“Consumer advocates and debt experts agree that credit card companies have never been more willing to cooperate with distressed borrows more than they are right now. Issuers are lowering rates and payments, offering workout plans and settling debts for 50 cents or less on the dollar.”

read the rest of the article here

Issuers barred from charging a late fee of more than $25

WASHINGTON – The Federal Reserve adopted new rules Tuesday aimed at protecting credit card customers from getting socked by lofty late payment charges and other penalty fees.

The rules respond to public and congressional outrage over practices by credit card companies.

They bar credit card companies from charging a penalty fee of more than $25 for paying a bill late. They prohibit credit card companies from charging penalty fees that are higher than the dollar amount associated with the customer’s violation. They also ban so-called “inactivity” fees when customers don’t use the account to make new purchases and they prevent multiple penalty fees on a single late payment.

The rules take effect on Aug. 22.

“Consumers will finally be protected from the worst credit card issuer abuses,” said Rep. Carolyn Maloney, D-N.Y., a major advocate for the changes.

In addition, the rules require companies to reconsider interest rates imposed on customers since the start of last year. Some lenders pushed through rate increases ahead of the first phase of sweeping new credit card protections, which took effect earlier this year. Those first set of rules were designed to protect customers from sudden hikes in interest rates.

Congress directed the Fed to implement the new credit card protections in legislation signed into law by President Barack Obama last year.

“The new rules require that late payment and other penalty fees be assessed in a way that is fairer and generally less costly for consumers,” said Fed Governor Elizabeth Duke, the central bank’s point person on the rules. “Card issuers must also reevaluate recent interest rate increases, and, if appropriate, reduce the rate,” she added.

The American Bankers Association said the industry intends to “work quickly and diligently” to implement the new provisions.

Legislation in Congress revamping the nation’s financial regulatory structure could reduce the Fed’s influence over consumer protections. A Senate-passed bill would house a watchdog agency inside the Fed, but chairman Ben Bernanke would have no authority over it. A House-passed bill would set up a new agency devoted to consumer protection and would strip the Fed of some of its consumer oversight. Lawmakers are working to reconcile the bills into a final package.

You may feel ‘the dark cloud of debt’ over you. Before it turns into a storm, assess your situation with guidelines that can help you avoid worse trouble.

By Bankrate.com

Do you have problems sleeping at night? Do you dread getting mail, fearing the arrival of a bank statement? Do you have to do relaxing meditation before checking your online bank account?

You may feel like your life is getting out of control. And it could because, as National Foundation for Credit Counseling spokeswoman Gail Cunningham says, “the dark cloud of debt follows you around 24/7.”

In some cases, a little financial belt-tightening or a few accelerated credit card payments are enough to get that cloud to dissipate. But sometimes a debt crisis becomes too overwhelming to handle on your own. How do you know when you need help to get it under control? The tipping point won’t be the same for everyone, but here are some general guidelines to assess your situation.

Minimum-payment syndrome

Your debt-to-income ratio is one important tool in evaluating your financial health.

“We recommend that people’s debt load be no more than 20% of their take-home pay,” Cunningham says. “That includes the vehicle. So, if you bring home $1,000 per month, and you’ve got a $200-a-month car payment, you’d better not owe anybody else.”

Another clue is how much of your debt you pay each month. The NFCC created a quiz called “How Do I Know If I’m in Financial Trouble?” consisting of 20 true-or-false statements. If more than two or three ring true, you may need credit counseling the foundation says. Statement No. 1 in the quiz is, “I normally pay only the minimum due on my credit card bills.”

Now that the Credit Card Accountability Responsibility and Disclosure Act is in effect, every bill comes with a bracing reminder of the consequences of that practice. Credit card issuers have to disclose how long it will take customers to wipe out a debt by making only the minimum monthly payments.

“The reality is that it will probably take you decades to pay off that debt,” Cunningham says.

A related reality check can creep up after a long period of making interest-only payments on a loan.

“If someone is only paying the interest and the debt keeps increasing because he’s not paying down any of the principal, it just snowballs,” says Carol Friedhoff, a financial planner at Savvy Outcomes in Dublin, Ohio. “At some point, you cannot even afford to pay the interest.”

Credit spending addiction

Barbara Wright, a credit counselor with ClearPoint Financial Solutions in Chesapeake, Va., says there are three red flags that you are addicted to spending: if you find yourself calling credit card issuers to check your available credit; constantly using your credit card as extra income; and/or paying for things on credit that you used to buy with cash (for example, groceries). If do any of these things, your debt habit may be out of control, she says.

Simply paying off your credit card balance may not be enough to ensure your recovery from this addiction. “Paying the credit card off is a good thing, but then going back and recharging on it is not,” Wright says.

Even worse is piling on debt when you’re already overwhelmed. “If you are in a bad situation but you are continuing to add debt, that’s also a bad sign,” Friedhoff says. “At some point, you need to stop spending.”

Getting help

Even if you realize you need help, it’s probably tempting to delay seeking it — the same way you avoid opening those bills. But Cunningham says it’s a big mistake to put things off.

“Delay only exacerbates the problem,” Cunningham says. “As soon as you see some warning flags go up, we suggest you seek out a credit counselor for help.”

A credit counseling session begins with a discussion of your overall financial situation, with an aim toward identifying your biggest areas of concern. Living expenses like rent, mortgage payments, utilities and food are tackled first, followed by secured debts like car loans, and then payments on credit card debt.

If you are running low on funds after covering your basic living expenses, the credit counselor may suggest creating a debt management plan. Under this scenario, your creditors agree to lower monthly payments and may temporarily waive or lower your interest payments, late fees or over-limit fees.

Last resorts

“There are only two exit ramps left on the debt highway if a debt management plan will not work, both of which are very serious financial decisions,” Cunningham says. “One is debt settlement, and one is bankruptcy.”

Unlike a debt management plan, in which consumers must pay 100% of what they owe, debt settlement involves creditors agreeing to take less. The best way to go about it, according to Cunningham, is to avoid the debt settlement companies offering their services for a fee and go straight to your creditors to work out a deal. “Why pay for something that you can do for yourself for free?” Cunningham asks.

If personal bankruptcy seems to be your only viable recourse, a nonprofit credit counseling agency affiliated with the National Foundation for Credit Counseling can help you navigate the process.

This article was reported by Sonya Stinson for Bankrate.com.

Can you explain to me why credit cards are bad? I know, “Don’t spend money that you don’t have.” But in the moment, paying 20 percent seems worth it for instant gratification. Obviously this attitude means all my friends think I’m an idiot, and I now have $10,000 in credit-card debt, but I expect I’ll pay them off sometime. If you can convince me that credit cards are actually terrible, I’ll stop. P.S. I never miss payments, and always pay more than the minimum.

Well, congratulations: You are the dream customer of credit-card companies. Their deal with you — you get to buy things you couldn’t otherwise afford, they get a whopping 20 percent interest — is widely regarded as extortionary. As your friends are clearly aware, you are paying a surcharge (which is actually much more than 20 percent over time, given the laws of compound interest) on everything you buy and don’t promptly pay off.

But if you’re happy with this bargain, far be it from me to dissuade you. As long as you keep making your monthly payments and the balance you’re carrying stays below 30% or so of your overall available credit, it shouldn’t hurt your credit score too much. And I’ll be the first to agree that credit cards are convenient, good for building a credit history, useful in emergencies, and, in a world of online purchases and credit-card-requiring car rentals, almost necessary. I bet even your friends don’t think credit cards are inherently terrible.

Still, have you done the math on exactly how much you’re paying? This credit card calculator can help you see how much interest you’ll pay on the original debt — and over how many years — based on the payments you’re making. When the time comes to wipe out that debt, even if you pay more than the minimum, you could end up paying almost $7,000 in interest charges. That, essentially, is the cost of instant gratification—and it’s a lot.

SmartMoney Magazine by Anne Kadet (Author Archive)

A mistake on your credit report can cost you literally thousands of dollars, especially in this economy. So what can you expect from a big credit bureau if you ask them to investigate and correct the error?

The answer, for many consumers: About 50 cents worth of effort, conducted by offshore workers at third-party firms. That’s just one of the findings from SmartMoney’s investigation into why credit-report errors continue to pop up so frequently—and why consumers often have so much trouble getting them fixed.

To follow what one consumer advocate calls an “electronic hot potato,” SmartMoney pieced together a depiction of the dispute process through information from trial depositions, internal company memos and the bureaus’ own employee manuals—much of which the bureaus and their trade group subsequently confirmed. The process may be efficient, but it remains a mystery to most consumers, and a source of bitterness for some.

The Wrong Kind of Thrills

For Brandon and Amanda Mendelson, it had all the elements of a paperback thriller: the innocent newlyweds, the mysterious account held by an obscure bank in Boca Raton, the faceless corporation controlling everything behind the scenes. But when the Mendelsons discovered the strange overdue loan mistakenly listed on Amanda’s credit report, they weren’t exactly thrilled. The Glens Falls, N.Y., couple had never done business with that bank, and the error spoiled Amanda’s credit history. Making matters worse, their call to a national credit bureau yielded nothing more than a form letter stating that the accuracy of the entry had been “investigated” and “verified.” Now they can’t help but wonder: investigated how? Verified by whom? Brandon studied organizational leadership in school, but even he can’t imagine how the bureau failed to fix such an obvious mistake. “Maybe it fell through the cracks,” he says.

Or maybe the process worked pretty much as it was designed to. Although they generally decline to discuss specific cases, the three major credit bureaus—Experian, Equifax and TransUnion—each attest to their commitment to accuracy and accountability in their record keeping. But while consumers might assume that each bureau employs an army of dedicated sleuths who carefully investigate and correct errors, all the bureaus actually process most disputes using a system that’s almost entirely automated—and where human beings are involved, they’re often working at a harried pace. The bureaus say the system, dubbed with the Muppety acronym e-OSCAR, is the most efficient way to handle the more than 20,000 disputes a day they receive. In practice, most complaints are electronically zapped straight to the lender, and according to consumer advocates, many lenders respond by simply rereporting the erroneous data.

Credit-report accuracy is profoundly important now, because an error can wreak more havoc than ever on your financial life. Before the nation heard the words credit crisis, just about anyone with a pulse could get a loan. Now many banks are refusing credit to anyone who looks remotely risky. And as legions of anxious job hunters know, a growing number of employers routinely check credit reports before they make a hire. It’s no wonder, then, that the National Foundation for Credit Counseling says call volume is up 31 percent in the past 12 months. “Credit is on consumers’ minds more than ever before,” says Curtis Arnold, CEO of CardRatings.com.

But according to a 2007 survey by pollster Zogby, 37 percent of consumers who obtain their credit reports find errors, and half of those said they could not easily correct the mistakes. An earlier study by the U.S. Public Interest Research Group, a nonprofit consumer advocacy organization, found that one in four reports contained “serious errors.” For its part, the Consumer Data Industry Association, the industry’s trade group, says only 11 percent of consumers who get their credit report file a dispute and just 5 percent of those challenge the results. “That’s an excellent satisfaction rate,” says the group’s president, Stuart Pratt. Still, even some industry insiders say there’s a problem. Testifying before Congress, one CEO of an independent Arizona credit bureau likened the dispute process to “having an IRS audit, brain surgery, getting a tooth pulled or going to your own funeral.”

And when the dispute process fails, consumers say they are left feeling powerless. Martha Soto, a 63-year-old Antioch, Calif., shipping manager, says she couldn’t get the mortgage she needed last fall because Experian listed her as the defendant in an unpaid court judgment. She says she’s faxed records proving that she’s actually the plaintiff; Experian says they’re the wrong records, and the dispute is still unresolved, leaving Soto increasingly frustrated. “They’re defaming you, and you can’t do anything about it,” says Soto. “It’s scary to think an agency like that can control your life.”

Read More Here

If maintaining good credit scores is a primary concern (and it should be), use all your credit cards routinely — because not using the cards could send your scores down.

Question: I have four credit cards. One for work expenses, one for personal expenses, a specific store card and then one other. This other card does not get used and has a zero balance. Does this hurt my credit scores to have this credit card with zero activity? Would it hurt my credit scores more if I closed this account? — Beth

Answer: If your primary goal is maintaining your credit scores, you should leave that extra card open — but not unused.

Based on the list of cards in your wallet, I’d guess the card with zero activity is one you keep in case of emergencies. Having an emergency card is a smart move, since that plastic could come in handy when an unexpected event catches you without enough cash.

Therefore, unless that extra card is causing legitimate problems — such as charging you an annual or inactivity fee, causing excessive temptation to spend or posing identity theft concerns — there probably isn’t a good reason to close that account. After all, “a zero balance on a credit card account won’t hurt your FICO score,” but closing an account could, says Craig Watts, a spokesman for Fair Isaac, the company that created the most commonly used credit score.

If your card remain unused, however, the bank may cancel it for you. That’s because “eventually the card issuer will close the account due to inactivity,” says Watts, because keeping the account open costs the lender money.

In recent months, lenders have become eager to close accounts in an effort to protect their profits. Alternately, the card issuer could “begin demanding that the consumer charge X amount to keep it open,” says Gail Cunningham, the vice president of public relations for the National Foundation for Credit Counseling

Regardless of who closes an account, your credit scores may fall due to a change in a key credit scoring ratio.

“Closing an account causes you to lose the available credit limit associated with it. Your utilization rate, also called your balance-to-limit ratio, will increase as a result of closing the account. That may cause a temporary decline in your credit scores,” says Rod Griffin, the director of public education for credit bureau Experian. That’s an important consideration if you’re about to apply for a loan.

To get an idea of how your utilization ratio could be affected by closing an account, let’s say each of your four cards has a credit limit of $1,000, for a combined total of $4,000 in available credit. Let’s also say that across those four accounts, you’ve got a total debt burden of $2,000. Then your unused card gets closed, taking your available credit down to just $3,000. Now, instead of using 50% of your credit lines, you’re suddenly using 67% of your available credit. That higher proportion makes you appear to be a riskier borrower, because you’re that much closer to maxing out your available credit.

Your credit scores will reflect such a change, although the actual scoring damage will vary from borrower to borrower. “The FICO score assesses all the information on your credit report. So the score impact from any one action, such as closing an account, will depend on what other information is present on the credit report,” Watts says.

Luckily, using that emergency card even semiregularly could prevent its closure by the bank — and could help your credit scores in the process. For example, you could charge a recurring subscription fee, such as Netflix, or a monthly cost, such as your cell phone bill, to your emergency card. By putting such regular charges on your plastic, you “won’t be actually taking on additional debt but should keep the card alive,” the NFCC’s Cunningham says.

Just be sure you always pay your bills on time and in full, since those two steps are necessary for building good credit. “Keeping the account open, using it to make small purchases and paying the balance in full each month is a good way to maintain your credit scores and might help improve them, especially if you’ve had recent credit problems,” Griffin says.

If you’ve been a responsible borrower, it’s unlikely that an account closure would have much impact. Because the most important steps for good credit involve making payments on time, not carrying excessive debt and applying for new loans only when necessary, “closing one card is much less likely to affect your FICO score,” Watts says.

Lots of retirees can’t make ends meet, especially if they are in debt. Here’s how to know if you (or your parents) are in trouble — and what to do about it.

By Liz Pulliam Weston
MSN Money

Janie raised five children as a single mother and even managed to put some money away for retirement.

That money’s gone now. Disability and a late-in-life divorce left her swimming in debt. She was forced to retire at 52, years earlier than she had planned, and she now lives on a disability check of $694 a month.

“I get so overwhelmed by medical and credit card bills,” Janie wrote. “After paying for necessities, I have nothing left over for food or personal items. This is why my credit cards are maxed out.”

By contrast, Bill wasn’t forced to retire early. But he did enter retirement with a significant amount of credit card debt. At 66, he’s wondering if he should tap his 401k to pay those bills.

A.R. is 68 and facing nearly $200,000 in student loan debt. The amount she originally borrowed for a master’s degree snowballed after years of deferments while she tried to build a business — a business she finally closed to care for her ailing mother and husband.

“It’s overwhelming and scary to me how much the interest has accumulated,” A.R. said. “There is no way I will ever be able to pay this tremendous (debt).”

The debt generation grows old

Debt and retirement aren’t supposed to go together. We envision older Americans living thriftily in paid-for homes, clipping coupons and eschewing credit card debt.

While that describes plenty of older people, it doesn’t capture the whole picture:

* Nearly six out of 10 people ages 65 to 74 have some kind of debt, according to the Federal Reserve’s Survey of Consumer Finances. The most common kinds of debt include mortgages (32.1%), credit card debt (31.9%) and installment loans (27.5%). The number carrying debt drops to four in 10 for people 75 and older (18.7% have mortgages, 23.5% have credit card debt and 13.9% have installment loans).

* Some seniors carry huge debt loads relative to their incomes. Nearly 16% of households headed by 65- to-74-year-olds said their debt payments exceeded 40% of their incomes. Nearly 14% of those 75 and older were in the same bind. Among other age groups, the percentage that devotes 40% or more of their incomes to debt ranges from about 13% in the 34-to-44 age bracket to 16% for those 45 to 54.

* The bankruptcy rate for people 55 and older soared from 1991 to 2007, according to a study by the Consumer Bankruptcy Project. People 55 and older accounted for 8% of bankruptcies in 1991 but 22% of the cases in 2007. Bankruptcy rates for people 75 and up more than quadrupled.

“When I started doing this 20 years ago, it was very unusual to talk to a senior who had problems with debt. They avoided it like the plague,” said debt and collections expert Gerri Detweiler, co-author of the e-book “Debt Collection Answers.” “There’s a new group (of seniors) now that’s more comfortable with credit and more likely to turn to credit when the money doesn’t stretch.”

Recession pushes many over edge

People who are still employed have a shot at paying back big debts by working more hours, taking a second job or delaying retirement. Once retired, though, fixed incomes often can’t cover rising medical costs and debt payments from years of easy credit.

“It becomes harder and harder to keep up with the payments without affecting your lifestyle, especially with variable-rate debt,” said financial planner Bonnie Kirchner, the author of “Who Can You Trust With Your Money?” “Many (people) are entering retirement with credit card debt, and it puts them in the position where they’ve lost control. They’re now under the control of the credit card companies.”
The recession has almost certainly made matters worse as job losses have soared, pushing people into retirement prematurely. Tightened credit standards, higher interest rates and the loss of home equity are sending more seniors over the edge.

“These economically burdened seniors go without heat in the winter and freeze, or without air conditioning in a steamy summer and die, or miss meals or eat dog food to survive,” said debt expert Steve Rhode, who founded a credit-counseling agency and who now provides advice at How to Get Out of Debt. “When it comes to seniors, debt kills.”

Your Social Security check isn’t safe

Yet far from cutting older debtors some slack, the U.S. government recently tightened the screws by expanding the number of people who could lose part of their Social Security checks to old debt.

The feds have long been able to withhold part of debtors’ Social Security benefits to pay back defaulted student loans, unpaid income taxes and other government debts. There’s no statute of limitations on how long the government can collect on student loans, but it did face a 10-year statute of limitations on collecting for other nontax debt, including small-business loans and money owed by veterans for health care.

A provision in the 2008 Farm Bill lifted the 10-year limitation for debts other than income taxes, so now the feds can pursue more debtors indefinitely. And that means more people will see their Social Security checks cut by up to 15%, which is the maximum the Treasury can withhold in so-called “offsetting” to pay defaulted government debt.

The average monthly benefit for retirees was $1,167 in 2009, according to the Social Security Administration; a 15% offset would lower that to $992, just above the federal poverty line of $902 in monthly income for a one-person household. A benefit check can’t be lowered below $750 for most debts, but there is no floor for tax-debt collections.

They can take every nickel

The farm bill change allows the government to begin collections on an additional $6 billion, on top of the $75 billion it was already pursuing, according to the Financial Management Service, which collects debts for the Treasury. The additional offsets are expected to collect about $10 million a year.

Debt collections from Social Security checks have increased dramatically, even before this change, a Wall Street Journal analysis (subscription required) of Treasury data showed. The Journal found that roughly 10% of the $4.3 billion in debts the Treasury collected in 2008 came from Social Security checks, up from 1.5% in 2001.

The Internal Revenue Service was the largest recipient, collecting $269.2 million from the offset Social Security checks, while Veterans Affairs received $68.4 million and the Department of Education got $62.5 million.

The collection program may be good for the nation’s coffers, but it’s potentially disastrous for people living with already-constricted incomes. Detweiler recently heard from a couple living in a trailer in Punta Gorda, Fla., who were told their Social Security checks would be nicked for a defaulted Small Business Administration loan.

“That was all the money they had,” Detweiler said. “It’s just a nightmare.”

Yet many seniors are reluctant to consider their options in dealing with debt, Detweiler said. Bankruptcy, debt settlement, credit counseling or simply not paying their bills may be anathema to many older debtors.

“Even if they’ve fallen victim to a predatory loan, they still feel an obligation to pay it back in full,” Detweiler said. “Their word is their bond” — even if they’re facing unpayable debts.

If you’re a senior in debt, or you’re concerned about your parents, here’s what you need to consider:

Heed the warning signs. The following red flags indicate deep trouble:

* Paying only the minimums on credit cards.

* Debt payments, including the mortgage, that exceed 40% of income.

* Borrowing from one source to pay another.

* Scrimping on medications or other essentials because of debt payments.

* Bills paid late or not at all.

* Calls from creditors or collection agencies.

* Garnishments or lawsuits because of debt.

Get help. Seniors struggling with debt should consider a free, confidential consultation with a bankruptcy attorney — not necessarily as the first step toward filing, Detweiler said, but so they can get some legal advice about their options and the risks their creditors may pose. If they’re reluctant, “their children may need to make that appointment for them and with them,” Detweiler said.

Be wary of tapping retirement accounts to pay debt. If you drain your retirement prematurely, you may not have enough money to live on. Furthermore, retirement accounts are legally protected from creditors. If you end up filing for bankruptcy, you’re likely to regret using protected money to pay off bills that could have been erased in court.

Federal law sets clear limits on what debt collectors can do. If their tactics go beyond those limits, you can win money — and it’s a surprisingly easy process.

By Katherine Reynolds Lewis

If you’re overdue on your bills, you may know all too well the headaches of phone calls, letters and threats from creditors.

Now some debtors are hitting back by suing when debt collectors violate their rights.

“People will take a lot of crap until it gets to the point where they’re so desperate they feel they have nothing to lose by fighting back,” said Steven Katz of Tucson, Ariz. Katz is the founder of Debtorboards, where consumers post their frustrations and successes with the collection industry.

Suing is a surprisingly easy process. Federal law lets individuals receive $1,000 for each abuse of their rights, plus any damages or attorney fees. Sometimes, a single phone call from a collector involves multiple violations.

“The violations they commit are spread all over the board,” said Katz, who has reaped $38,000 by suing debt collectors in small-claims court. In a time when jobs are scarce and cash is tight, he believes collectors are becoming more aggressive with consumers and often crossing the line into illegal threats and deception.

Indeed, the Federal Trade Commission hears more complaints about debt collection than any other industry the agency regulates. In 2009, the FTC received 119,549 complaints about debt collection, regarding both original creditors and third-party collectors, up 14% from the previous year.

In a fall 2009 national poll of 1,001 adults, more than 30% of respondents answered yes when asked whether they’d received debt collection calls at inappropriate times of the day, in such frequency as to seem harassing or regarding a bill they didn’t believe they owed. Forty-seven percent said letters and calls from debt collection agencies seem to be more common than in the past, according to the survey, conducted by Scripps Howard News Service in partnership with Ohio University.

When can you sue?

The first step in turning the tables on debt collectors is to know your rights. The Fair Debt Collection Practices Act prohibits such tactics as:

Harassment. Using obscene or profane language or making multiple calls in a short period of time.

Illegal threats. Saying you’ll be arrested or sued, if the debt collector lacks the intention or ability to follow through. Threatening to garnish wages, if such a practice is illegal in your state.

Inappropriate contact. Calling before 8 a.m. or after 9 p.m., or calling you at work after you’ve told them you can’t receive calls there. Contacting your relatives or neighbors about your debt for any reason other than to locate you.

Lying. Misrepresenting the amount you owe or the legal status of forms sent to you. Debt collectors falsely portraying themselves as attorneys or government officials, or claiming incorrectly that you committed a crime.

Unfair practices. Giving false credit information about you or trying to collect any additional charges that aren’t allowed under state law and the contract that initially created your debt. Making your debt appear more recent than it truly is.

Carrie Lengyel, a 45-year-old warehouse worker in Butler, Pa., knew the collection agent was lying when he left a voice mail saying he’d be stopping by her workplace and would need her manager to be available. At the time of the call, she’d been unemployed for a year and didn’t have a place of employment for him to visit.

“It made me mad because I knew he wasn’t allowed to say what he was saying,” Lengyel said. “I never dreamed that you could actually sue them for coming back at you the way they do.”

Two weeks after providing Pittsburgh attorney Clayton Morrow a copy of the recording the collector left her, Lengyel received a settlement for $1,000 — twice her original debt — and a promise to cease contact. She was happy that Morrow received $1,500 in the settlement, since he took her case on contingency.

Building your case

To lay the groundwork for a lawsuit, keep detailed records and document any possible violations of your rights. When you first receive a call or letter about a debt, start a file that includes the collector’s name and address, a copy of all related documents and a record of every subsequent call, with the number it came from. If it’s legal to record telephone calls in your state, do so.

The first time you’re contacted, you have 30 days to dispute the debt. You should always do this, Debtorboards’ Katz said, because it forces the collector to provide you with detailed documentation that the obligation is yours.

“Chances are they don’t have it,” he said, noting that many collectors purchase debts from the original creditors. “If you’re going to accuse me of not paying a debt, you’d better prove a debt existed in the first place.”

If you receive documents showing that you do owe money, look at the original date of the obligation and the last time you made a payment. Has the statute of limitations in your state expired? If so, the collector cannot legally sue you, and it’s safe to tell him, in a certified letter, to stop contacting you. Any subsequent contact constitutes a violation — and $1,000 in your pocket.

Think twice before you acknowledge owing the debt or offer a partial payment; you could inadvertently restart the statute of limitations or even hurt your credit rating. “Most first-time consumers get into trouble by opening their mouths and saying too much,” Katz said.

He recommended reading your local court rules so you can file complaints yourself and avoid legal fees. If you’re more comfortable hiring a lawyer, you can find one through the National Association of Consumer Advocates.

When not to sue

Before you run off to the courthouse, you should understand the possible pitfalls of suing or threatening to sue a debt collector.

First of all, make sure you’re in a position to show up before a judge. If you fail to appear, the debt collector likely will win a default judgment against you.

Second, check the statue of limitations in your state for the type of debt in question; it can be anywhere from two to 15 years. If the statute hasn’t yet expired, you run the risk of being sued in return and ordered to repay the full amount of the debt. If you’re unsure, consult a lawyer.

“If there’s a possibility of being sued on the debt, unless you’ve got a huge case in terms of damages, you’re likely to open that Pandora’s box where otherwise they might not have thought to sue you,” said Dana Karni, a consumer debt attorney in Houston.

Traps to avoid

Remember, the debt collector is more experienced than you and knows all the tricks of the trade. To keep from being caught:

Be wary. When you’re in a conversation with a collector, keep your guard up, and don’t volunteer any information. Stay general and vague, and never give out your bank’s name or your account number.

Get everything in writing. Insist on full paperwork for any settlement offer to ensure that you don’t make a small payment you think has erased the debt but has instead restarted the statute of limitations, putting you back on the hook for a larger amount.

Respond to legal papers. Many times, a collector’s threat to sue you is empty. But if you do get a summons, file a response. Don’t ignore it in hopes it will simply go away.

Mistrust promises. Don’t believe a debt collector’s claims that he can improve your credit in exchange for a token payment. By the time your debt is in collections, your credit has already been affected. Moreover, unless you have proof that the debt is cleared, the collector could sell it to another company that might come after you again.

Keep your cool. Don’t let pressure tactics rush you into a decision. “Collection agencies are in business to scare and intimidate people,” said Timothy G. McFarlin, an attorney in Irvine, Calif. “They buy debt at a few pennies on the dollar and then they look to collect the entire amount or more when they add fees.”

Houston paralegal Monica Johnson felt a rush of fear when a debt collector threatened her with arrest, but when she checked with her local court, there was no outstanding warrant in her name. A few days later, the collector left her a voice mail saying he was at a nearby truck stop and was about to bring a summons to her house, where her four teenage daughters were home alone for summer vacation.

“I’m worried about this guy showing up at the house with the girls,” said Johnson, who was at work at the time. “I’m trying to call my husband on the phone to see if he can make it there before me. I’m over an hour away.”

Her husband ended up leaving his sick mother at a hospital and racing home to protect their daughters. Nobody ever showed up at the house.

When Johnson and her husband consulted attorney Karni, they were relieved to learn that the debt at issue, a payday loan, was too old for the collector to sue. Her complaint against the debt collector is pending.

Yes, the clock ticks on credit-report scars and on the debts themselves. But that doesn’t necessarily get you off the hook. By Liz Pulliam Weston

Not too long ago, the only people who had to worry about legal limitations on old debt collections were folks who didn’t pay their bills.

Today, however, increasingly aggressive collectors are going after people for debts they’ve already paid or that aren’t even theirs. Knowing something about so-called “statutes of limitations” on debts can help you deal with misdirected or belligerent collection attempts.

Here are just a few examples from my mailbag:

* Suzy from New York City was fielding calls from a so-called “debt repurchaser,” a company that buys old debts from other collection agencies. The repurchaser demanded payment for a credit card bill that Suzy paid through a credit counselor, but she’d long since lost all her records regarding the account.

* Jerri’s credit card number was stolen and used to call a 900 number, a premium call that cost more than $200. Her credit card issuer removed the charge and reissued new cards. Apparently the 900-number service provider turned the debt over to a collection agency, because three years later she started getting calls demanding payment.

* Brian in West Hollywood messed up his credit big-time in his early 20s, but his father stepped in, paid off his bills and closed all his accounts. Nearly 15 years later, Brian had rebuilt his credit and was looking forward to buying his first home when he got a disturbing call from a collection agency. “They claim I have an outstanding debt of $387.30 from the early 1990s,” Brian wrote. The debt was supposedly from a credit card that Brian doesn’t remember ever having. “They have threatened that if I do not pay this, it will damage my credit report. . . . I feel like this is a scam, but I don’t know. . . . I am nervous about any negative marks on my credit report.”

The Federal Trade Commission and state regulators around the country have taken action against collectors that have tried to resuscitate old, paid-off debts or that hounded people about debts that weren’t theirs. But you can’t always count on regulators intervening in your case, so knowing something about debt limitations can help you defend yourself against the worst practices.

How old is too old to collect?

There are two major types of limitations on debt that you need to know — and that many people confuse.

The first has to do with how long debt problems can show up on your credit reports. Federal law typically requires credit bureaus to drop negative information after seven years. The clock usually starts ticking 180 days after the account first goes delinquent (in other words, when you miss your first payment on the account). There are exceptions: Bankruptcies can remain on your credit reports for up to 10 years, and some debts, such as unpaid tax liens, can stay on your reports indefinitely.

Collectors can’t legally restart the seven-year clock by “re-aging” the debt (giving it a new delinquency date) or by selling it to another agency. (The FTC shut down one large collection agency, CAMCO, after charging the company repeatedly re-aged debts in its attempts to collect.)

The other curb on debt collection is the statute of limitations, which gives creditors a certain time period — in most states, three to six years — in which to sue you over a debt.

Statutes of limitations vary widely by state, and by the type of debt, according to attorney John Lamb, co-author of “Solve Your Money Troubles: Get Debt Collectors off Your Back & Regain Financial Freedom.” States often have different rules for oral and written contracts, as well as for “closed-end” contracts such as installment loans and “open-ended” contracts, which typically (but not always) include credit card accounts.

California, for example, has fairly short statutes of limitations on most debts: two years for oral contracts and four years for written contracts, promissory notes and credit card debts. Kentucky, by contrast, says creditors can sue over written contracts for 15 years after the last payment was made, and for five years on most other debts, including credit cards.

Some other key points about statutes of limitations:

* The devil’s in the details. Not only do states have different statutes of limitations for different debts, but two states may treat the same debt differently. A credit card debt might be considered an open-ended account in one state and a written contract in another. The only way to know for sure is to check your state laws or consult an attorney.

* You can inadvertently restart the clock. Generally, the statute of limitations starts ticking from “date of last activity” on the accounts, said Los Angeles bankruptcy attorney Scott Bovitz. (If the account is still listed on your credit reports, the date of last activity should be noted there.) On a credit card debt, that could be the last payment you made or the last purchase you charged. But in some states, Lamb said, making a payment on an old debt, agreeing to an extended repayment plan or even acknowledging that the debt is yours can extend the statute of limitations or restart the clock altogether.

* A creditor may still sue you after the SOL has run out. Suing or threatening to sue you after a statute of limitations has run out violates the Fair Debt Collection Practices Act, Lamb said, but that doesn’t mean it doesn’t happen. To prevent the creditor from winning a judgment against you, you’ll need to show up in court and point out that the statute of limitations has expired.

* The creditor may try to pick a better venue. If you sign a credit contract and move to another state with different limits, the creditor may try to sue you in the state that has the longer statute. If that’s not the state in which you currently live, Lamb said, you should protest: “The general rule is that the state you live in” is the one whose statutes should apply.

* Debts can still exist even if the creditor can’t sue. Some people erroneously believe that debts are erased after the statute of limitations has run out. Although the creditor’s ability to sue you has been curtailed, it can still try other methods to persuade you to pay, including calls and letters. The debt can also be sold to another collector that can renew efforts to get you to pay. A legitimate debt is truly erased only when it’s paid or erased in bankruptcy court.

First, make sure you’re covered

So how should you handle attempts to collect an out-of-statute debt? Sometimes the best recourse is to simply “hang up the phone and walk away,” Lamb said.

“You want to be very careful,” Lamb said, “not to say anything that could be used to restart the statute of limitations.”

If you want to fight back, you should first make “absolutely sure” the statute of limitations has indeed expired, Lamb said. Otherwise, contacting the collector may goad it into more action.

In Jerri’s case, for example, the statute of limitations in her home state of Wisconsin had three more years to run. Since the bogus debt didn’t turn up on her credit reports and the collection agency didn’t threaten to sue, she opted to just ignore the calls, which eventually stopped.

You can start your research at one of a number of Web sites that post information on statutes of limitations, such as CreditInfoCenter.com, whose chart includes links to relevant state laws.

If you’re sure the debt is too old for a lawsuit, you could send the collector a letter via certified mail, return receipt requested. The letter should include the fact that the debt isn’t yours (if that’s true), that the statute of limitations has expired and that you want all collection efforts stopped.

You may be able to handle this yourself, or you may want a lawyer’s help. The National Association of Consumer Advocates can provide referrals to attorneys familiar with fair credit laws.

More than ever, credit card companies are ready to negotiate with borrowers who are in over their heads. But know your options before you commit.

By Liz Pulliam Weston

Consumer advocates and debt experts agree that credit card companies have never been more willing to cooperate with distressed borrowers than they are right now. Issuers are lowering rates and minimum payments, offering workout plans and settling debts for 50 cents or less on the dollar.

But not everyone is getting the help that’s needed.

Rosemarie is 59 and disabled, and has had trouble making the minimum payments on her $12,000 credit card debt since her interest rate soared to 30%. She asked for relief but didn’t get it.

“I was late making a few payments, and now they are charging me over $300 a month in interest,” Rosemarie wrote me. “I called asking if they could lower the interest, (but) they said no. . . . What can I do?”

Cutting a deal with your credit card company typically isn’t easy or simple.

Issuers don’t have enough workers to deal with all their delinquent accounts, which can make it tough to find someone who can help, said Michael Bovee, the president of the Consumer Recovery Network, a debt-settlement company that also teaches people how to resolve debt problems on their own. Plus every issuer has different policies and procedures, and those may change over time, further complicating your negotiations.

But it is possible to cut a deal if:

* You’re clear about the state of your finances and what you can afford.

* You understand the timelines involved in distressed debt.

* You’re willing to let your credit scores take a hit.

First, you have to be in trouble

It’s an unfortunate reality that most issuers won’t start offering real solutions until borrowers begin missing payments, credit experts said.

“The further behind you fall, the more eager they (credit card companies) are to work with you,” said Gerri Detweiler, a personal-finance expert for Credit.com. After you miss a payment (or two or three), issuers may offer forbearance or hardship programs that reduce interest rates and minimum payments for three to six months.

As you fall further behind, they may progress to workout plans that allow you to pay off your debt at a reduced rate over several years and, beyond that, offer settlements for less than what you owe.

But the help comes at a steep price. A single missed payment can knock more than 100 points off good credit scores, as I wrote in “5 ways to kill your credit scores,” with subsequent late payments doing further damage. Settlements compound the injury, because you’re paying less than what you owe, something that lenders and credit-scoring formulas view as a big black mark.

So before you pick up the phone to start negotiating with your credit card issuers, make sure you don’t have better alternatives.

If you still have good credit scores, for example, you may be able to transfer your debt to:

* A lower-rate credit card (you can find offers at MSN Money, Bankrate.com, CreditCards.com, CardRatings.com, LowCards.com and Index Credit Cards, among other sites).

* A three-year, fixed-rate personal loan from a credit union or bank.

* A three-year, fixed-rate loan from a peer-to-peer lending site such as Prosper or Lending Club.

Regardless of your credit, you may be able to move your debt to a 401k loan or an existing home equity line of credit, but these loans are fraught with peril. Your 401k loan could become an inadvertent withdrawal if you lose your job, triggering taxes and penalties. Transfers to a retirement or home equity loan also turn debt that could be erased in bankruptcy court into debt that can’t, so use these loans only if you’re sure you can pay them off.

Don’t grab just any lifeline

If none of these alternatives will work for you, it’s time to take a close look at where you stand and what you can afford to pay your credit card companies. You need to:

* Work out a budget. Review all your expenses to see what nonessentials can be cut to free up cash for your cards. MSN Money’s Managing Your Budget Decision Center can help. Make sure your budget is realistic, though; if you try to get too Spartan or fail to include all your expenses, you won’t be able to stick to your plan. “Make sure you have a good handle on what you can pay and what you can’t pay,” Credit.com’s Detweiler said. “You want to be able to put food on the table and gas in the car” before you think about paying nonessentials. (For more, read “How not to pay your bills.”) Agreeing to a payment plan you can’t afford is counterproductive, the credit experts said, because you’ll lose all credibility if you fail to make the agreed-on payments and the issuer may respond with hardball tactics.

* Get realistic about your situation. If your financial setback is truly temporary, a short-term forbearance or hardship plan may be all you need to get through a rough patch. Issuers can reduce your interest rate and minimum payments for a few months and may waive fees to make your debt more affordable. Some even offer to erase any earlier late payments from your credit reports as long as you make subsequent payments on time, Detweiler said. But if you won’t be able to afford your payments once the forbearance ends, you may need a more drastic solution, such as a workout arrangement or a debt settlement.

A workout typically allows you to pay off your balance over several years at a reduced interest rate. Some issuers offer these plans directly to borrowers, while others require you to use a debt-management plan offered by a legitimate credit counselor, such as one affiliated with the National Foundation for Credit Counseling. You won’t be able to use your cards during the workout period, and it may have implications for your credit, as I discuss in “The consumer’s guide to credit counseling.”