I read an editorial in today’s New York Times that discussed the failure of federal agencies that are supposed to keep up with deceptive and unfair practices in the banking and credit card industries. As a consequence, many hard-working Americans who pay their bills are mired in debt and in danger of losing whatever savings they have. Many might even be at risk of losing their homes!

The editorial urged Congressional action and discussed that in Congressional hearings this spring held by Senator Carl Levin, the abusive policies were highlighted. There was testimony from one witness in which the person had exceeded the card’s $3,000 limit by $200 triggering penalties and interest that amounted to $7,500! After paying an average of $1,000 per year for six years, the witness still owed a balance of $4,400!

While this evidence is anecdotal, the phenomenon has become too common. The editorial cited teaser packages that “bombard” unwary customers. These packages promise low interest rates to start, yet reserve the right for the credit card company to raise rates whenever they want. These provisions are buried in deliberately arcane contracts that run 30 pages long and that “even lawyers have trouble understanding.”

The Congressional investigations and studies by consumer advocates exposed even other deceptive practices such as penalty rates being applied retroactively (higher rates being applied to purchases made before the penalty was incurred or in some cases even on debts that were paid off). One witness pointed out at the hearings that the credit card industry “is the only one allowed to increase the price of a product after it has been sold.”

The editorial also cited the credit card company policy of “universal default” wherein a credit card company can apply high interest and penalty on a credit card for missing payments with a different company! The hearings also discovered the practice of “double cycle billing.” This practice describes credit card policies of charging interest on the full balance in a cycle, even if someone has paid off a large majority of the balance. For example, a cardholder who pays $450 of a $500 balance is still charged interest on the entire amount, not just the $50 remaining.

The editorial goes on to point out that there used to be usury laws in most states that prevented these practices, but those laws have been preempted by federal regulations that are designed to make banks and credit card companies happy.

The editorial went on to support the legislation proposed by Michigan Senator Levin that proposes to limit “penalty” interest rates to an additional 7% above the previous rate and would prohibit proactive penalties and the practice of “double cycle billing.” The proposed legislation would also limit the amount of fees companies could charge customers who exceed their credit limit.

The editorial says this bill is a good “start,” but urges a “comprehensive” approach to the problem. Such an approach should include banning deceptive card offers outright, strengthen federal oversight and toughen truth-in-lending laws toward credit cards.

Bankruptcy filings were up 11.5% in May over the previous month, according to the American Bankruptcy Institute relying on statistics published by the National Bankruptcy Research Center. May 2007 saw an increase in filing of approximately 51% over May 2006.

“Personal bankruptcies continue to be more volatile this year than in 2006,” said Samuel J. Gerdano, ABI Executive Director. “Overall, consumer bankruptcies are higher than last year, but still well below the levels of 2004-05.”

Redemption is a process that is sometimes misunderstood. Redemption is the process of paying a lump sum payment to a secured creditor (lienholder) in exchange for the release of the lien. In Chapter 7 bankruptcy, a debtor can use 11 U.S.C. Section 722 to pay only the fair market value for the collateral, not the contractual balance.

Usually this situation arises when a debtor is financing a vehicle. Vehicles depreciate. Sometimes they depreciate rapidly. Most people I counsel owe more on their vehicles than what the vehicles are worth. Through the redemption process, a debtor could save thousands of dollars on principal and interest payments because the debtor only has to pay the “value” which is usually less than the “balance” on the loan. For example, if the debtor’s car is worth $10,000, but the debtor owes $15,000, the debtor could use the redemption process under chapter 7 bankrutpcy and force the creditor to release its lien after receiving only $10,000.

It is important to realize that there isn’t a redemption process in chapter 13. This is only something that can be done in chapter 7. The “catch” in the process is that most debtors I counsel don’t have a lump sum of money equal to the value of the vehicle they can pay at once. Some debtors might be able to get the money from friends or family or borrow from a retirement asset, but even for those debtors who don’t have sources of cash, redemption is possible.

Believe it or not, debtors can sometimes borrow the money to fund the lump sum payment needed to redeem. There are finance companies that offer financing for debtors in these specific circumstances. While it may be true that these finance companies charge higher than average interest rates, depending on the value of the car and the terms of the original loan, these transactions can be very beneficial for debtors and still result in thousands of dollars of savings over the life of a loan and significantly lower vehicle payments each month.

If you’re in this situation, make sure any attorney you choose knows about this process and can offer representation regarding this process in chapter 7. It could save you thousands of dollars on top of what you are eliminating in medical, credit card and other unsecured debt!

Here are some helpful tips that could help you avoid making common mistakes while trying to reduce your debt.

1) STAY FOCUSED. Focus on one debt or one type of debt at a time. If you try to reduce all of your debt at once it can be overwhelming and very discouraging. You’ll be more successful if you focus on one debt or one type of debt at a time. Once you’ve eliminated the first one, you can move on to #2, etc…. Of course, you’ll have to pay the minimums on the others as you pay down each priority, but this strategy will work better than trying to pay a dollar or two more than the minimums on every creditor.

2) DON’T CANCEL CARDS WITH BALANCES. Obviously when you are trying to pay down debt, don’t use your credit cards. However, you should wait to cancel cards until after you’ve paid them off. You’ll want to take this approach because if you close the account while there is still a balance, this removes leverage with the credit card company. You will no longer be a customer so they will no longer have any incentive to make your life easier. Of course, they have little incentive even if you’re a customer, but they will have absolutely no incentive if you close your account.

3) HAVE REALISTIC EXPECTATIONS. Don’t try to build your debt reduction plan around unrealistic expectations. You’ll just get frustrated and give up. If you’ve never tried to live on a budget, don’t expect that you’re going to be perfect in the first month or two. Changing behaviors is a process that rarely happens overnight.

4) ESTABLISH AN EMERGENCY FUND. As difficult as it may seem, you must make an emergency fund a priority. It can be small, $1000 for instance. But, it’s very important there be one. When you are trying to get out of debt you may be tempted to empty out all savings accounts and apply the money toward your debt. Avoid this temptation. You want to maintain an emergency fund in order to pay for unexpected expenses. Without the emergency fund, you end up borrowing to pay these expenses and you’ll find yourself going backward. You may have to delay your debt reduction plan and only pay minimums for a few months while you rebuild the emergency fund, but it’s important to build and maintain this fund.

5) STICK TO YOUR PLAN. Don’t let other people dissuade you from your plan. There are different plans. Some people like to pay off their lowest balance cards first, then work their way from the lowest to the highest balances. Some people prefer to adopt a strategy where they pay the highest interest rate debt first and work their way down to the lowest interest rate. Whatever the strategy you decide works best for you, stick to it! You know yourself better than anyone else. Of course, listening to financial advisors and gathering information is smart, but you have to be true to yourself and you have to apply the advice that you know you can use. Reread #3!

6) RESTRICT ACCESS TO YOUR CHECKING AND SAVINGS ACCOUNT. Don’t be tempted to give your bank account information to a credit card company to automatically debit payments. You can certainly use your bank’s online banking system to pay bills, or you can send a check, but you would be well advised not to set up automatic payments with the credit card companies.

7) DON’T BE TEMPTED BY A SECOND MORTGAGE OR HOME EQUITY LINE OF CREDIT. Remember, a good debt reduction plan requires changing your behavior. Using a second mortage or HELOC to pay off credit card debts doesn’t help give you discipline to change your behavior. Usually what happens is that you end up with more mortgage debt AND new credit card debt. Why risk your house to pay credit card debts?

8) AVOID MAJOR PURCHASES. Try not to make any major purchases while you are trying to get out of debt. This may seem like common sense, but reminders don’t hurt. Sure, you may be forced into a major purchase if the washing machine dies, or the fence falls over. But, don’t be tempted after paying off goal #1 and goal #2 and start seeing some light at the end of the tunnel to run out and buy that new television you’ve been eyeing. Wait until you’ve completed your debt reduction plan first! Think of it as being a reward at the end of the process. You may even decide you don’t need or want that television after all once you’re done with your debt reduction plan.

9) DON’T ARGUE ABOUT MONEY WITH LOVED ONES. Again, reread #3. Maybe your spouse won’t be as disciplined about the plan as you. But, you shouldn’t criticize purchases your spouse makes because you wouldn’t have made the same purchases. It’s more important for each of you to love and support each other, not fight with each other.

10) NEVER THINK YOU ARE STUCK. I often hear people who think they can’t do anything about changing their jobs, their health, their financial situations, or their futures. But, you can. It’s up to you. If you want a better life, you have to choose a better life and choose to do things to make your life better. If you start feeling frustrated or hopeless, wake up! There is a better life out there, you just have to make it! Stop blaming yourself or others for your problems. Get up, get out there and just do it. Join a church, join a support group, write a resume, make a plan and execute your plan!