Debt payment plan does not erase credit history> Fair Credit Reporting Act allows person’s account information to remain on record up to seven years

Last week we told you how credit counseling could help you develop a debt repayment plan to get out of a financial bind.

Such a plan does not erase your credit history. Under the Fair Credit Reporting Act, accurate information about your accounts can stay on your credit report for up to seven years. In addition, your creditors will continue to report information about accounts that are handled through a debt repayment plan. For example, creditors may report that an account is in financial counseling, that payments may have been late or missed altogether, or that there are write-offs or other concessions. A demonstrated pattern of timely payments will help you obtain credit in the future.

Debt repayment plans usually cover unsecured debt. Your auto and home loan, which are considered secured debt, may not be included. You must continue to make payments to these creditors directly.

Most automobile financing agreements allow a creditor to repossess your car any time you default on the loan agreement. No notice is required. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. If you can’t do this, the creditor may sell the car. If you see default approaching, you may be better off selling the car yourself and paying off the debt. You would avoid the added costs of repossession and a negative entry on your credit report.

If you fall behind on your mortgage, contact your lender immediately to avoid foreclosure. Most lenders are willing to work with you if they believe you’re acting in good faith and the situation is temporary. Some lenders may reduce or suspend your payments for a short time. When you resume regular payments, though, you may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If you and your lender cannot work out a plan, contact a housing counseling agency. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner who’s having trouble making mortgage payments. Call the local office of the Department of Housing and Urban Development or the housing authority in your state or city for help in finding a housing counseling agency near you.

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. Think carefully before taking this on. These loans require your home as collateral. If you can’t make payments, or if the payments are late, you could lose your home.

The cost of these consolidated loans can add up. In addition to interest on the loan, you pay “points.” Typically, one point is equal to 1 percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.

Personal bankruptcy generally is considered the debt management option of last resort because the results are long-lasting and far-reaching. A bankruptcy stays on your credit report for 10 years, making it difficult to acquire credit, buy a home, get insurance, or sometimes, get a job. However, it is a legal procedure that offers a fresh start for people who can’t satisfy their debts.

There are two kinds of personal bankruptcy: Chapter 13 and Chapter 7. Each must be filed in federal court. The current filing fee is $160. Attorney fees are additional.

Chapter 13: Also known as reorganization, Chapter 13 allows debtors to keep property such as a mortgaged house or a car, that they otherwise might lose. Reorganization may allow you to pay off a default during a three- to five-year period, rather than surrender any property.

Chapter 7: Known as a straight bankruptcy, Chapter 7 involves liquidation of all assets that are not exempt in your state. Exempt property may include work-related tools and basic household furnishings. Some of your property may be sold by a court-appointed official or turned over to creditors. You can file for Chapter 7 only once every six years.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, garnishments, utility shutoffs, and debt collection activities. Both also provide exemptions that allow people to keep certain assets, although exemption amounts vary among states. Note that personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. Your debt under Chapter 13 bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

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