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Frequently asked questions about debt

What are my liabilities?
Simply put, liabilities are the debts you owe. Liabilities include your mortgage, credit card debt, installment and auto loans, loans against a life insurance policy, students loans and loans against your investments (such as margin loans with a brokerage firm). Other liabilities include any taxes you owe -- even taxes you would owe if you sold all of your investments today.

What is a debt ratio and what does it mean?
Your debt ratio is the amount of credit you’ve accumulated on a monthly basis as compared to your income. It’s a critical number if you plan to make any major purchases, such as a home or car since lenders check your debt ratio to ensure you’re capable of repaying the loan. For example, mortgage lenders generally won’t approve your loan if your mortgage payment would exceed 28% of your gross income (before taxes are withheld). Your total payments -- including all other debts -- should not exceed 36% to qualify for a mortgage. These debts don’t include food, utilities or taxes that you pay. For these calculations, mortgage lenders look at items like credit card bills, student loans and car loans and how your mortgage would affect your overall ability to pay.

What are non-profit credit counselors?
Non-profit credit counselors are credit experts who help consumers get their debt under control, with a long-term goal of getting out of debt completely. By far the largest and perhaps most-respected group is Consumer Credit Counseling Services (CCCS), which has more than 1,000 offices across the country. The group’s counselors help debt-laden consumers reorganize their budgets and will also contact creditors on the consumer’s behalf to restructure debt. The fee for this depends on the debtor’s ability to pay. Those in dire straits can get help from the CCCS for free. You can find the number of the nearest CCCS office in the telephone book or by calling 1-800-388-2227.

Should I hire a debt consolidation company?

If you’re having some financial trouble and are tempted to hire a company that promises to consolidate your debt with one big loan, be careful. It’s usually better to use non-profit credit-counseling groups, such as the nationwide Consumer Credit Counseling Services, to help you get out of debt.

Is it possible to renegotiate my debt with my creditors?
If you’ve got too much debt and can’t keep up with your bills, you may be able to negotiate with your creditors to buy some more time or reach a settlement of what you owe. It may be easier than you think to negotiate with the people to whom you owe money. In response to ever increasing amounts of consumer debt, many businesses and bill collectors have modified their expectations and their collection practices. If you assert yourself, you may well get more time to pay, late fees dropped and your debts settled for less than the full amount. If a creditor agrees to discount the balance of your account in exchange for you paying a lump sum, you are likely to owe capital gains taxes on the amount of forgiven debt.

Will mortgage lenders work out alternative repayment programs if one of their borrowers loses a job?
Most mortgage lenders know that borrowers sometimes fall on hard times, and they don’t like to incur the costs involved in foreclosure. For example,iIf you want to keep your house and you’ve missed a payment or two, most mortgage companies will let you make up the delinquency through a repayment plan, but most will insist that you do it within four months.

If I owe the IRS more than I’m able to pay in back taxes, how do I negotiate a settlement for an amount that I can pay?
If you are working and earning enough to pay the IRS over time, chances are slim that they will negotiate. If you are able to pay little if anything on the back taxes owed and can verify that fact, they will negotiate. The IRS is more likely to negotiate for a reduction of interest and penalties. Get in touch with your local collection division.

Can I lower my taxes by paying off consumer (credit-card) debt with a home equity loan?
There are two good reasons to refinance your home to pay off credit-card debt. First, home equity interest is fully tax-deductible up to $100,000, while there’s no tax deduction for credit card interest. Second, most credit cards charge 15% to 22% interest. Home equity loans have much lower rates, typically a point or two above the prime rate. It’s almost always a good idea to substitute a low-interest loan for high-cost debt. But there are also negatives. Most people pay off credit-card debt in about 15 months, keeping total interest costs down. Home equity loans generally are in effect for much longer. Over the long run, an equity loan can cost you more. Then, there is the risk of cleaning up your consumer credit with an equity loan, only to run up debt on your credit cards all over again.

How do I stop debt collectors from calling me?
If you don’t pay a bill, your account could be turned over to a debt collection agency. These firms are notorious for being extremely aggressive and may persistently call you in an effort to force you to pay up. Fortunately, the federal Fair Debt Collection Practices Act, passed in 1977, has curbed some of the most abusive tactics once commonly used by bill collectors. You can’t stop an agency or the original creditor from suing you, but at least the FDCPA gives you the right to demand that the collection agency stop calling you. Under the FDCPA, a collection agency cannot legally contact you at an unusual or inconvenient time or place. Phone calls before 8 a.m. and after 9 p.m. are not allowed. A collector can’t call you at work, either, if he knows that your employer prohibits you from receiving collections calls while you are on the job. If you get such a call, immediately tell the collector that your boss prohibits them. In fact, if you have hired an attorney, a collector must deal directly with your lawyer. Most debt collectors will back off when you tell them to. If they don’t, send a letter to both the collection agency and the original creditor demanding that the phone calls stop. If that doesn’t work, contact your state’s Consumer Affairs Department to file a complaint and ask what to do next.

Can I protect my home from creditors?
Your state may provide you with special protection from creditors through the filing of a homestead exemption, which exempts some or all of the value of the owner’s equity in the homestead from claims of unsecured creditors. Deciding whether or not to file a homestead exemption often depends on an individual’s situation. Contact your county recorder’s office for details.

Can a credit card company force me to sell my home in order to pay a bill?
If you fall behind on your credit-card bills, you should work hard to get caught up or try to restructure the debt in order to buy more time. However, you don’t have to lose sleep that the credit-card company will try to force the sale of your home to get paid. It can’t.

Can the Internal Revenue Service force me to sell my home in order to satisfy a tax lien?
Most creditors can’t force you to sell your home, unless you pledged it as security for a loan. But there’s an exception if you owe the Internal Revenue Service money. If you fail to pay back taxes after receiving notices from the IRS, it may place a lien on your real property, especially if you’re unemployed, self-employed or sporadically employed and the IRS would have trouble attaching your wages. Many creditors with real property liens (except mortgage or home equity lenders) simply wait until the house is sold or refinanced to get paid. The IRS, however, doesn’t like to wait and may force a sale if the amount you owe is substantial.