Six out of ten Americans suffer from a “bad credit rating.” Bad credit starts with imprudent choices, maxed-out credit cards, exhausted savings, overdue bills … then a letter from a collection agency.

This is followed by more letters and phone calls every day. Now each time you submit an application for credit or even a job, you will be troubled and humiliated by the specter of late payments on your credit rating.

Credit grantors tend to view any kind of collection account, whether paid or not, as negative. These negative entries can stay on your report for seven years and in the case of bankruptcy, ten years.

Here are some scenarios that can put black marks on your credit:

• You go through a divorce and your spouse maxes out your joint credit cards
• An unpaid bill from your college years comes back to haunt you
• A creditor fraudulently places a black mark on your report
• A contractor you employed places a black mark on your credit report because you refused to pay him for incomplete or substandard work
• You were late with your credit card payment

Things happen in life: layoffs, poor health, unplanned crises that can have consequences on your credit report.

Divorce and separation can also cause bad credit. This does not mean you have to give up on dreams that you may have, such as owning a home. If the bank turns down your mortgage application, many brokers and lenders may consider you an “A” buyer.
Several companies offer mortgage loans to people with less-than-perfect credit ratings, because homes are very secure collateral. The rates and fees might be outrageous, but even people in bankruptcy and foreclosures can apply.

Automotive credit also plays a part in re-establishing your good credit standing because an automobile is an asset that can be repossessed if things go wrong.

There are two ways you can have bad credit: one is where you can’t buy anything on credit, and the other is where you have a bad credit report, but you may still be able to buy on credit. There are also varying degrees of bad credit. Much depends on what you are purchasing and who the creditor is.

If you’ve reached the end of your tether, filing bankruptcy instead of trying to pay your bills in dibs and drabs can also decrease your ability to purchase on credit.

If your financial problems stem from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP alone is not credit counseling, and DMPs are not for everyone. You should sign up for one of these plans only after a certified credit counselor has spent time thoroughly reviewing your financial situation, and has offered you customized advice on managing your money. Even if a DMP is appropriate for you, a reputable credit counseling organization still can help you create a budget and teach you money management skills.
In a DMP, you deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills, according to a payment schedule the counselor develops with you and your creditors. Your creditors may agree to lower your interest rates or waive certain fees, but check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. A successful DMP requires you to make regular, timely payments, and could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan. You may have to agree not to apply for – or use – any additional credit while you’re participating in the plan.
Debt Consolidation
You may be able to lower your cost of credit by consolidating your debt through a second mortgage or a home equity line of credit. Remember that these loans require you to put up your home as collateral, so if you can’t make the payments – or if your payments are late – you could lose your home.
Also, the costs of consolidation loans usually include added expenses on the ‘back end’ of the loan. In addition to interest on the loans, you may have to pay “points,” with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.
Debt Negotiation Programs
Debt negotiation differs greatly from credit counseling and DMPs. It can be very risky, and have a long term negative impact on your credit report and, in turn, your ability to get credit. That’s why many states have laws regulating debt negotiation companies and the services they offer. Contact your state Attorney General for more information.
The Claims   
Debt negotiation firms may claim they’re nonprofit. They also may claim that they can arrange for your unsecured debt — typically credit card debt — to be paid off for anywhere from 10 to 50 percent of the balance owed. For example, if you owe $10,000 on a credit card, a debt negotiation firm may claim it can arrange for you to pay it off with a lesser amount, say $4,000.
The firms often pitch their services as an alternative to bankruptcy. They may claim that using their services will have little or no negative impact on your ability to get credit in the future, or that any negative information can be removed from your credit report when you complete their debt negotiation program. The firms usually tell you to stop making payments to your creditors, and instead, send payments to the debt negotiation company. The firm may promise to hold your funds in a special account and pay your creditors on your behalf.
The Truth 
Just because a debt negotiation company describes itself as a “nonprofit” organization, there’s no guarantee that the services they offer are legitimate. There also is no guarantee that a creditor will accept partial payment of a legitimate debt. In fact, if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. If you exceed your credit limit, additional fees and charges also can be added. This can cause your original debt to double or triple. What’s more, most debt negotiation companies charge consumers substantial fees for their services, including a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you’ve supposedly saved.
While creditors have no obligation to agree to negotiate the amount a consumer owes, they have a legal obligation to provide accurate information to the credit reporting agencies, including your failure to make monthly payments. That can result in a negative entry on your credit report. And in certain situations, creditors may have the right to sue you to recover the money you owe. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home. Finally, the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.
Damage Control
Turning to a business that offers help in solving debt problems may seem like a reasonable solution when your bills become unmanageable. But before you do business with any company, check it out with your state Attorney General, local consumer protection agency, and the Better Business Bureau. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.
Some businesses that offer to help you with your debt problems may charge high fees and fail to follow through on the services they sell. Others may misrepresent the terms of a debt consolidation loan, failing to explain certain costs or mention that you’re signing over your home as collateral. Businesses advertising voluntary debt reorganization plans may not explain that the plan is a Chapter 13 bankruptcy, tell you everything that’s involved, or help you through what can be a long and complex legal process.
In addition, some companies guarantee you a loan if you pay a fee in advance. The fee may range from $100 to several hundred dollars. Resist the temptation to follow up on these advance-fee loan guarantees. They may be illegal. It is true that many legitimate creditors offer extensions of credit through telemarketing and require an application or appraisal fee in advance. But legitimate creditors never guarantee that the consumer will get the loan — or even represent that a loan is likely. Under the federal Telemarketing Sales Rule, a seller or tele-marketer who guarantees or represents a high likelihood of your getting a loan or some other extension of credit may not ask for or accept payment until you’ve received the loan.

Are you facing the possibility of a foreclosure? Before bailing out without a parachute, do some homework and see if there are ways to minimize or even eliminate your losses.

Obviously, you’re certainly better off selling the house than having it go to foreclosure. If you can find a buyer who will offer to pay at least what you owe your lender, take the offer rather than face a foreclosure. However, this solution is generally not easy to come by and usually not timely enough to satisfy the mortgage company.

If you receive an offer that is for less than what you owe your lender, your lender can actually block the sale. Yet you can approach your mortgage company about a “short” sale or deed in lieu of foreclosure. However, one stipulation to qualify is that you must occupy the property. (A short sale of property is one in which the sale proceeds won’t cover the amount owed on the loan and the lender agrees to forego the rest.) Many lenders will agree to a short sale, but some may require documentation of any financial or medical hardship you have experienced before agreeing to a short sale.

Also, be aware of current market values. Check out prices of comparable properties – ones that are the same size in the same neighborhood that sold during the last six to 12 months – on websites such as www.domania.com.

Another option is to simply execute a deed giving the property back to the mortgage company. You do not need to actually qualify for a deed in lieu of foreclosure.

You may have been told by the mortgage company that you didn’t “qualify” (mortgage companies typically don’t want the property back), but they cannot stop you from executing a deed in the company’s favor. The difference between the house’s value (the amount for which the company sells it) and the total balance owed. This difference is called a deficiency. Unless the mortgage company writes off the deficiency, you are still liable for that amount.

If the mortgage company writes off any part of the deficiency, you’ll receive an IRS Form 1099-Misc next year and the amount written off will have to be reported as income. However, you can avoid this if you can show that at the time of the write-off, your debts exceeded the value of your assets. We recommend having an accountant or professional tax preparer assist you before the April 15 filing date.

If you want to try to negotiate with the mortgage company – either on the mortgage now or on the deficiency balance later, visit www.myvesta.org
(formerly Debt Counselors of America), or call 800-MYVESTA.

Foreclosure Proceedings
Most lenders don’t start foreclosure proceedings until you’ve missed four or five payments, but it varies from state to state. Before taking back your house, most lenders would rather rewrite the loan, suspend principal payments for a while (have you pay interest only), reduce your payments or even let you miss a few payments and spread them out over time.

If your loan is insured by a federal agency, such as the Department of Housing and Urban Development (HUD) or the Federal Housing Administration (FHA), the lender may be required to try to assist you in preventing foreclosure.