Regardless of how you plan to resolve your debt problems there will come a time when you will have to find out exactly how much your household brings in each month and how much goes out each month and to whom.

Most people balk at developing a budget plan; however, you will have to organize your monthly income and expenses on a worksheet if you plan to do any of the following:

(1) File bankruptcy
(2) Sign-up with a credit counseling service
(3) Negotiate with creditors for alternate repayment plans and reduced settlements
Even if you don't plan to do any of the above, it is important to get a very clear picture of how your money is being spent each month. Therefore, to discover your true financial condition and get out of debt once and for all you should do the following:

Step 1: Find out where you are spending your money and how much is being wasted each month.

Step 2: Find out how and where you can cut back on expenses in order to free up more money to pay your debts.

Step 3: Decide what action you are going to take (bankruptcy, credit counseling, debt negotiation) based on what you discovered about your finances in Steps 1 and 2 above.

Use our menu at right to discover ways to reduce your monthly expenses and develop a budget. By keeping track of every penny spent for several months you might discover that you can get out of debt on your own without chosing options (1), (2), or (3) above. Some people discover that they are wasting as much as $800 a month that could go towards paying off debt.

A good way to start the process of resolving your debt problems is to find out how seriously in debt you really are. To do this, calculate your debt-to-income ratio

How to Calculate Your Debt-to-Income Ratio:

To calculate your score, you need to add up your monthly fixed expenses. Monthly fixed expenses include all debt, such as the following: house payment or lease, credit card and other revolving credit balances; car payments, alimony, child support, etc. Do not include grocery, telephone, and utility bills or any debt that will be paid off in the next few months. If your car loan will be paid off two or three months from now, don't include it in the equation.

Sample calculation:

Gross monthly household income: $5,000

Fixed expenses: $1,560
[house payment $540.00 + car payment $370.00 + credit cards $250.00 + child support $400.00]
Debt-to-income ratio calculation:
$1,560
$5,000 = 31%

The above calculation shows that this person is headed for trouble. He needs to start paying down his debt rather than accumulating more. Unfortunately, he can probably still get approved for another credit card provided he has a good record of paying his bills on time.

Suppose a few years ago when you were single you stopped paying on a credit card debt and the account was written off. Three years later, you're married and suddenly a debt collection agency, who purchased your old written off credit card account from the original creditor, is knocking on your door demanding payment and threatening to garnish, not only your wages, but those of your new husband or wife.
Can a creditor or debt collector go after my new husband or wife for my old debts?
The answer is probably no, but there are conditions in which your new spouse would be liable. For example, if you put the spouse's name on the credit card account as a joint accountholder, he or she could be held liable, even if you put his or her name on the card account as a joint accountholder after you incurred all of the debt. This is true even if your new spouse had no idea you are about to default on the card or have already defaulted.
There is another issue surrounding this question, which is, if the debt is old, is it a time-barred debt? The collector might be barred from collecting anything from anybody if the debt is too old.
I am married but have a credit card that is in my name only, which I have recently defaulted on. Can a creditor or debt collector go after my spouse for repayment of this debt even though his name isn't listed on the credit card?
Yes, marriage is like a partnership with each of you jointly liable for any debts incurred during the marriage. It doesn't matter if your spouse is or isn't listed on the card as a joint accountholder, he or she can still be sued, have his wages garnished, etc., just as if he incurred the debt.
I have been living with someone for a long time. Can a debt collector go after him for my delinquent debt, even if we aren't married?
No, a debt collector or creditor cannot go after someone with whom you are living with, even if you've been living together for thirty years. The biggest advantage of living together as man and wife without getting married is that you protect yourself from the financial and legal liabilities of your partner. For example, if your partner became very sick and accumulated a massive amount of medical debt, you would be liable for it if you are married to that person, but you wouldn't be liable if you are just living together.

You defaulted on your credit card debt a long time ago. Your credit report indicates that the debt was written off by the credit card company a year ago. Your account was turned over to a collection agency who sent you a few form letters and called you a few times, but eventually they gave up and now you're home free. You think you got out of paying this debt, right? Don't get too comfortable just yet.

There is a new investment opportunity and it isn't real estate. It is debt collecting. Groups of investors are forming companies and purchasing old debt from original creditors for literally pennies on the dollar and are going after old, written off credit card debt with a vengeance. The industry is so lucrative that two of these investment companies have made the Fortune 500 list.

The term that has been coined for companies who purchase uncollectible, written-off debt is "scavenger debt collectors" but few of them will admit they are collection agencies. They usually call themselves litigation firms to scare the hell out of you, and they use very aggressive collection techniques that often violate the provisions of the Fair Debt Collection Practices Act. Many of them claim that they are not bound by the Fair Debt Collection Practices Act, but they most certainly are.

Scavenger debt collectors buy old debt for just pennies on the dollar and try to collect the whole amount due plus interest. For example, suppose you owed Citibank exactly $1,000. Citibank wrote off the account when they couldn't collect from you, turned it over to a debt collection agency, who also couldn't collect from you. Now, Citibank has sold it to a scavenger debt collection firm for about $70.00. And the scavenger debt collector is going to come after you for the entire $1,000 plus interest. Pretty lucrative, huh?

Of course, the scavenger debt collectors know that most of what they have purchased is uncollectible -- that's why they bought it for just pennies on the dollar. But they are going to use intimidation tactics to collect as much as they can. Please do not let them scare you. Most of what they say is bluffing to get you to send them as much as you can as quickly as you can to avoid being sued.

If you are contacted by a scavenger debt collector, this is what will happen:

First of all, they will let you know that they are a "litigation firm" who is preparing the papers to sue you, but they wanted to contact you and perhaps work out some sort of settlement or pay off agreement. They will lead you to believe that if you don't pay, you will be sued in the next few weeks. But remember, they are probably not a litigation firm and the person on the phone is just a regular debt collector, but he or she will lead you to believe he is an attorney or a paralegal who works for a law firm, when in fact, they are just regular debt collectors. Do not let the "litigation firm" term scare you. Ask the person with whom you are speaking if he/she is an attorney and if the company is an actual law firm. In fact, ask a lot of questions about who it is that now owns your old debt. Chances are you will find that they are a group of investors who aren't really a litigation firm.

Secondly, the scavenger debt collector won't tell you that they purchased the debt for .07 to .10 cents or even as little as .03 cents on the dollar. They will go into a grand epic tale about how their investors purchased this debt and they must get their money back. If you tell them you don't have the money, they will try to determine how much you do have and will start telling you they will accept 80%, then 70%. The collector might tell you he has to consult with the investors and find out if he can offer you a really good deal -- 50%. He calls you back and says he was able to convince them to accept 50% as payment in full provided you can get it to them in the next five days.

The truth is that they will accept as little as 25 percent as a settlement. They will likely not accept anything less than 25 percent because they purchased your debt to make a really nice profit.

If you refuse to pay, they will turn your account over to a real attorney, who will send you a threatening letter in yet another effort to intimidate you into paying. Note that attorneys are forbidden from sending letters claiming they will sue when they won't or can't, so if you receive such a letter from a real attorney, pay attention to what it says to determine if you are really going to be sued. Does the letter say they are exploring their legal options or that papers are being prepared for suit? If it says the latter, you are probably getting sued for real since attorneys can't say it if it isn't true.

In any event, they will not actually sue you unless their asset search reveals you have assets to seize. They aren't going to spend any money suing you if you don't have anything. After all, you can't get blood out of a turnip. And don't think you can hide assets, because with today's computers and vast databases, they can find out what you have in checking accounts, savings accounts, what real estate you own, etc. You really have very little privacy anymore in terms of your finances.

when you cannot pay an unsecured debt and a creditor or debt collection agency is threatening to sue you, what do you do? All states have laws that exempt certain income and property from being seized or attached by a creditor or debt collector. For example, those who live solely on social security (or have a very limited income) can defend a creditor lawsuit by proving to the judge in court that their social security check is their only source of income and cannot be taken by creditors. There is a good chance that the debt might be dismissed altogether in this situation and without filing bankruptcy.

How do you keep a creditor from taking your income and property you have?
Find out what property you can declare exempt in your state, and when you are sued and you go to court, tell the judge that you want any exempt income and property declared legally exempt. Make sure that you do not say or sign anything that waives your property exemption rights.

IT IS YOUR RESPONSIBILITY TO TELL THE JUDGE THAT YOU WANT CERTAIN PROPERTY DECLARED EXEMPT. DO NOT WAIT FOR THE JUDGE TO ASK YOU, AS SHE / HE MIGHT NOT EVER ASK YOU.

The creditor or collection agency who is suing you will likely try to get you to sign a repayment plan. Do not agree to a repayment agreement that you cannot afford, and make very sure that the agreement you sign does not include a clause where you waive your right to have your income and property exempt from creditors as your state provides. If you can only afford $15 a month, then tell the judge this -- in fact, prove it to him by bringing as many records of your living expenses to court with you, including utility bills and grocery receipts, as you can.

DO NOT SIGN A REPAYMENT PLAN AND THEN DEFAULT ON IT. IF YOU CANNOT AFFORD TO PAY THE DEBT, TELL THE JUDGE THIS AND DON'T AGREE TO REPAY IT.

What property is exempt from creditors and debt collectors in your state?
In summary, all states exempt income under a certain amount in order to protect those with low incomes from excessive wage garnishment. For example, your state might have legislation on the books that says a creditor can only seize any net income over $250.00 per week. If you make $250 or less per week, your income is exempt. Your state might put a cap on how much of your wages can be garnished, perhaps no more than 15 percent of your total net wages can be seized. In addition, your state might have declared that government benefits, such as social security, welfare, unemployment compensation and veteran's benefits are entirely exempt from creditors and collection agencies. Your state might also have exempted other retirement benefits (pensions), child support, worker's compensation, life insurance policies, and personal injury awards. Your state might offer you a homestead exemption that protects all or a portion of the equity in your home from creditors. The cash you have in the bank might be protected, as is your car and other assets, such as your clothing, furniture, work tools and a vehicle.

The debt collection industry is one of the most complained-about industries to the Federal Trade Commission (FTC). From 1999 to 2001 (the latest years available), the debt collection industry was the #1 complained about industry in the USA. This is because, despite the Fair Debt Collection Practices Act, which regulates debt collection activities and behavior, too many debt collectors are poorly trained and informed and work in an industry with a very high turnover rate. [See FTC actions against debt collectors.]

Another reason debt collectors use abusive and illegal tactics against debtors is that most debt collectors know they will get away with their illegal tactics and behavior because (1) most consumers are uninformed about debt collection laws; (2) it's hard to prove the behavior occurred and its hard to prosecute it; and (3) there is a legal loophole in the law that allows debt collection agencies who get into trouble to simply close their current operation and create a new company and identity, and thus avoid any existing injunctions and continue to operate in the same manner.

What should you do if a debt collector is intimidating or harassing you?

(1) Find out if the collector is violating the FDCPA or your state's laws. If so, send the collector a certified letter, return receipt requested, telling them that you believe he is in violation of the FDCPA or your state's laws; and, if you want

(2) Tell the debt collector you want him to stop phoning you at home and at work.

(3) You can file a complaint online at www.ftc.gov. The FTC is the body in charge of regulating debt collection agencies. They will not handle your case personally, but you should report the agency anyway, since they will sanction the agency if it receives enough complaints from consumers.

(4) Report the activity to your State Attorney General's office. They will investigate the matter.

(5) You can also gather evidence by recording phone conversations with the debt collection agency. If you can prove the debt collector used illegal tactics, you can sue for damages under the FDCPA.

What debts are covered?

Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, or for credit cards.
How may a debt collector contact you?

A collector may contact you in person, by mail, telephone, or fax. However, a debt collector may not contact you at unreasonable times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves.

Can you stop a debt collector from contacting you?

You can stop a collector from contacting you by writing a letter to the collection agency telling them to stop. Once the agency receives your letter, they may not contact you again except to say there will be no further contact. The agency may notify you if the debt collector or the creditor intends to take some specific action.
May a debt collector contact anyone else about your debt?

If you have an attorney, the debt collector may not contact anyone other than your attorney. If you do not have an attorney, a collector may contact other people, but only to find out where you live and work. Collectors usually are prohibited from contacting such permissible third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money.
What must the debt collector tell you about the debt?

Within five days after you are first contacted, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money.
May a debt collector continue to contact you if you believe you do not owe money?

A collector may not contact you if, within 30 days after you are first contacted, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed.

Each state allows a creditor a specific amount of time to enforce a judgment; however, some states allow a creditor to renew a judgment a second time or indefinitely. This means that a creditor could hold a debt over your head for a significant period of your life or even the rest of your life.

When a creditor obtains a judgment against you, he has several options to choose from to try and satisfy the judgment:

(1) The creditor will try to attach a lien against any property you own, such as your home. This does not mean you will be thrown out of your home, but rather, that you will not have clear title to your property after the creditor files a lien against it. The interest on the judgment lien will continue to accumulate over time, and if and when you sell your home, the creditor will receive the value of the judgment with interest from the sell of your home before you see any money, provided that the statute of limitations on collecting the judgment hasn't run.

(2) The creditor can locate any monies you have in bank accounts and seize them. Don't think that the creditor can't locate the $5,000 you have in savings at your local bank. There are businesses who specialize in helping creditors and debt collection agencies locate all of your assets, including all of your bank accounts. If the creditor finds any money you have that is not exempt from seizure by your state's laws, he will use his judgment to levy levy your bank account.

(3) A creditor might try to garnish your wages, particularly if you don't own any property or have any money in savings. The federal government and many states have enacted legislation that limits the amount a creditor can garnish from your wages. The only way to avoid the wage garnishment is to resign from your job, find another, and hope that the creditor doesn't locate you again, at least for a year or two. The creditor could force you into becoming a job hopper for the rest of your life in order to stay one step ahead of a wage garnishment.

The reasons above are why you should negotiate with creditors for a reduced settlement or an affordable repayment plan before the creditor sues you. If he does sue you, he will do so for the amount you owe, plus attorney and collection fees that could tack on thousands more in addition to what you originally owed. You will have to pay the judgment or file bankruptcy to have the judgment voided. This is unnecessary when you can settle your debt for about 25% of what you owe by threatening to file Chapter 7 bankruptcy. Our debt kit includes sample letters and negotiating tips to help you wipe out most of your unsecured debt without filing bankrutpcy. When you order our debt kit, you get the bankruptcy and credit kit free and you can download it right now.

The table below indicates the number of years a judgment is valid in your state, the maximum interest rate a creditor can seek, and if the judgment can be renewed. The information below is not guaranteed to be accurate. Its purpose is to illustrate to you why you should work out an agreement with the creditor before you are sued so you don't have a judgment hanging over your head which could eventually force you into filing bankruptcy to get rid of it.

Are you being hounded by a debt collector for an old debt you thought was written off years ago? If so, it is likely you are being contacted by a scavenger debt collector, which is a company that purchases older, mostly uncollectible debt for a tiny fraction of its value. Scavenger debt collectors are notorious for using illegal and unethical methods to collect "time-barred" debt.

You do not have to pay debt that is considered too old by your state. Every state has laws governing the time in which a person or entity can file suit to collect a debt. Generally, a creditor or debt collector gives up his right to file suit to collect a debt after a period of six years from the time the debt was written off (or the date of last activity on your credit report), but various states allow anywhere from 2 to 15 years to collect delinquent debt (see statutes of limitation table below).

The purpose of these statutes of limitation is to bring some measure of fairness to the debtor so that he / she (1) will not have to worry about being sued for the rest of their lives; and (2) so that the debtor can properly defend himself with fresh evidence and witnesses, if any.

This doesn't mean that a creditor cannot file suit against you after the statute of limitations has expired; however, if a creditor or debt collector does file suit, you can ask the judge to dismiss the suit on the grounds that the statute of limitations has expired. In fact, if the statute of limitations is about to run on debt you owe, don't be surprised if you suddenly hear from a collection agency threatening to sue if you don't pay immediately.
If a debt collector contacts you regarding an old debt, do not admit that you owe the debt and do not agree to make any payments. Simply tell them that the "statute of limitations has run on this debt and do not contact me again". If they continue contacting you, send them a certified letter, return receipt requested, telling them not to contact you about the debt again. Remember -- DO NOT ADMIT THAT YOU OWE THE DEBT, DO NOT AGREE TO PAY THE DEBT, AND DO NOT AGREE TO SEND ANY MONEY TO THEM.
If you do, then the statute of limitations might start running all over again, giving them the legal right to sue you.