to the bureaus and didn't wreak havoc on his credit score.
If in doubt, try asking hospitals and vets for a payment plan, talking to your student loan provider, asking for a loan-modification program for your mortgage or whatever else might help you get your finances back in order.
"You should always explore all your options, whether that may be a hardship plan or a settlement if you can afford to pay a lump sum," Nitzsche says. Your creditors might not say yes, but you never know until you ask. And, he says, "If you have good credit, you can also research consolidation or a credit card balance transfer."
Before jumping on the phone, try to have a clear goal in mind. Do you want a new payment arrangement? Are you asking your creditor to forgive part of your debt if you settle the remainder?
"If you ask your creditor to erase your whole debt even though it's a valid charge, your chances of getting your way will be very slim," he says. "On the other hand, if you say you're experiencing a period of hardship and have the full intent of paying but need breathing room, you may be likelier to find something that's agreeable to both you and your creditor."
You also may be more successful if you reach out sooner rather than later. "I encourage people to have proactive conversations with medical billers and creditors as opposed to waiting until it's too late," McClary says. "I can speak from firsthand experience: Creditors, medical billers and debt collectors may be more likely to work with you if they don't have to hunt you down and pry information out of you."
McClary likens negotiating bills to ordering at In-N-Out Burger, which is famous for off-the-menu items. "While it looks like there are only twelve or thirteen menu items, there are actually a variety of other things you can order. You have to know what to ask for."
Similarly, if you don't like the options your creditor presents, keep asking questions to potentially unearth a better solution. For example, some creditors might lower your interest rate for a limited period, such as six months, to give you a break.
Throughout, know your own limitations. Negotiating with one or two creditors is one thing, while juggling four, five or six creditors is quite another. When you start to feel overwhelmed, McClary says, it may be time to seek the help of a professional who can help you streamline the process.
The pros and cons of settling your debt
Settling a debt typically means negotiating a reduced payment that'll count as paying off your account. This is attractive because it means ditching a debt for less than you owe, but it has the potential to hurt your credit score almost as much as a bankruptcy. However, if you're considering settlement, you may already have collections and judgments against you, so the damage may already have been done.
With debt settlement, the account is usually reported as "settled," which is better than being delinquent but not the same as paying in full. However, you may be able to convince your creditor to report the account as "paid in full," which will likely be more beneficial to your credit score.
"Debt settlement could be a good idea if it's your only option other than bankruptcy," Carbonaro says. "But you have to solve the underlying problem of how it happened, or it could happen again."
In addition to the potentially serious hit to your credit score, settling a debt might mean getting stuck with an unexpected tax bill. Your settled debts could be "reported as income, so you may have to pay taxes to the IRS on that settled amount," McClary says. If you do pursue debt settlement, consider whether you can handle the tax bill.
Additionally, understand that settlement means you'll need to pay the remaining portion of your debt. So, if you owe $5,000 and negotiate a settlement for $2,500, you now have to fork over $2,500. McClary says, "Sometimes creditors ask for that in a lump sum, so you must be prepared to make a significant payment to resolve everything."
Sadly, debt settlement is also an area chock-full of scams and ineffective third parties. "There are a lot of debt settlement scams out there, so you really need to do careful research before working with a company," says Wang.
McClary notes that methods used by some for-profit settlement negotiators can do more harm than good. "For example," McClary says, "some debt settlement firms encourage people to cease communication with their creditors while they are waiting for a settlement. That can be very bad advice. I've seen people become more severely delinquent and in some cases have legal action taken against them as a result."
For the most part, McClary doesn't recommend settling debts because of the likely negative impact on credit scores, potential tax bill and the money required upfront. But if you've considered carefully and are interested in debt settlement, he strongly recommends you handle it yourself rather than using a third-party negotiator.
Get everything in writing and carefully check your credit report to make sure your debt is being reported the way it should be. "I've heard so many stories of people who thought they negotiated a settlement only to find out the creditor didn't report it correctly to the credit bureaus, so they faced continued collection efforts," McClary says.
At the end of the day, it's important to remember that there's another person on the other end of the line, and often one who's willing to help you get back on your feet so you can afford to make payments. After all, your creditors don't gain much if you can't pay back what you owe.
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