Credit dominates our finances. The latest statistics show that as a nation we are carrying record-high installment debt, especially on credit cards. The national average is approximately $8,000 of personal debt per household; however, many people carry at least $20,000 to $180,000 in debt, including home mortgages, cars, college education, vacations, clothing, entertainment and groceries. The possibility of using credit is a good thing, but understanding why and when to use it is more important.

Five Steps to Financial Freedom

• Calculate How Much You Owe:
  Assemble all monthly statements, making a list of the total amounts due on each card, and the monthly minimum payments. Determine which cards have the highest interest rates and close those accounts. There isn't any reason to have more than two cards and each card should have an interest rate less than 14%. Use your cards only for essential purchases. Use a debit card for large purchases, it will cut down on emotional spending.
• Change Your Lifestyle:
  With the decline in the stock market and economy, the value of your assets may have been reduced. If this is the case, you may need to scale down your lifestyle. Change your lifestyle before you even consider bankruptcy.

• Budget, Budget & Budget:
  Learn how to interpret your economic activity in a financial statement format. Learn about financial ratios and how the impact spending decisions. Living beneath one's means is an essential way to start financial recovery.

• Learn Money Management:
  Don't leave all your financial health to the responsibility of others. Many business and personal relationships have been ruined over money issues, and an irresponsible partner can cause years of credit problems. Know how to read your own bank statement, balance your checkbook, and be aware of charges on your monthly bills. Be educated in the basics. Also, investigate your credit rating by contacting one of the national credit bureaus: Experian (888-397-3742); Trans Union (800-888-4213); or Equifax (800-685-1111). Learn how to interpret the information on the report. It should be reviewed on an annual basis to ensure there is no misuse of name, Social Security and credit card numbers.

• Control Debt:
  If you have trouble keeping track of your payment obligations you should consider consolidating your debt into one loan. This will help you to feel more organized and ensure your debt obligations are paid on a regular basis.

Bankruptcy Considerations

Filing for bankruptcy can eliminate current financial debts and future obligations, but doing so will cause long term consequences. Bankruptcy is reported on your credit report for at least seven to ten years, and is public record. More than 1.47 million Americans are expected to file bankruptcy this year, an increase of 22% over 2001.

Investigate the types and cost of bankruptcy proceedings. Personal bankruptcy fees are nondeductible expenses, and most financial advisors would encourage clients to work hard to get out of debt. However, some people have no choice. Credit card companies will sometimes settle for a nominal amount, because their debt is unsecured and dismissible in bankruptcy.

There are two types of bankruptcy filings for individuals: Chapter 7, Liquidation, and Chapter 13, Adjustment of Debts of an Individual with Regular Income, often referred to as 'Wage Earner's Reorganization' Under Chapter 7, comprising 70% of all filings, the filer usually has all debts eliminated, including property. Chapter 13 allows for an individual with a regular income to repay debts over a three or five year plan. Filers can keep property and usually creditors will accept a reduced amount on loan obligations. Filers must, however, live within a budget approved and supervised by a bankruptcy trustee for five years. Consult with your CPA and bankruptcy attorney in the state, in which you live, and determine what assets are exempt from proceedings and what restrictions apply.

The bankruptcy court looks carefully at recent expenditures, including purchase of luxury items, vacation trips, loans, and cash advances made within 60 days of filing. These types of debts are usually not dischargeable in bankruptcy. Other non-dischargeable debts include certain tax claims under three years old, alimony, child support, injuries to a person or property, government fines and penalties, student loans, and certain condominium or cooperative housing fees.

Steps to Repair Credit

Negative information cannot be removed from a credit report but you can request an examination of information in your file that you want to dispute as outdated, incomplete or inaccurate. Once you have identified the item, you can explain why you dispute the information. If an item is changed or removed, the credit bureau cannot put the disputed information back in your file. Information is generally reported for seven years, except:

• Bankruptcy information can be reported for 10 years.
• Information concerning a lawsuit or a judgement against you can be reported for seven years or until the statute of limitations expires.
• Default information on student loans can be reported for seven years after guarantor actions.

The federal government instituted new legislation to require credit card or finance companies to report canceled debt on Federal Form 1099-C, Cancellation of Debt. This reporting is required for the forgiveness of $600 or more. For an individual, this canceled amount should be reported on the 'Other Income' line of your 1040.

Once you have gotten your credit strategy back on track, you are ready to start rebuilding your credit. Consume, invest, and save wisely and do not add new debt to current expenses.