Credit Trouble and Protections

As easy as it is to use credit, it is even easier to get into trouble with it. Because of late fees and compounding interest, if you don't pay your balance in full each month, it quickly multiplies and becomes more difficult to pay. It doesn't take long for the debt to overwhelm you.

If that should happen to you, the first thing to do is devise a realistic budget with a plan to pay off the balance. Contact your creditors and explain that you are having financial difficulties and have a plan to make your payments. Do not wait for the creditor to turn your account over to a debt collector; be proactive in resolving the debt. If your account has been turned over to a collector, you do have some protections: the Fair Debt Collection Practices (federal) law keeps a collector from calling you at work, for example, or after 9 p.m.

You may want to use a credit counselor to help you create a budget and negotiate with creditors. Many counseling agencies are nonprofit organizations that can also help with debt consolidation and debt management. Some "counselors" are little more than creditors trying to sell you more credit, but be careful about checking their credentials before you agree to any plan. What you need is more realistic credit, not more credit.

As a last resort, you may file for personal bankruptcy, which may relieve you of some of your debts but will blemish your credit rating for ten years, making it very difficult – and expensive – for you to use any kind of credit or debt. Federal bankruptcy laws allow you to file under Chapter 7 or Chapter 13. Each allows you to keep some assets, and each holds you to some debts.

Chapter 7 requires liquidating most of your assets, while Chapter 13 applies if you have some income. It gets complicated, and you will want legal assistance, which may be provided by your local Legal Aid Society. The effects of bankruptcy can last longer than your debts would have, however, so it should never be seen as an "out" but really as a last resort.

Modern laws and regulations governing the extension and use of credit and debt try to balance the protection of the lender and the borrower. They try to ensure that credit or debt is used for economic purposes and not to further social or political goals. They try to balance borrowers' access to credit and debt as financial management tools with the rights of property owners (lenders).

Federal legislation in the United States reflects this balance of concerns. Major federal legislation is shown in Figure 7.10, "Major U.S. Federal Legislation: Credit and Debt."

Figure 7.10 Major U.S. Federal Legislation: Credit and Debt

In addition, many states have their own legislation and oversight. Not coincidentally, most of these laws were written after using credit cards, and thus credit became widespread. The set of laws and regulations that governs banking, credit, and debt markets has evolved as new practices for trading money are invented and new rules are seen as necessary. You should be aware of the limitations on your own behavior and on others as you trade in these markets.

If you feel that your legal rights as a borrower or lender have been ignored and that the offender has not responded to your direct, written notice, there are local, state, and national agencies and organizations for assistance. Some organizations help borrowers manage credit and debt.

Laws and regulations can govern how we behave in the credit and debt markets, but not whether we choose to participate as a lender or as a borrower: whether we use credit to manage cash flow or to finance a lifestyle, whether we use debt to finance assets or lifestyle, and whether we save. Laws and regulations can protect us from each other, but they cannot protect us from ourselves.

Source: Rachel S. Siegel and Carol Yacht, https://courses.lumenlearning.com/suny-personalfinance/chapter/7-3-other-peoples-money-credit/
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