Chapter 7 Raising money to repay debts: Making good choices and avoiding bad choices

Topics Choices to consider with caution Choices that could get you into trouble Choices to avoid

Choices to Consider with Caution Borrowing from Friends and Relatives. Friends or relatives may be able to help you out, but be careful. Some creditors will push you to get a friend or relative to cosign on an account, but do not do it. Your financial problems may become theirs if you cannot pay it. Dipping into Savings. Using your savings should be part of an overall plan, not your only plan.

Choices to Consider with Caution Selling Assets. You might consider selling a major asset such as a car or house if you can no longer afford the payments. Major assets are not the only possibilities. You might be able to raise money, particularly to help you in the short-term, by selling items you really do not need such as old bicycles, furniture, or other household items.

Choices that Could Get You into Trouble Using Credit Cards to Borrow Money. Taking out new unsecured credit, such as adding to your credit card debt, is better than incurring new secured debts. Nevertheless, use of credit cards to balance your budget can make your situation worse. Credit card debt is high-interest debt with potential penalties for nonpayment. (See Ch. 5 for more about credit card use and costs.) Although credit card debt can usually be eliminated in bankruptcy, this may not be true if you run up big bills or take cash advances just before filing. If you use a credit card at a time when you did not have the ability to repay, you have committed fraud which prevents the debt from being eliminated in the bankruptcy process.

Choices that Could Get You Into Trouble Borrowing against Your Home. You may be tempted, as a way to make ends meet, to consolidate many small loans into one larger loan, to refinance your home mortgage, or to take other steps to turn old loans into new loans. (See Ch. 6 to evaluate refinancing as a strategy to deal with your financial problems.) In general, it is a bad option when you are already facing financial problems. It is always a bad idea to refinance unsecured debt into secured debt and to trade low- interest rate credit for higher rate loans. However, there may be situations where borrowing against your home makes sense. Then, consider borrowing against your home.

Choices to Avoid Bouncing checks. Bouncing checks is never the answer. You will be charged a hefty fee, often by both the bank and by the creditor each time the check is presented for payment. You may face criminal prosecution for fraud. Using overdrafts as Credit. Using an overdraft as a source of credit may sound tempting but when your consider the fees, they don’t look so good. Banks charge high fees for each overdraft, up to $35 per transaction. Some banks charge $5 every day until you pay the overdraft. Postdated checks. A postdated check is one dated later than the date on which the check was written, with the expectation that it will not be cashed until that later date. If the check bounces, you will pay hefty fees.

Choices to Avoid 4. “Payday” lenders. You, as the payday loan customer, write a check or sign an authorization for the lender to take money out of your account electronically. The amount on the check equals the amount borrowed plus a fee that is either a percentage or a flat dollar amount. These types of loans always have huge interest rates associated with the loan. 5. Selling or giving away a creditor’s collateral. You may have property, typically cars, that serves as collateral for a loan from one of your creditors. You must pay off the loan when selling these debts or giving them away. Otherwise, you are still responsible for the loan.

Choices to Avoid 6. Transferring property to protect it from creditors. You are in debt and you want to protect your valuable property from your creditors. So you attempted to give your property away to your friend. Or you sell it for a small percentage of its real value to someone who will later return it to you. Creditors can cancel the transfer under state laws. This is called “fraudulent transfers” or “fraudulent conveyances”. 7. Pawn shops and auto title pawn. Pawnbrokers take property from you in exchange for an amount of money that is always less than what the property is worth. The property acts as collateral for the loan. If you cannot repay the loan, the pawn shop keeps the property. These loans often have higher interest rates.

Choices to Avoid 8. Purchase and lease back. Some companies and individuals make money by purchasing your property from you at a low price and then to lease that property back to you at a high rental rate. 9. “Hard money” lenders. These companies make money by lending to people in difficult financial situations on hard terms (usually meaning bad terms) including very high interest rates.

Choices to Avoid 10. Tax Refund Anticipation Loans (RALS). These lenders advance you money in exchange for your expected tax refund. These are very short-term loans with hefty fees. 11. Get-rich-quick schemes. Many products and jobs are advertised with the promise that you will make a lot of money quickly. These are almost always scams. The vast majority of these offers require payment of substantial “set up” or “one-time-start-up” fees.

Choices to Avoid 12. Telemarketing scams. Many products, services, investments, and loans are advertised over the phone. Most telemarketers are highly trained in aggressive sales techniques. 13. The truth about the lottery and prize sweepstakes. People facing financial difficulties sometimes look to the lottery as a way to improve their financial situation. This is an expensive long shot at best. The lottery pays out only a percentage of the money it takes in. The percentage in some states is one-half or less.