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Smart solutions to your debt dilemmas

TODAY financial editor Jean Chatzky shares advice on balancing the bills and resolving your credit problems.
/ Source: TODAY contributor

Need advice about paying off your debts or making ends meet in today's economy? TODAY financial editor Jean Chatzky gives answers to some of the most common consumer debt questions.

Q: I have three children, am a single mother, with one child in college, and I feel it's a struggle to balance saving for retirement, taking a vacation, putting the kids in summer daycare. Can we balance all of this? How do you make it all work? — Ursa, Oakhurst, Calif.

A: Ursa, I feel for you. It really seems as if the bad news comes in batches. Here's a suggestion though, if you can find a few days, try a staycation instead of a vacation. I didn't make this word up. I got it from a Better Homes and Gardens study that shows that eight out of 10 people like the idea of spending vacation time at home or in their local area. And what's not to like: You don't have to travel, which means you don't have to pack. You can turn off the phone, the e-mail, sleep late, eat your own food and read a good book. And there's so much money to be saved in the process. It's not just the cost of travel, air, hotel, gas. It's sending the dog to the kennel, buying the kids souvenirs or new flip-flops. I'm going to be doing some of this myself. Lastly, I just want to tell you because you asked: I don't ever feel balanced; in fact, I don't even like the word. There are some days I feel good at my job. There are others I feel good at home. My mother used to tell me when I was stressed out over whether my kids were eating a well-balanced diet, that I couldn't look at meals or days, I had to look at weeks. That's how I choose to look at my work and my life. If over a week I get it all in, I've done an OK job.

Q:  My family is $20,000 in debt. We also have $35,000 in student loans that are in constant deferment. And my husband lost his job. Although he just started a new one, we are considering bankruptcy. Should we do it? Does it include student loans? And what is the difference between Chapter 7 and Chapter 11? — Monica, Waterford, Mich.

A: Monica: Chapter 11 is for debtors engaged in business, so it's not for you. What you should be considering is Chapter 7 or Chapter 13. They are different. To file Chapter 7, you have to figure out if your monthly income is less than or equal to the median income for a household in your size in your state. If it is, you can file for Chapter 7, which allows you to liquidate old debts and start from scratch.

If you can't do that, you'll need to look at Chapter 13, which is not a liquidation plan, but a repayment plan. It is often called a wage earner's plan because it enables individuals with regular income to develop a plan to repay all or part of their debts. Debtors propose a repayment plan to make installments to creditors over three to five years. That plan has to be approved by the court; you will be able to reschedule secured debts (like car loans) and extend them over the life of the three to five years, which may lower payments. The charge is a $235 filling fee and a $39 miscellaneous fee and may be made in installments if the court allows.

Before you do that, though, the new bankruptcy law requires you to go through credit counseling — which is a good thing. For a good not-for-profit credit counselor, go to NFCC.org. They will ask you a series of questions to help you figure out if bankruptcy is the only possible option. It may be that since your husband is now working again, you may be able to use a debt management program through a credit counseling service to avoid bankruptcy. Over the long term, that's a good thing.

Q: I co-signed a credit card with my daughter. I was unaware of the high balance or that she had stopped paying until I got a letter from a lawyer. I called the bank to negotiate a one-time payment, but they would not accept anything less than the actual balance owed. We cannot pay the minimum amount due each month; should we pay it in full using some of our retirement savings?Gloria, Livingston, N.J.

A: Gloria: You did the right thing by trying to negotiate because often banks will work with you. Now you have a few options. You can go back to the debt collection lawyer who contacted you and see if they are willing to negotiate. If that doesn't work, you can work with a credit counselor who is associated with the NFCC. He or she will be able to help you negotiate a settlement that you can afford. The downside of this is that it will bring your credit score down a bit, but if your daughter hasn't been making the payments, your credit score has likely already been hurt. You should pull your report from annualcreditreport.com to check out the damage.

Importantly: Your retirement savings should be your very last resort. You don't mention how old you are, but I'm guessing you're going to be pulling out money early, and that means big penalties and also tax implications. That means you're going to lose a big chunk of money in the process, and set yourself back significantly when it comes to retirement. If there is any other way to come up with this money rather than raiding retirement savings — selling belongings (your daughter's belongings, perhaps) — I want you to do that first. And for the future, at the very least, you need to be careful when you decide to co-sign a loan or credit card with anyone, even a relative or close friend. And if you can, you should avoid it at all costs. According to the FTC, studies show that for co-signed loans that go into default, as many as three out of four co-signers are asked to repay the loan. The reason people need a co-signer is because the lender doesn't consider them a good risk when it comes to lending them money, so make sure you've considered this before you sign on the dotted line. In most states, when you co-sign and your friend/relative misses a payment, the lender can immediately collect from you — meaning they don't even have to pursue the actual borrower first.

Q: We plan to refinish our basement and roll the last of our remaining credit card debt into the loan or line of credit we obtain for the construction. We are wondering if it makes sense to do a home equity loan, a home equity line of credit or use a 0 percent credit card offer?Kristin, Denver, Colo.

A: Before you borrow, you need to be sure that your home still has the equity that you think it has AND that a lender is willing to let you take out a HELOC — a home equity line of credit — which is a better option than a home equity loan. Many lenders won't let you go past 85 percent LTV with a HELOC. Some are as low as 60 percent LTV. It's harder to borrow against your home today than it was two years ago.

Since your credit scores are already good, I'd leave the additional debt on the credit card at zero percent since it's free money. It will keep your monthly payment lower — despite the tax deduction — than converting for a HELOC. And you're right about turning an unsecured debt into a secured one — you put your house at additional risk should you not be able to pay your mortgages.

Q: My wife and I just recently pulled our credit report. I am at 825, she is at 857. It took us a long time coming from our worst scores, 620 and 645. What can we do to keep our credit in good standing? The only credit we plan on keeping is our house and a car, and then paying cash for everything else. Is this a good plan or should we collect more small loans to keep our credit score good?— Ken, Westfield, N.Y.

A: Ken: In whose book are you a B? You are an A, no doubt about it. She may be an A plus, but that's just splitting hairs. Excellent job, both of you. I don't know about collecting small loans, but I would make sure that you have at least one credit card in each of your names (it can be joint or you can each have one individually, just be sure one of you is not an authorized user on the other's card). A credit card is an important part of the thickness of a credit file, which is one of the factors that any credit score is based on. I pulled a few no-annual-fee cards with sizable programs — although with those scores, I can't imagine a program wouldn't take you. If you want to protect yourself from going crazy with the spending, when your card issuer writes to offer you an increase in your credit line, say no thanks. Disney Rewards Visa from Chase, Blue from American Express and Capital One Platinum Prestige MasterCard all have no annual fee. You can find others that might fit on Web sites like creditcards.com.

Jean Chatzky is an editor-at-large at Money Magazine and serves as AOL’s official Money Coach. She is the personal finance editor for NBC’s TODAY Show and is also a columnist for Life Magazine. She is the author of four books, including 2004’s “Pay it Down! From Debt to Wealth on $10 a Day” (Portfolio). To find out more, visit her Web site, .