An essential step in repairing your credit is to understand where your money goes. With that information in hand, you can make intelligent choices about how to spend your money. If youd rather not create a budget yourself, you can contact a nonprofit credit or debt counseling organization. Information on credit and debt
counseling agencies is located in Appendix 1.

Budgeting help. Several excellent computer programs, such as Quicken, can help you keep track of your expenses, particularly those paid by check or credit card. Many of these programs have budget features as well. Be sure you have an opportunity to record your cash outlays, however, before relying on these budgeting features. This is because many commercial budgeting programs have you analyze your expenses paid primarily by check, and overlook the most obvious source of paymentcash.

A. Keep Track of Your Daily Expenditures

Your goal in this chapter is to create a monthly budgetto compare your average monthly expenses to your total monthly income. This section introduces Form F-2: Daily Expenditures (copies are below, in Appendix 3 and on the CD-ROM) on which you have space to record everything you spend over the course of a week, paying special attention to cash outlays. Heres how to use the form:

1. Make eight copies of the form so you can record your expenditures for two months. (To create your monthly budget, record expenses for two months. By doing this, you avoid creating a budget based on a week or a month of unusually high or low expenses.) If you are married or live with someone with whom you share expenses, make 16 copies so you each can record your expenditures.
2. Select a Sunday to begin recording your expenses.
3. Record that Sundays date in the blank at the top of one copy of the form.
4. Carry that weeks form with you at all times.
5. Record every expense you pay for by cash or cash equivalent. Cash equivalent means check, ATM or debit card or automatic bank withdrawal. Be sure to include bank fees. Also, dont forget savings and investments, such as deposits into savings accounts, certificates of deposit or money market accounts, or purchases of investments such as stocks or bonds.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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Until your bankruptcy case ends, your past financial problems are in the hands of the bankruptcy court. Nothing can be sold or paid without the courts consent. You keep control, however, of virtually all property and income you acquire after you file for bankruptcy.

At the end of the bankruptcy process, most of your debts are dischargedwiped outby the court. You no longer legally owe the debts you owed when you filed for bankruptcy. If you incur debts after filing, however, you are still obligated to pay them. And you cant file for Chapter 7 bankruptcy again for another six years from the date of your filing.

Of course, bankruptcy isnt for everyone. One reason is that many types of debts cant be erased in Chapter 7 bankruptcy, including:

• child support or alimony obligations
• student loans, unless repaying would cause you undue hardship
• court-ordered restitutionpayments youre ordered to make after a criminal conviction
• most federal, state and local income taxes less than three years past due, and any money borrowed or charged to pay those tax debts
• debts arising from intoxicated driving
• debts from a marital settlement agreement or divorce decree unless the bankruptcy judge rules it would be impossible for you to pay or that the benefit youd get by the discharge outweighs any harm to your ex-spouse, and
• debts that a bankruptcy judge rules were incurred as a result of a wrongful act on your partexamples include debts incurred from fraud (such as lying on a credit application or writing a bad check), based on intentional injury (such as assault, battery, false imprisonment, libel and slander), larceny (theft), breach of trust or embezzlement.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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If you dont want to negotiate with your creditors, there are people and organizations available to help you. Creditors are often more than happy to work with respected organizations that work with debtors who are serious about repaying their debts. Nonprofit credit and debt counseling agencies (see Appendix 1), the United Way or a church or synagogue are all excellent prospects. These organizations will help you figure out how much you owe, how much you can afford to pay each month and what your various options areincluding bankruptcy. A credit or debt counseling agency will also talk to your creditors for you. Check your phone books Yellow Pages under Counseling.

Use caution with lawyers and credit repair clinics. A lawyer can help, but lawyers charge high fees which rarely are justified, especially when youre heavily in debt. Whatever you do, dont use a credit repair clinic. (See Chapter 6, Section G.)

5. File for Chapter 7 Bankruptcy

Chapter 7 bankruptcy is the bankruptcy plan most people have heard about. It allows you to wipe out most consumer debtscredit cards, medical bills and the like. In exchange, however, you might have to surrender some of your property, such as a second car, valuable electronic equipment or a vacation home. To file, you fill out several forms that describe your property, your current income and expenses, your debts and any recent purchases and gifts. Then you file the forms with the federal bankruptcy court in your area.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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The payday loan industry is growing fast. In many states, these loans are illegal. In others, lenders may offer a similar type of loan, but call it something else. Either way, think twice before you get one of these loans.

A payday loan works like this: You give the lender a check and get back an amount of money less than the face value of the check. Some lenders offer an alternative automatic debit arrangement. For example, if you give the lender a check for $300, it may give you $250 in cash and keep the remaining $50 as its fee. The lender holds on to the check for a few weeks (often until your payday). At this time, you must pay the lender the face value of the check ($300), allow the lender to cash the check and keep the money or take out another loan and pay another fee. This is a very expensive way to borrow money. To find out more about the payday loan laws in your state, visit the National Consumer Law Centers website at www.consumerlaw.org.

• Pawnshops

Visiting a pawnshop should be one of the last ways you consider raising cash. At a pawnshop,
you leave your property such as jewelry, television, or musical instrument. In return, the pawnbroker lends you approximately 50% to 60% of the items resale value; the average amount of a pawnshop loan is $50 or so.

You are given a few months to repay the loan, and are charged interest, often at an exorbitant
rate. If you default on your loan to a pawnshop, the property left at the shop becomes the property of the pawnbroker.

• Debt Consolidation Companies

Debt consolidating, debt pooling, budget planning, debt adjusting or debt prorating companies produce poor results. They siphon off your limited resources in debt consolidation charges, pay only a few creditors and jeopardize much of your property. These companies are often merely a front for loan sharking. Some charge outrageously high interest. Others charge ridiculously high fees.

Debt consolidating is either regulated or prohibited in most states. These laws usually dont apply to nonprofit organizations, lawyers and merchant-owned associations claiming to help debtors.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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Finance companies and similar lenders also make unsecured consolidation loansthat is, they may lend you some money without requiring that you pledge any property as a guarantee that youll pay. But the interest rate on these loans can be astronomical, often reaching 25% or more. Lenders also charge all kinds of feesmany not disclosedbringing the effective interest rate closer to 50%.

If you want to take out a consolidation loan, you are better off borrowing from a bank or credit union than a finance company. Many finance companies engage in illegal or borderline collection practices if you default, and are not as willing as banks and credit unions to negotiate if you have trouble paying. Furthermore, loans from finance companies may be viewed negatively by potential creditors who see them in your credit file. They often imply prior debt problems.

• Tax Refund Anticipation Loans

Although getting a tax refund fast is often a good way to get quick cash, you should probably avoid a tax refund anticipation loan. A tax refund anticipation loan is a loan, offered by a private company, for the period of time between the day you file your tax return and the day you get your refund from the IRS. The amount of the loan is equal to the amount of your anticipated refund minus the loan fee (which is often quite high), minus the fee for electronic filing and minus the tax preparation fee. For example, if you expect a tax refund of $500, the company might charge you $75. You will get only $425 of your $500 refund.

It is usually better to be patient and wait for your refund, rather than pay the high fee for a tax refund anticipation loan. In most cases, you can file your return electronically or by fax and get the money quickly. For more information on how to get a refund sooner and for answers to other tax questions, contact the IRS at 800-829-1040 (voice), 800-829-4059 (TDD) or visit its website at www.irs.treas.gov.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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• Can the lender really afford to help you? If the person is on a fixed income and needs the money to get by, you should probably look elsewhere for a loan.
• Do you want to owe this person money? If the loan comes with emotional strings attached, be sure you can handle the situation before taking the money.
• Will the loan help you out or will it just delay the inevitable (most likely, filing for bankruptcy)? Dont borrow money to make payments on debts you will eventually discharge in bankruptcy.
• Will you have to repay the loan now or will the lender let you wait until youre back on your feet? If you have to make payments now, youre just adding another monthly payment to your already unmanageable pile of debts.
• If the loan is from your parents, can you treat it as part of your eventual inheritance? If so, you wont ever have to repay it. If your siblings get angry that youre getting some of mom and dads money, be sure they understand that your inheritance will be reduced accordingly.

g. Options to Avoid

• Borrowing From a Finance Company

A few finance companies lend money to consumers. These companies make secured consolidation loans, requiring that you pledge your house, car or other personal property as collateral. The loans are just like second mortgages or secured personal loans; youll usually be charged interest between 10% and 15% and if you default on the loan, the finance company can foreclose on your home or take your property.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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A variety of plans help older homeowners make use of the accumulated value (equity) in their homes without requiring them to move, give up title to the property or make payments on a loan. The most common types of plans are reverse mortgages.

Reverse mortgages are loans against the equity in the home that provide cash advances to a homeowner
and require no repayment until the end of the loan term or when the home is sold. The borrower can receive the cash in several waysa lump sum, regular monthly payments, a line of credit or a combination.

There are pros and cons to reverse mortgages. In general, a reverse mortgage works best for older people with a lot of equity in their homes. In most cases, the reverse mortgage lender will look at your age, the amount of equity you have in your home and current interest rates to determine the amount it will lend you. All reverse mortgages cost moneyclosing costs (title insurance, escrow fees and appraisal fees), loan origination fees, accrued interest, and in most cases, an additional charge to offset the lenders risk that you wont repay. Almost every state allows lenders to offer reverse mortgages.

The most widely available reverse mortgage plans are the FHAs Home Equity Conversion Mortgage Program and Fannie Maes Home Keeper Mortgage Program.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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• You can borrow a fixed amount of money and repay it in equal monthly installments for a set period (home equity loan). Or you can borrow as you need the money, drawing against the amount granted when you opened the account; youll pay off this type of loan as you would a credit card bill (home equity line of credit).
• The interest you pay may be fully deductible on your income tax return.

Disadvantages of Home Equity Loans

• Many home equity loans are sold by predatory lenders at very high rates. Predatory lenders target people in financial trouble or with past credit problems. Often, they sell loans that borrowers have trouble paying off down the line. (For more on predatory lenders and mortgages for people with poor credit, see Money Troubles: Legal Strategies to Cope With Your Debts, by Robin Leonard and Deanne Loonin (Nolo).)
• You are obligating yourself to make another monthly or periodic payment. If you are unable to pay, you may have to sell your house, or even worse, face the possibility of foreclosure (the lender forcing a sale of your house to pay off what you owe). Before you take out a home equity loan, be sure you can afford the monthly payment.
• While interest may be deductible, its often high19% per year or more.
• You may have to pay an assortment of upfront fees for an appraisal, credit report, title insurance and points. These fees can be as much as $1,000 or more. In addition, for giving you an equity line of credit, many lenders charge a yearly fee of $25 to $50.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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Instead of withdrawing money, you can usually borrow up to half of your vested account balance, but not more than $50,000. Then, you pay the money back, with interest, over five years. If you cant pay the money back within five years (or immediately, if you leave your job), your loan will be treated like an early withdrawal and youll pay both an early distribution tax and income tax.

If youre seriously considering using the money in your retirement plan or IRA to pay off your debts, get a copy of IRAs, 401(k)s and Other Retirement Plans: Taking Your Money Out, by Twila Slesnick and John C. Suttle (Nolo).

d. Obtain a Home Equity Loan or Credit Line

Many banks, savings and loans, credit unions and other lenders offer home equity loans, also called second mortgages, and home equity lines of credit. Lenders who make these loans establish how much you can borrow by starting with a percentage of the market value of your houseusually between 50% and 80%. Then, they deduct what you still owe on it.

Obtaining a home equity loan has both advantages and disadvantages. If all of your debts are unsecured and your house is exempt from collection, its almost never a good idea to put your home into jeopardy by getting a second mortgage or home equity line of credit. If youre behind on your house payment, youll be better off negotiating a mortgage workout with your lender. (For more on mortgage workouts, see Money Troubles: Legal Strategies to Cope With Your Debts, by Robin Leonard and Deanne Loonin (Nolo).) If you are not able to negotiate a mortgage workout or, for other reasons, decide that you do want a home equity loan, be sure you understand all the terms before you sign on the dotted line. It is extremely important that you find out how much the loan will cost you each month and determine whether you can afford it. If you cant afford it, youll likely lose your home.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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c. Withdraw or Borrow Money From a Tax-Deferred Account

If you have an IRA, 401(k) or other tax-deferred retirement account, you can get cash to pay off debts by withdrawing money from it before retirement but in most cases youll pay a penalty and taxes. Or, with a 401(k) plan, you may be able to borrow money from it (instead of withdrawing it). There are serious disadvantages to both optionsyou should only consider doing either to pay off debts if you have other substantial retirement funds or you are truly desperate. And even then, this should be a last resort. Always look to raise money from nonretirement resources first.

Taken From : Credit Repair by Attorneys Robin Leonard and Deanne Loonin

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