Debt Relief Lowdown

Never use your retirement accounts to pay off mortgage loans

You have an unbearable debt and don’t want to file for bankruptcy. But you also don’t want to approach a credit-counseling center because you know exactly how to repay your debt – withdraw the money in your individual retirement accounts (IRA) and pay off your loans. This would mean a dent in your retirement funds, but only a small one.

If you really think so, then the first thing you need to do is rush to a credit counselor, or somebody who’ll tell you that such an act would not only be self-defeating, it could make you lose some good money! The choice of using your IRA funds actually should not exist on your list of options to repay loans.

Imagine if you’ve deferred payment, then the taxes and penalties will be quite high. So, when you account for all these penalties and taxes, you may be forced to withdraw much more than you actually intended to.

And the biggest problem with trying to withdraw from your IRA is that you’ll lose your future tax-deferred returns. This means that if you withdraw something as paltry as $1,000, it could cost you over $10,000 in lost retirement income at a rate of 8% per annum or in other words, over 30-35 years, you would have lost nearly $1 million in future income! A better option would be to examine your accounts and find ways to trim unnecessary expenses.

Firstly, if your debt burden is too high, don’t try to sort out your financial affairs alone. You need professional help and quick. So quit dilly-dallying. But before you meet with your counselor, you could sit down and do some stock taking to know where exactly you’ve gone wrong in managing your money. Once you identify the problem areas, you’ve won half the battle. Now it is only a matter of time before you and your counselor chalk out a plan to ensure that you are back on track at the earliest possible.

Is your credit-counseling agency cheating you?

Here’s one example of how an incorrect choice of a credit-counseling agency could take you deeper into debt. The company, Financial Counselors of America has been accused of worsening the debt situation of its customers. Wmcstations.com reports:

If they're charging 100-200 dollars, that's 200 dollars that could go to your creditors," said Hack Hogan with Consumer Credit Counseling in Memphis. "That's 200 dollars you could pay to your debt. Why do you need to pay it to an agency?"

Read more: Consumers be warned!

How to choose a good credit-counseling agency

If your debt level is very high then you probably have no choice but to approach a credit-counseling agency. However, you need to choose the agency wisely since there are many credit counseling agencies that work as fronts for for-profit enterprises. One of the first things you need to check is whether the agency is accredited with either the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies.

And never approach the first agency you find. Make a list of prospective agencies that you want to work with and then narrow it down to a few that seem good. Next, you should call up your local Better Business Bureau and see if any complaints are filed with them. As a rule, don’t work with a credit-counseling agency that has many complaints filed against it.

Once you’ve chosen the agency you want to work with, find out the range of services that the agency offers. Finally, if any credit-counseling agency lures you with promises of wiping off your credit history, stay away from them – simple fact is that your credit history cannot be erased.

Is credit counseling a ‘waste of time’?

According to the norms laid down by the new bankruptcy law, anybody who wants to file for bankruptcy has to first undergo a credit counseling session. However, according to a recent study, these sessions are ‘a waste of time and money' for 97 percent of the consumers. Mercurynews.com reports:

Only 3 percent of the 61,000 consumers who sought counseling had enough of a financial cushion to benefit from a payment plan, according to the study by the National Association of Consumer Bankruptcy Attorneys.

Read more: Credit advice ‘waste of time'

Live ‘below’ your means & get out of debt

Getting out of debt is like losing weight: theories abound making the process seem simple, but is extremely difficult to practice. There are now a number of options available to people struggling with mounting debt. Enidnews.com reports:

"People have to learn a new discipline, " said Jennifer Delcamp, vice president of Consumer Credit Counseling Service of Central Oklahoma. "They don’t have to learn to live within their means, they have to learn to live below their means. "

Read more:Local agencies offer financial counseling assistance

Get out of debt: Kill the overspending habit

Readers will notice that in the past few weeks I have been giving small tips on how to get out of debt or reduce your debt burden. Agreed, debt is a difficult issue with most of us. And the fact that just about everyone out there wants to give you advice on how to deal with it, makes it doubly difficult to deal with this touchy issue.

Firstly, here we don’t try to tell you the ‘right path’. Simply because there is nothing like a right path: The reasons for one person being in debt vary considerably from the reasons of another person. So, it doesn’t make sense to create a one-size-fits-all plan. But what we can do is examine the situation, find out similarities and address the root cause of these similar problems.

For example, some people just cannot help spending too much. These people are controlled by their desire to spend. In other words, this is a psychological problem and needs to be addressed as such. It is just like any other kind of addiction, which you cannot rid yourself of easily.

If you feel that this sums up the way you behave then probably you can do with our little tip. Get help, and quick. This may sound melodramatic, but if you don’t try to sort out your affairs before it is too late, you may well find yourself in a debt cauldron that just keeps heating up, and will finally stew you!

Probably the best way out for you is to talk with a credit counselor on a private basis. It is not compulsory that you enter their debt repayment program. And once you’ve had a frank tête-à-tête, you may be able to work out something. The good news is that planning and professional help will definitely help you turn things around.

Credit counselors see rise in business

The new bankruptcy law may have made it more difficult for people to file for bankruptcy, but one group of people isn’t unhappy about the changes. For credit counseling agencies, the new law only means more business since you are required to go in for a counseling session six months before filing. Bizjournals.com reports:

The intention of lawmakers was to get people to slow down and think before looking to bankruptcy as a way out of debt.

Read more: Credit counselors see more business as new bankruptcy regs take effect

Credit counseling agencies

What can be worse than mounting credit? Unscrupulous credit-counseling agencies that collect huge fees and do nothing to help customers get out of their debt trap.

Today more than ever before, this can create a very dangerous situation. Even middle class families and people, who earn a good amount of money each month as salary, are struggling to pay mounting bills. The fact that consumer debt crossed the $2 trillion mark in 2005 points to a deep-rooted malaise. Something that needs to be eventually weeded out. But at present, it is important to help these people who are struggling to repay their debts. And if in such a scenario, predatory companies try to take advantage of the helpless situation of these people, they must be dealt with strongly. News-journalonline.com reports:

There are others who fly under the nonprofit banner but actually serve as shells for other companies aimed at squeezing money out of people already in financial trouble. The Washington Post reported that the Internal Revenue Service revoked non-profit status for up to 20 of those agencies this fall, though names of specific companies weren't revealed.

Read more: Debt-repair services can mislead consumers

Pre-Bankruptcy Counseling

Debt Reduction Services Inc, a national credit counseling organization, was the latest organization to have been given the approval to provide pre-bankruptcy counseling in compliance with the Bankruptcy Code. The agency has offices in Idaho, Alaska, Montana, New York, Oklahoma, Oregon, and Washington. PR.com reports:

"This gives us another great platform in helping us meet our mission of educating the general public to the best of our abilities about the importance of maintaining a healthy financial lifestyle and avoid the pitfalls of over indebtedness, " said Greg Kannenburg, Director of Counseling of Debt Reduction Services, Inc.

Read more: Debt Reduction Services Inc. to Provide Pre-Bankruptcy Counseling

Credit counseling pitfalls

AmeriDebt Inc., a non-profit credit-counseling agency, which at one point of time seemed like a buffer against inevitable bankruptcy is everything a counseling agency should not be.

As Andris Pukke, who launched this agency finds himself in court yet again, the attention has moved to credit counseling agencies and what can go wrong with them. And AmeriDebt makes for a very good case study. Pukke was one of the select few that understood and took advantage of the credit card boom that hit the country in the last decade of the 20th century.

As people struggled with mounting debts and no way out of the mire of bankruptcy, such self-styled credit counselors mushroomed all across the country. And as the demand grew, the service became less personalized. Where you could once have face-to-face sessions with your counselor, all people had to do now was call toll-free numbers and get instant debt management information. Instant salvation in the age of instant popcorn!

They took advantage of the naiveté of the general public. These agencies hired in the hundreds and all the employees had to do was collect ‘voluntary contributions’. There was very little or no counseling offered to clients who were left high and dry once the money was collected from them. Meanwhile, creditors calls kept mounting and clients finally had no choice but file for bankruptcy – an option that they had been trying to avoid in all earnest.

And while his clients lost money and suffered bankruptcy; Pukke used their money to fund his lavish homes and exotic vacations. Pukke seems to have run out of luck finally.

But this experience is not without its lessons. And the most important one is that everything needs a check AND a re-check – and that includes your credit counselor’s credentials as well!