Gain Control of Your Expenditures
Do you pay your bills on time? According to Bankrate’s 2004 finan- cial literacy survey, more than nine in every ten Americans (95 per- cent) agree that it’s very important to pay bills on time (and thus avoid late fees), yet only 83 percent of them claim that they do so consistently. With interest rates hovering around 12–18 percent for credit cards (1.5 percent on the unpaid monthly balance), the average household pays $1,700 in interest a year, according to Robert D.
Manning’s Credit Card Nation. This is the beginning of a very slip- pery slope. In fact, eight percent of families have missed a debt pay- ment by two months in a recent year, according to the Federal Reserve. Twenty-three percent have been contacted by a collection agency for a late bill. And as we mentioned in our introduction, 1.65 million declared bankruptcy in 2003.
More than half of those in debt—52 percent of Americans—blame their predicaments on poor money management and ignorance about financial protocols. However, Bankrate’s surveys show that people who pay their bills as they come in are more satisfied and less stressed than those who do not. Just the simple habit of paying each
bill as it arrives can make a big difference in your quality of life. Here are some more tips for slaying those financial dragons.
° Shift your bills around by changing the due dates on your credit cards. In this way they will not be so heavy during one part of the month. All you have to do is call the customer service number on the bill and speak to a representative.
° If you have a computer and can go online, use your bank’s online banking service. Over 35 million Americans use online bill pay- ment today, with that number expected to double in the next five years, according to Jupiter Research. You can schedule a number of your regular monthly payments to take place on the day of your choice. Do not assume that the payment will be executed electron- ically—assume instead that your bank will send it out by “snail mail.” When you schedule your payments, leave time for the check to go through the U.S. postal system. Once you’ve set up your monthly payments, check your account regularly (two to three times a week) to balance your checkbook and make sure you have enough funds to cover upcoming payments.
Note: Bankrate studies show that approximately half of banks charge for online banking and bill pay; half do not. The typi- cal charge is between five and eight dollars per month. Search for free online banking services. It engenders a long-term customer relationship between you and your bank. If your bank doesn’t offer these services, switch to one that does.
° Always pay your home and auto secured debt promptly—your home and auto are at risk. If you are late on paying unsecured debt, such as your credit cards, your credit rating will suffer and the bank can sue you. But they can’t repossess your car or foreclose on your house—like they can if you are unable to keep up with your secured debt payments.
Bills and Chills 13
The Bugaboos of Bankruptcy
If you’re in way over your head and your finances are ruining your life and your health, it might be worthwhile to consider filing for bank- ruptcy. (You can only do it once every seven years.)
There are several chapters in the bankruptcy code. Most likely you’ll be filing for Chapter 7 protection. This means that your assets will be sold to pay your debts. Which ones will be sold depends on where you live. Most states do not permit creditors to take your home or car, assuming you’ve got just one. Pretty much everything else, however, is game. The proceeds go into one pot and the creditors are paid accord- ing to their priority under the law. Even if the whole debt is not repaid, the slate is wiped clean except for obligations such as student loans, child support, and alimony.
Another bankruptcy option is Chapter 13, but this is only if you have regular income and your unsecured debts (such as credit cards) do not exceed $269,250 and your secured debts (such as a mort- gage) do not exceed $871,550. (These numbers are adjusted every three years for inflation.) Most of those who file for Chapter 13 sub- mit a plan to repay all or part of their debts over three to five years.
During this time you pay your current bills and turn over your dis- posable income to a court-appointed trustee, who in turn sends the payments to your creditors. The judge who is hearing the case can switch you to Chapter 7 for liquidation. Attorneys for Chapter 13 often will take their fees through the repayment plan, but those for Chapter 7 filings will probably want their fee ($500 to $1,000) paid up front in cash. A word of caution: If you hide assets, you’re committing fraud, a federal offense punishable by a hefty fine and time in prison.
It usually takes three to six months to complete Chapter 7 liquida- tion. In Chapter 13, the time frame depends on the length of the repay- ment plan, but it should not be more than five years. Once you file for
bankruptcy protection your creditors can no longer try to collect pay- ment and you get to start over with a clean slate. But this will put a per- manent black mark on your credit record for ten years; as a result, you’ll pay much higher interest rates on credit cards and other credit sources as a high risk. It could also cripple your ability to rent an apart- ment or to be hired for some jobs. Bankruptcy is an emotional drain as well. It is an absolute of last resort.
In the next chapter, we’ll look at surefire ways to keep you out of the debtors’ doldrums by sticking to a budget.