You’ve gotten to the breaking point where you can’t imagine trying to dodge one more call from a collection agency and need relief immediately.
Unfortunately this sinking feeling is all too common across the heartland today. According to a recent survey by Bankrate.com, four out of 10 Americans are on the verge of financial collapse, with 25% of survey participants reporting that they owe more on credit cards than they have saved for an emergency.
Surprisingly and most alarming, those supposed to be on the brink of retirement were more likely to have more credit card debt than savings.
"These are the people who are supposed to be getting ready to retire. This may be an indication that they are not really ready," says Mackey McNeill, CFA, president and CEO of Mackey Advisors.
Unfortunately what may be occurring is this pre-retirement group may be helping their children to stay afloat as the economy struggles to recover. Bankrate.com’s survey reported that 31% of the survey respondents who had children have credit card debt that is higher than their savings.
Credit experts contend that consumers approach debt “backwards” by struggling to first meet minimum payments each month only to have nothing left over for savings. Gail Cunningham, VP/Membership and PR for the National Foundation for Credit Counseling says that consumers should be paying themselves first before disbursing cash to creditors.
“I really land on the side of savings,” she says. “People absolutely need to service their debt, but I do know that people's entire financial well-being can be wrecked by one flat tire, one visit to the emergency room or one leaky toilet."
If you are starting with nothing in your emergency fund, but require a benchmark figure, stockpiling up to two years worth of expenses would be best.
"Ideally, I would like two years' worth of expenses. That is really optimistic, though. At a minimum you'd want six months to a year," says Kimberly Foss, CFP, president of Empyrion Wealth Management.
Should You Consider a Debt Management Company?
In some cases, the consumer will head to a debt management company, hoping that a credit counselor will provide guidance and direction. Unfortunately following the collapse of the economy, numerous predatory debt management companies sprung up across the country, causing more harm than good to the consumer.
While many of these companies promise the moon and the stars, credit counselor Richard Musser says that getting out of debt does not happen overnight. "There is no magic bullet," he explains. "It's going take time. If you got yourself into a debt situation, it's going take time to undo it."
Musser says that a debt consolidation or management company may help you reach a settlement where you end up paying less than what you owe, but the work done to whittle down the debt may have a negative impact on the consumer’s credit score--which could have a lasting effect for several years. Additionally, some companies charge up front fees or try to cross sell additional services in an effort to boost that fee.
While not all credit counseling/debt management companies are considered to be predatory, the consumer will have to perform significant research before handing over his or her debt history.
The Federal Trade Commission suggests that before agreeing to work with a debt counselor, consumers should ask questions such as:
What services do you offer? The FTC recommends that consumers avoid companies that push or only offer a debt management plan (DMP) as the only option before evaluating your financial situation.
What are your fees? Get this detailed information up front and get it in writing.
Is there a formal contract I have to sign? Don’t sign a contract without reading it first and/or having your attorney evaluate it.
How are you counselors compensated? The FTC says that if employees are paid based on the number of services you sign up for, to consider that to be a red flag.
Your Credit Union Has a Better Alternative
Rather than wading through the sketchy world of debt consolidation/management companies, go with a friend and neighbor you know--your credit union.
Many credit unions offer comprehensive debt management and financial literacy assistance to not only help you pay off your debt, but jump-start that savings/emergency fund.
For example, PrimeWay Federal Credit Union ($412 million, Houston, TX) has had a “Debt in Focus” program for about four years. “We rolled it out because we had a number of members who were struggling financially, but they never came into a branch,” says Michelle Oshinski, SVP Marketing & Government Affairs. “Our mission as an organization is to help our members create financial strength through education, service and stewardship. We trained a number of employees as Certified Financial Counselors, but we also wanted to help those who might be too embarrassed to come into the office.”
Oshinski cites a few examples where the credit union has pulled the member back from the brink of financial disaster. “One member went through a terrible divorce after coming to this country from Japan,” she said. “She didn’t have any local family and was left with horrible credit card debt as a result. We gave her a chance and she proved herself. We finished helping her settle the last amount of credit card debt, saving her a huge amount of money. She rebuilt her credit, and her life. She ended up going back to get her doctorate in mathematics, teaches at U of H downtown now and has preached to her students and faculty how credit unions can change lives.”
The second example Oshinski shares surrounds a member who came into a branch to discuss payday loans. “He had spent thousands of dollars and was living off payday loans. He finally got to a point where none of the loan companies would lend to him and his payroll wouldn’t make the needed payments.”
“He was from Africa and worked as a gas station attendant for over 20 years,” she continues. “He had a wife and three kids who were getting older and ready to graduate from high school. This man fell apart as he recounted how hard he worked to take care of his family and the one thing he regretted most was that he didn’t own a home and lived in the same apartment since coming to America, getting married, and starting his family.”
Oshinski says that she talked with the member and through the conversation realized that he had a nice sized retirement built up with a recognized oil company. “He never used his retirement money to help himself. This man was able to take out a temporary loan with his 401k to payoff the payday loan places and clear his credit.”
Then the member qualified to take out a temporary loan to payoff the 401k loan. His credit score improved during this process so much so that he qualified for a mortgage loan. He used his retirement money again to make the needed down payment. “Within a year, this hardworking man went from a very low point to a very high point in his life. He touched base with me after completing the process to thank me for taking the time to talk with him and point out a way he could make his dream come true.”
It’s stories like PrimeWay’s that demonstrate how going to a credit union allows the member to move beyond the cycle of debt and learn how to manage money and make it work to their advantage.
Golden 1 Credit Union ($7 billion, Sacramento CA) supports financial literacy by offering an expansive debt management series. The online seven part video tutorials touch on various aspects of debt management including how to control spending, bankruptcy and how to actively attack and reduce debt. Members can also opt to attend a live debt management seminar that covers specific topics such as how to stick to a budget and how to pay yourself first.
Additionally the credit union offers a comprehensive online debt management calculator that allows the member to determine how to consolidate debt and credit card payoff.
UW Credit Union ($1.4 billion, Madison, WI) guides members through its BALANCE program, which is a free financial counseling program that allows the member to ask financial questions, review their credit report and develop a solid financial plan.
Drowning in debt and need a lifesaver? Before you make a move, find a credit union and inquire about its debt management program--it could save you from financial disaster.