Debt Consolidation Loans » Get Out of Debt

What To Do: Not Having Trouble, But Still Need to Pay Your Debt

Shaun Connell — Thu, 27 Jan 2011 04:59:58 +0000

There are plenty of people in debt but who are managing their minimum monthly payments just fine. They’re not late on payments and they’re not feeling overwhelmed by their debt. Still, when they add up all their debt or calculate their net worth, the numbers say that they have too much debt. What are the options for these types of borrowers?

Debt Consolidation

Credit counseling, debt settlement, and bankruptcy are for people who are having trouble paying back their debts. These are all strategies that help you lower your minimum payment or eliminate your debt completely. However, if you can afford to pay your debts, but you’d rather pay it off quicker or cheaper, debt consolidation is a better option.

Debt consolidation lets you combine your debts by paying them off with a lump-sum loan. Then, you make payments on the debt consolidation loan. Your payments may be lower than they previously were. They could even be higher if you’ve lowered the debt payoff time.

Accelerating Debt Payments

Another option is to accelerate your debt payments by sending extra payment to your creditors each month. If you’re comfortably making your minimum payments each month, then it’s probably safe to say that you could increase what you’re paying and pay off your debt even faster. The key is to figure out how much extra you can send each month.

If you don’t already have one, create a budget for your income and expenses so you know where your money is going and how you can come up with the extra money to pay your debt. The more you can put toward your debt each month, the faster you can pay off your debt.

Rather than spread your extra payment among all your debts, pick one that you want to pay off first. Send your extra payment to that creditor while continuing the minimum payments on all your other debts. Then, when you’ve paid off that first debt begin sending the extra payment to another one of your debts. Keep up this process until you’ve paid off all your debts.

Do Something Different

If you keep paying your debts at the rate you’re going now, it could take several years before you’re finally debt free. Not only that, you’d end up paying much more interest than if you paid your debt off quicker. If you’re already making it fine with your debts, consider consolidating them so you’ll have one debt payment or accelerate your debt payment by paying more than the minimum each month.

5 Things You Must Do To Make Any Debt Solution Work

Shaun Connell — Tue, 18 Jan 2011 22:15:24 +0000

When it comes to getting out debt, you have a few options – you can pay the debt regularly or accelerate your payments, go through consumer credit counseling, consolidate your debts, settle your debts, or file bankruptcy. No matter which debt management solution you choose, there are some key things you must do to make sure you’re successful.

Create a budget. The lack of a budget is one of the main causes of overspending. Without a budget, you may have not a good understanding about whether you actually have enough money to pay your regular expenses, let alone pay off your debt. Update your budget every month to account for the expenses you have that money. Refer to your budget whenever you need to make a spending decision.

Live below your means. Spending less than you make gives you some breathing room in your budget. You can use the extra money to pay off your debt. Living below your income may mean you have to make some sacrifices. You may have to give up certain luxuries that you’re used to having. But, you can adjust. No matter what your income level is right now, there are people who are surviving on less. Plus, it’s only a temporary change until you can get rid of your debt.

Set up an emergency fund. When emergency expenses come up, you need a savings account you can use to cover the emergency. Otherwise, you would have to use a credit card or take out a loan to pay for the expense. That would be breaking the next rule of avoiding debt.

Do not create any more debt. This is the number one thing you must do when you’re trying to get out of debt, no matter which debt management solution you choose. If you create more debt, you’ll only make it harder to pay off your old debt and your new debt.

Put everything you have toward paying your debt. The more aggressively you attack your debt, the sooner you can pay it off. Using a budget and living below your means will give you some extra income you can use to pay off your debt. Use windfalls, like a year-end bonus or tax refund, to help pay off your debt too. Consider selling some of your valuable household items to make big dents in your debt.

Not only will these actions help you get out of debt. They’ll help you stay out of debt, too.

Bankruptcy Can Be Beneficial

Shaun Connell — Tue, 18 Jan 2011 06:33:01 +0000

The general consensus is that you should avoid bankruptcy at all costs. It’s devastating to your credit score, stays on your credit history for a long time, and opens your life up to the court system. Even with all the drawbacks of bankruptcy, there are debtors who benefit from filing bankruptcy. After all, the bankruptcy system was created to give some borrowers a fresh start.

Collection Calls Will Stop

It’s kind of hard to get your finances together when you’re bombarded with calls from creditors and debt collectors trying to see when you can make payment. These calls must stop when you file bankruptcy – at least for all the debts you include in your bankruptcy. A creditor may get special permission from the court to continue collecting from you, but this is an exception rather than a rule.

Stop Wage Garnishment, Lawsuits, and Pending Foreclosure

Filing bankruptcy will stop most wages garnishments, especially those from creditors or collectors for unsecured debts. However, wage garnishments for court-ordered child support, alimony, and certain taxes will continue even though you’ve filed bankruptcy.

You can also use bankruptcy to stop a pending lawsuit from a creditor. Because of the automatic stay that’s entered when you file bankruptcy, creditors can’t sue you.

Finally, you may be able to stop the foreclosure process depending on how far the process has continued once you file bankruptcy. Your mortgage lender may file a petition with the court to keep your foreclosure going. If you’ve filed a Chapter 13 bankruptcy, you have a good chance of stopping the foreclosure process and keeping your home as long as you can make your bankruptcy payments and your regular mortgage payment.

You Can Get a Fresh Start

With Chapter 7 bankruptcy, you can have most, and sometimes all, of your unsecured debts discharged. That means no more debt payments, with the exception of your mortgage or car note. In some cases, you may have to give up certain assets that will be sold and used to pay your creditors. Fortunately, you’ll be able to keep many of your assets based on federal and state laws.

Relief from debt is the biggest benefit of filing bankruptcy. If you’re dealing with an overwhelming amount of debt and no other debt solution will work for you – not credit counseling, debt consolidation, debt settlement, or paying on your own – bankruptcy is a viable option for getting rid of your debt and getting the fresh start you need.

What’s So Bad About Bankruptcy, Anyway?

Shaun Connell — Fri, 14 Jan 2011 20:30:55 +0000

There’s a negative stigma around bankruptcy and rightfully so. While there are some advantages to filing bankruptcy (which will be covered in another post), there are certainly some drawbacks as well. If you’re wondering why we mostly say bankruptcy is a last resort option, here are a few reasons.

Bankruptcy follows you for a long time.

No negative information stays on your credit report longer than bankruptcy. Federal laws regarding credit reporting allow bankruptcy entries to stay on your credit report for 10 years. Most other negative information stays on your credit report for only seven years.

Your credit report isn’t the only place that bankruptcy is recorded. It also goes on public record with the court where you file bankruptcy. Those records typically exist forever, unless they are somehow destroyed. That means anyone who wants to go down to the courthouse to see if you’ve ever filed bankruptcy can find out that information long after it leaves your credit report.

Many applications – loan, employment, rental – ask if you’ve ever filed bankruptcy. It’s important that you’re honest in answering this question because otherwise you could be found guilty of fraud.

Lenders don’t like it.

After you file bankruptcy, you won’t be able to get a credit card or loan for several months. Those banks that do make credit cards available will do so at a higher cost – higher interest rates, higher annual fees, and lower credit limits. They’re not making credit available to you because they feel sorry for you. They’re only letting you borrow money because they know you’re debt free and can’t file bankruptcy again for several years.

Following a bankruptcy, it will be a few years before you can borrow on favorable terms again. Most people who have some type of financial dealing with you will charge a higher premium because they’re afraid you won’t be able to pay your bills again.

You lose a lot of privacy.

When you file bankruptcy, the court will pry into the deepest crevices of your financial life. They want to know how much you make, who pays you, what type of expenses you have, and the value of your assets. They’ll ask for financial statements, tax returns, and check stubs. Letting complete strangers know everything about your money isn’t fun, but it’s what you have to endure to file bankruptcy.

Living With Bankruptcy

Yes, bankruptcy is bad. But remember that all the debt strategies have some type of negative consequence. If bankruptcy is the only way you can deal with your debt, it’s better to know upfront what type of negative consequences you’ll face rather than to have them hit you unexpectedly.

What Is and Isn’t True About Bankruptcy

Shaun Connell — Fri, 14 Jan 2011 04:58:31 +0000

There are a lot of rumors out their about bankruptcy. This misinformation had led many consumers to make the wrong decisions – either to file when they don’t need to file or not to file when they really should file. Bankruptcy is typically a last resort situation, but if it’s the only way to handle your debt, it’s better to do it sooner rather than later.

Bankruptcy isn’t the end of the world. Yes, it’s true that bankruptcy is undesirable. But, you know what? The earth will not stop revolving if you have to file bankruptcy. The bankruptcy system was designed to give people a fresh start on their debts. Yes, there are some negative consequences to filing bankruptcy. But no, it will not ruin your life.

Bankruptcy stays on your credit report longer than other information. The maximum amount of time bankruptcy can remain on your credit report is 10 years. That’s three years longer than other types of negative credit report information. That’s the bad news. The good news is that bankruptcy hurts your credit score less as it gets older. Some banks will be willing to give you a new credit card or loan well before that 10-year mark.

Filing bankruptcy is not taking the easy way out. Anyone who says otherwise must have never been through anything dealing with the United States court system. Bankruptcy laws have changed and now require you to go through credit counseling before you can ever file bankruptcy. Even then, you have to complete paperwork about your income so the court can decide which bankruptcy you can file. The bankruptcy process is so complex that people have to hire a lawyer to help with it.

Bankruptcy doesn’t means you’ll lose everything you owe. It’s true that in Chapter 7 bankruptcy certain assets will be taken and sold and the money will be used to pay back your creditors. However, not all your assets can be seized. Each state has separate laws that say what can and can’t be taken by the bankruptcy court, but you can usually keep your house and car if you can keep up the payments. Retirement funds, household goods, and clothing are also kept out of the bankruptcy process.

Bankruptcy doesn’t eliminate all your debts. There are many debts that will survive bankruptcy. This includes alimony, child support, certain taxes, student loans, debts incurred through fraud, and debts resulting from a DUI.

Make sure whatever information you have about bankruptcy has come through a reputable source. If you’re wondering whether bankruptcy is the way to deal with your debt, talk to a court-approved credit counseling agency in your state.

How A Debt Consolidation Loan Saves You Money

Shaun Connell — Thu, 06 Jan 2011 21:00:29 +0000

The debt consolidation loan method of managing your debt involves paying off all your debts using a single loan. Combining all your debts in this way means you’ll only have one monthly payment for nearly all of your debts – at least your unsecured debts. One of the biggest benefits of consolidating debts is the money you save when you consolidate.

Fixed Interest Rate

Most credit card debt has a variable interest rate. That is, an interest rate that fluctuates periodically based on another interest rate. Even fixed credit card interest rates can change as long as the credit card issuer sends advance notice of the interest rate change. Fluctuating interest rates on credit card debt means you could pay more interest on your credit card balances than you expected to pay when you first took on the debt.

Debt consolidation loans have a fixed interest rate. The interest rate won’t change over the life of the loan. This means you’ll have a fixed monthly payment each month until the loan is completely repaid. Ideally, the interest rate on your debt consolidation loan will be lower than the rate on your credit card debts. Ultimately, this gives you the opportunity to save money on the interest on your loan. If you use this savings to pay off your consolidation loan faster, you’ll save even more money.

More Budget Room

Sometimes, the only way you can afford a debt consolidation loan is to lengthen the repayment period. For example, paying your debt over six years instead of four years will give you a lower monthly payment, but it also increases the amount of interest you pay on the loan. But, you may still pay less interest than you hadn’t consolidated.

On the surface, it seems as though you won’t save any money with a longer repayment period since you’ll end up paying more interest on the loan, but there’s another benefit. If your only options are to consolidate with a longer repayment period or to fall deeper into debt, then clearly the better and cheaper option is to finance on a long repayment period. In the long run, you are saving money because you’re not creating more debt to repay.

If you have to opt for a longer repayment period because that’s all you can handle right now, you can increase your payment amount in the future when you have more money.

How to Know When Credit Counseling is Wrong For You

Shaun Connell — Wed, 05 Jan 2011 05:31:30 +0000

Much of the media would have you think credit counseling is the go-to solution when you’re having trouble with your credit card payments. However, it’s been said that only some of the people who enroll in a credit counseling program actually complete the program. The rest of the people drop out and either pay on their own or ultimately file bankruptcy. Here are some ways to know that credit counseling is wrong for you.

You can’t afford the monthly payments.

The combined monthly payment on a credit counseling program isn’t that much different than what you’re already paying to your creditors. Yes, your credit card interest rates and minimum payments are lowered, but the credit counseling agency adds its own fee which pushes your payment more toward what you were paying outside the credit counseling program. If the monthly payments are too high for you, then credit counseling won’t work.

You can’t make payments every month.

For credit counseling to work, you have to be able to make your payments on time every single month. If you’re late or you miss a payment, your creditors also miss a payment. When that happens, you’ll get dropped from the credit counseling program and your interest rate and payment will go back to what it was before credit counseling.

You have money management problems.

Credit counseling agencies are supposed to help with financial management, but many of them don’t. They simply tell you what payment to send and wait for the payment. If you’re mismanaging your money – unnecessarily spending more than you should be – then you won’t be able to afford your monthly payments and you’ll probably miss a payment or two. Getting your financial habits on track will probably give you the opportunity to manage your debt without a credit counseling agency.

You have issues other than debt.

If you have an underlying issue like gambling or alcoholism that’s causing you to accumulate debt, you must treat that issue before you can deal with your debt through credit counseling or any other type of debt solution. There are many social programs that help with these types of problems, for example the National Council on Problem Gambling or Gamblers Association for gambling issues and Alcoholics Anonymous for alcoholism. If you have trouble with compulsive debting, you can seek help through Debtors Anonymous.

There’s no sense in signing up for a credit counseling program if it’s not going to work for you. You can spend your energy on a solution that will work.

Advantages of Credit Counseling

Shaun Connell — Tue, 04 Jan 2011 01:09:45 +0000

Credit counseling agencies operate as a liaison between you and your creditors. When you hire a credit counseling agency, that company works with you to create a debt management plan (DMP) that fits within your budget. They send the DMP to your creditors for approval, then once the creditors give the ok, you start sending a lump-sum monthly payment to the credit counseling agency. Here are some of the benefits of working with a credit counseling agency.

A single monthly payment for all your (unsecured) debts.

One of the primary benefits of credit counseling is that you have just one payment each month to take care of all your unsecured debts. The credit counseling agency divides your payment and sends the appropriate amount to each of your creditors based on your DMP. If you’ve had trouble working out your budget, the consolidation of these payments can make it easier since you don’t have to remember all your various credit card payments.

Lower interest rate and monthly payment on your debts.

Credit counseling agencies have pre-existing relationships with banks that often lets them arrange for a lower interest rate and monthly payment on your behalf. You’re not necessarily getting a better deal by working with one agency over another since credit card companies extend the same terms to all consumers on a DMP. However, you can’t get these terms as easily if you approached the credit card company on your own.

Avoid bankruptcy.

Enrolling in a credit counseling program may help you avoid bankruptcy, an action that will remain on your credit report for 10 years. Most people want to avoid bankruptcy at all costs because it’s harder to recover for bankruptcy. For many people, bankruptcy feels like failure (though it can also be looked at as a fresh start). To go through bankruptcy, your finances are under court scrutiny and you may even have to live under a budget created by the court. Credit counseling can help you avoid this.

No long lasting consequences to your credit.

You might read that credit counseling has a negative effect on your ability to get credit. That’s true. However, it doesn’t affect your credit score – the number that many creditors and lenders use to approve your applications. When you enroll in a DMP, your credit report will be updated to show that you’re in the program. This remark on your credit report could cause lenders to turn you down for a credit card or loan even though your credit score hasn’t been harmed.

There Are Drawbacks, Too

Like other debt solutions, credit counseling isn’t without drawbacks. For example, you have to stop using your credit cards while you’re in the program. And you may have some creditors that won’t lower your monthly payment. But, for some people credit counseling is the solution that helps them avoid financial ruin.

The Downside to Debt Settlement

Shaun Connell — Fri, 24 Dec 2010 06:09:22 +0000

Before you decide to go through with debt settlement, you have to know both the good and the bad about this particular debt management solution. The good thing is that you can be virtually debt-free in less than three years. (You may still have mortgage or auto loan.) With your debt out of the way, you can focus on building your savings and building your credit. Take a deeper look at the downside of debt settlement.

The Effect on Your Credit

Perhaps the biggest disadvantage to debt settlement is that your credit will suffer while you’re going through the process. First, your credit score will drop since you typically have to let your accounts fall behind before you can settle them. One or two of your accounts may only reach 90 days past due, but the majority of them will be charged-off or may even be sent to a collection agency before you can settle on the debt.

Once you settle your debts, your credit report will be updated to show that the accounts were settled. This remark also counts against you because you didn’t pay your balances as agreed. You’ll lose additional points for settling your accounts, but by the time you actually settle, your credit score will have dropped pretty low.

It’s hard to say exactly how many points, you lose, but you can expect your credit score to be in the 400s or low 500s when you’re done with debt settlement.

Yes, your credit score will suffer, but the good news is that you’ll be out of debt and you can focus on rebuilding your credit score. Adding positive payment information to your credit report will help rehabilitate your credit score over time. Plus, the debt settlement and late payments will hurt your credit score less as they get older and after seven years, they’ll disappear completely.

Tax Consequences

Another big disadvantage of debt settlement is that you could owe taxes on the amount of debt that was cancelled. The IRS considers forgiven debt to be taxable income. If the cancelled amount is more than $600, you’ll have to include that debt on your tax return for the year the debt was settled.

You might not have to pay taxes on settled debts if you were insolvent when the debt was cancelled. Being insolvent means you had a negative net worth – that your debts exceed your assets. You would have to use IRS Form 982 to use the insolvency exemption.

Don’t Discount Debt Settlement

There are disadvantages to every debt solution – debt settlement is no exception. But, there are some benefits and ways to minimize the disadvantages so that they aren’t so bad.

Starting a DIY Debt Settlement Program

Shaun Connell — Thu, 23 Dec 2010 00:33:24 +0000

Hiring a debt settlement company means you pay thousands of dollars for their services. Because debt settlement fees are paid upfront, it takes longer for the company to actually settle a debt for you. If you take the do it yourself path to debt settlement, you can save settlement fees and work out your own.

Get Brave About Debt Settlement

Many people are intimidated by debt settlement because it means they have to talk to giant credit card companies and debt collectors. In reality, working out a settlement is just negotiation, similar to what you do at a yard sale. You offer one price, the credit card company offers another, and at some point the two of you agree on an amount.

You must be committed a DIY debt settlement program. If you change your mind months after you’ve already started the debt settlement process, you might be forced to file bankruptcy, an option most people want to avoid.

How to Start a DIY Debt Settlement Program

At the start of your do-it-yourself debt settlement program, you must stop making payments to your creditors and start putting that same payment into a separate checking account. You’ll have to be disciplined to keep up the payment amount and frequency. If you deposit less or skip months, it will take longer to save up enough money to settle your accounts and the process goes on longer.

Once you stop paying your debts, your creditors will call you and send letters asking for payment. Screen these phone calls and only talk to your creditors on the calls you initiate. This gives you more control over the situation. It’s ok to call your creditors once or twice a month just to say, “I know I’m behind on my payments, but I’m having a hard time. I hope to make a payment in the future, but I can’t make any promises at this time.”

Making a Settlement Offer

After your account is a few months past due, mention to your creditors that you may be able to get together enough money to settle your account. Don’t mention that you’ve already been saving up. Wait for them to make a settlement offer and decide if you have enough money saved up to afford that amount. If the offer is too high, just wait another month or two to see if the settlement offer decreases.

When you settle debts on your own, you’re doing the same thing a debt settlement company would do, except you’re saving several thousand dollars. You’re in control of your accounts and you don’t have to wait several months before you can see results.