It happens to the best of us. An emergency comes up, and you've go unexpected expenses. Perhaps a bill payment slipped your mind. Perhaps your past payment record with a debt was less than...responsible. Now, the debt collector is calling, and they aren't playing nice. What do you do?

If this sounds like an experience you have had, you first need to know your rights as a creditor, and how to deal with debt collectors. The Fair Debt Collection Practices Act spells out these rights, and what debt collectors can and can't do. For example, debt collectors can't threaten to throw you in jail in you don't pay your debt (there is no debtor's prison in the U.S.). They can't threaten to sue you if they have no intention of doing so. They can't continue to call you if you have notified them in writing to stop. They cannot falsely claim they are attorneys or call you all hours of the day or night. The Federal Trade Commission has a pretty good overview of the Fair Debt Collection Practices Act on their website.

So now that you know your rights, how do you address this pesky debt and the collection calls?

1. Don't assume you owe the debt. You may not even actually owe the debt, or the amount the debt collector says you do. You have the right to request validation of the debt. Send the debt collector a letter (always do this in writing and always send the letter certified, return receipt requested, so they can't claim they didn't receive it) asking for validation of the debt. If they can't provide proof, they can't keep hounding you for the money. Don't admit the debt is yours until they can provide proof.

2. If you owe the debt, ask for a payment plan if you need one. Always get the details of this plan in writing, and never, ever give the debt collector your bank account information and let them do automatic debits. They can, and will, take out the amount of the entire debt if you've got the money in your account.

3. Find out the statute of limitations on the debt. Debt collectors can't chase you for years seeking payment for a debt. There is a statute of limitations on debt. Find out what it is for your state. Scavenger or "zombie" debt collectors will purchase old debts for pennies on the dollar and come after you for the full amount. If the debt is past the statue of limitations, don't even reply to them. The exceptions to this are tax payments, student loans, child support and civil judgments.


Keep in mind, not all debt collectors are unethical. They have a job to do, too. They just want to collect money for a debt that is owed. But, there are also some bad actors out there, and knowing your rights and how to deal with them is the best way to protect yourself and your credit score.

Americans hate to quit or give up at anything. I think it is something that is a part of our culture. To quit is to admit failure, to admit we didn't achieve our goal, and that we have lost something. We are taught that quitters never win and winners never quit. What this way of thinking doesn't take into account is that there are times when it is smart to quit.

While quitting is rarely the best possible outcome for a situation, when it comes to personal finances there are times when quitting will prevent you from losing more money and help set you on a better financial path.

My oldest son learned this lesson recently. He bought a car that I would have wanted when I was in high school: a red Camero. He didn't have any credit and I was not about to become a co-signer. I had urged him to work at his job for awhile and save enough money to buy the car in cash. Instead, he decided to purchase it from one of those "buy here, pay here" places.

The auto dealership did nothing wrong. In this situation, my son purchased a car before he had a driver's license, which he still doesn't have. As a result, he was making $300 per month car payments and $100 per month insurance payments on a car that sat in our driveway all day. After he moved out of the house, my son decided that this was too much money to pay for a car he could not drive.

He asked me what I thought he should do. "Take it back to the dealership," I said.

He protested, saying he would feel bad because he is putting the dealership in a bad spot, and because he failed at purchasing his own first car. I pointed out that this was the wrong way to look at it. There is no doubt he learned a costly lesson (mainly because he didn't listen to my advice. Go figure.) I told him he had the following choices:

A. Keep the car. Continue to make payments and pay car insurance, which was costing him $400 per month, or $4,800 per year....for a car he could not, and would not, drive.

B. Give the car back. The dealership has already received a $750 down payment, and $2,600 in car payments. The car wasn't driven anywhere, so it has almost no more miles than when the car was purchased, and it was purchased used. It hasn't depreciated anymore than when he bought the car a few months ago. The dealership gets the car back, they will be able to resell it (more people are buying used, not new, these days) and they made almost $3,500 for their trouble.

Basically, my son learned a $3,500 lesson. If he had stayed the course he would have cost himself more money, with no benefit to himself. By giving the car back, he was cutting his losses. It wasn't the best possible outcome for either party, but it was the next best move. The dealership said after my son gets his license he can always come back and purchase another car, and they will apply the $750 down payment he already made to a different vehicle.

Some people may have stubbornly held on to that car, determined they could make the situation work...while depleting their bank account and not driving the car. I'm not saying everyone should shirk their responsibilities and start returning their cars. However, if you have a choice between making rent payments or making payments on a car you can't afford (and this does happen), you need to be able to determine what your real priorities are, and know when to cut your losses.

This post was featured in this week's Carnival of Personal Finance. Check out this week's carnival for other great articles!

Something happened to me this past weekend that hasn't happened in years. I have been drafted...or rather, overdrafted. It wasn't as the result of anything I did, but it still cost me several hundred dollars.

It all started a few weeks ago, when my wife agreed to pay one of our creditors a lump-sum payment to clear a bill. She had been paying the bill with a direct debit from our checking account. She made an arrangement to pay off the rest of the bill with a lump-sum payment, and the creditor agreed to wait until the middle of the month, the next time I get paid. They didn't.

I'm sure you know what's coming. The creditor wanted their money sooner rather than later, and emptied my checking account. What's worse, the checks we used to pay the bills prior to this withdrawal all bounced.

Of course, I was more than a little irritated this happened. Ever since I started working to clear up my family's finances about six years ago, I haven't experienced a legitimate overdraft charge. Now, one simple snafu cost me in the neighborhood of $500. Luckily, I had the money to cover the overdrafts and set things right with my checking account again. However, this brings up some important points about dealing with creditors.

Get it in writing. If you make a payment arrangement with a creditor, get it in writing. Oral agreements won't hold up in a dispute with a creditor, and they can (and most likely will) break them.

Don't give creditors your bank info. There is a difference between automatic bill pay through your bank and handing over the routing and account numbers to your checking account. With these numbers, a creditor can withdraw any amount they want, leaving you holding the (empty) bag.

Pay your own way. If a creditor tries to force you into handing over your bank account info, don't do it. Tell them you will send a check or call on a certain date to give them a credit card number, but do NOT give a creditor the information they can use to drain your bank account.

Even though you are trying to do the right thing by paying off your bills in full, there is a right way and a wrong way to go about doing it. Doing it the right way can save you time, headaches and most importantly, your hard-earned money.

OK, so you have blown it up to this point. You haven't created a spending plan and you have no emergency savings. What you do have are plenty of credit card bills. What are you going to do now? It's hopeless, right?

Not so fast. The first step in solving your financial problem is recognizing you have a problem. Then, you have to do something about it. Where do you start? Like the old saying goes: you start at the beginning.

That's right. The most important first step is just doing SOMETHING. Here are five things, easy things, you can do right now to start digging yourself out of that financial hole you dug for yourself.

1. Stop spending money. To be more precise, stop spending more money than you have. This might mean making some tough choices, like getting rid of that money pit of a car that you're still paying off, but you've gotten yourself in deep and it's going to hurt a little trying to claw your way out of the trouble you've gotten yourself into. Create a spending plan (I hate the word "budget". That's as bad as the word "diet"). Allocate money to food and shelter first. Then, the bills you need to survive, such as utilities. Shoot for living on ten percent less than you make, and eventually try to increase that to 20 or 30 percent.

2. Know what you owe. Go through your house and dig out all of those bills you have been avoiding. Get a copy of your credit report. This will give you an idea of what needs to be paid.

3. Prioritize your bills. Some people say pay off the smallest bills first and celebrate your little victories. I say pay off your bills with the highest interest first. Those interest payments can be killers. Get rid of them.

4. Be proactive. Don't wait for the bill collectors to call you. You call them. Tell them how much you can pay, or when you can pay. Don't wait for a bill to go to a collections agency. This will kill your credit score. If you don’t want to do this yourself, there are debt management companies that can do it for you.”

5. Pay cash...for everything. Stop paying for your stuff with credit cards. This goes for bill payments too. Yes, cash is less convenient, but when it's gone, it's gone. You can't go over your budget if you are paying for everything with cash. I use checks and debit cards, too. This helps me keep track of my spending. I check my online bank account each night and balance my checkbook. Yes, every night. How else are you going to know what you are spending? If you don't have that kind of discipline, stick to cash. Even better: use automatic BillPay for your monthly household bills. That comes right out of your bank account and you won't "forget" to pay your bills.

While you can start these steps today, you won't solve all of your financial woes overnight. It took you a long time to get into the bind you are in, and it will take time to get out. Just grit your teeth, put away the credit cards and be prepared to live a much more simple life for awhile. Eventually, the feeling of being debt-free will replace that sense of dread you feel when the phone rings or you go to the mail box.

FTC Disclosure: This post contains a paid link.

As I have mentioned here before, my family and I will be moving into a new home next month. The new house is rent-free because it belongs to my father-in-law and he is letting us live there until he retires in four years. I had fully expected that I would be making one more rent payment for the month of January. However, my landlord pointed out to me that I paid the first and last month's rent when I moved into my current home. As a result, my last rent payment was indeed my last rent payment. I had an unexpected windfall of $750 already in my checking account!

Like most people, I was tempted to go out and buy something for the family. I do plan to take them out to the movies, which we haven't done in a long time. I have already put the rest of the money to good use. I started working on one of my New Year's Resolutions: to eliminate $10,000 of debt this year.

I took $600 and completely paid off one of my credit cards. It was a great feeling to write the check and see the balance I owed drop all the way down to $0. It was also a tremendous load off my mind. I've probably paid $32 in finance charges on that card in the past year. That's not a lot, but it could have been put to better use in my own bank account.

So, I now have $9,400 in debt left to eliminate in 2008. The New Year hasn't even started, and I'm already off to a great start with my resolutions!

This brings up a good question: when you receive an unexpected financial windfall, what is the best way to handle it? I use the following list as a guideline:

1. Do I have outstanding debt? If so, apply it toward the highest-interest debt first.
2. If there are no outstanding debts, put the money in my emergency fund.
3. If my emergency fund is already fully funded, put the money towards my retirement.

Of course, I always keep a small portion...10 percent or so...for family entertainment, meals out, or for something my kids really need, like new shoes or clothes. This time, we'll be going to the movies. Never just completely blow an unexpected financial windfall. If you have debt or lack savings or need to catch up with your retirement fund, that unexpected windfall can help you catch up.