Posted: December 1st, 2011 | Author: Joe | Filed under: Debt | Tags: Bankruptcy, Credit Counseling, Credit score, debt consolidation, debt management, Guest Post, How To | 2 Comments »
Debt is an ongoing problem that plagues consumers around the world. Heavy debt is caused by various factors. Loss of job, divorce, and over extending one’s financial abilities are just a few ways debt sneaks up on hard-working people. If you are having a problem with debt, you are most likely wondering how to get out of it. Here are five common solutions.
1. Bankruptcy
Many people get scared and naturally want to solve debt by filing for bankruptcy. Bankruptcy is a legal status that clearly defines one’s inability to pay creditors. Depending on the chapter the debtor files, he or she may be excused from making any payments.
The downside to choosing bankruptcy as an option is the resulting credit status. A bankruptcy will remain on the consumer’s credit report for a period of seven to ten years. This status will make it difficult for that person to obtain any credit during that time. Bankruptcy should be used as a last resort when no other options seem feasible.
Debt consolidation is another common method to solving the problem of overwhelming creditor bills. The process involves merging all open accounts into one account. A consolidation can be done in several ways. One way is for the debtor to apply for a consolidation loan. The lender will write out a check big enough to cover all of the debtor’s open accounts. The debtor will then make payment to this single creditor.
A debtor could also perform a self-initiated consolidation by applying for a high limit credit card that would cover payment for all existing accounts. This is also a great method because some high limit credit cards offer excellent APRs. The down side is availability. If the debtor has already experienced several negative notations on his or her credit report, lenders may be reluctant to help. In addition, if that individual’s income is not enough to cover the debt payments, a consolidation will not be very beneficial.
(Read more about Debt Consolidation and Your Credit Score.)
Credit counseling services can provide consumers with advice on how to manage their bills. They offer a wide range of solutions from financial planning, to payment tips, to writing letters to creditors. Credit counseling services are not a bad idea. However, they are not free. So, the customer risks paying for something that may not work.
(Read more: 10 tips to help you talk to your credit counselor.)
4. Debt Management Company
A debt management company is a company that also offers a wide range of services to consumers in need of assistance. One thing they can do is negotiate with the lenders. They will attempt to convince lenders to lower interest rates and finance charges on the debtor’s behalf. Another service that these companies offer is a third party debt consolidation. In this situation, the debtor makes a lump sum payment to the debt management company and they pay of his or her creditors. DMC companies can possibly help to lower an individual’s debt. However, the bill can get costly and not every DMC is trustworthy.
5. Nada
Some people actually opt to do nothing to fix credit. They let the debt rack up in hopes that the seven-year period will pass before legal action wipes them clean. This is definitely not an intelligent idea. A smart debtor needs to be proactive for effective debt repair. With the right attitude and the will to make the situation better, a debtor can get from under the heavy weight.
This has been a
guest post from Leah Fields. Leah likes to write about home improvement, personal finance; she writes for
creditreport.org.
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Posted: July 6th, 2011 | Author: Joe | Filed under: Debt | Tags: Debt, debt consolidation, loan consolidation, loans, Tips | No Comments »
What does debt consolidation mean? The term seems to have different uses among different people, but here are 3 different types of debt consolidation.
Debt consolidation loan
When most people talk about debt consolidation, they mean a debt consolidation loan. Find out more what a debt consolidation loan is here.
If, for example, you owe money on two credit cards and a loan, it may be better to take out one large loan, big enough to pay off all three debts at the same time. That would leave you with one payment to make every month instead of three.
Making one payment every month is just easier than arranging and budgeting for three separate payments – and you will only have to deal with one creditor.
You could even reduce the amount you pay every month if your loan has a longer repayment period. However, paying off your loan over a longer period could also increase how much you pay overall, due to interest.
Anyone interested in debt consolidation loans could try an online debt consolidation calculator. They help you to estimate your monthly repayments once you’ve entered a loan amount, interest rate and repayment period.
If your earnings change from month to month, or you’re not sure you’d be able to make regular repayments, you might find a different approach is more appropriate.
Balance Transfer
Another way to consolidate debts, which can work well for credit card debt, is to transfer multiple debts onto a 0% credit card. ‘Balance transfer’ cards don’t charge interest for a set period, after which time the card starts charging interest.
For that reason, a balance transfer could be ideal if you are able to clear the balance before the interest-free period ends. Otherwise, it may be possible to transfer the balance to another interest-free credit card. However, you’d normally be charged a transfer fee each time, something like 3%. For large balances, that could be quite expensive.
Other forms of debt consolidation
There are other ways of consolidating problem debts into one monthly payment without borrowing any more money. These include IVAs (Individual Voluntary Arrangements) and debt management plans.
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Posted: March 17th, 2010 | Author: Joe | Filed under: Credit, Debt, Tips | Tags: Credit Cards, Credit score, Debt, debt consolidation, debt settlement, Tips | 8 Comments »
If there was ever a time when credit card holders had leverage to negotiate a better deal on their credit card debt, now is the time!
With near record bankruptcies and unemployment, credit card issuers have had to write off a lot of uncollected balances. This makes credit card companies much more likely to want to work a deal with the credit card holder. I suppose it’s one of the silver linings to the great recession and credit card debt.
I should preface the remainder of this post by saying that while it’s a better time to negotiate the terms of your credit card debt with the issuer, it may not be easy. The idea is simple enough, but many issuers lack the staff required to deal with every delinquent account on a 1-on-1 basis, and they also can’t take a loss on every one.
So, how do you know if you may be able to work a deal on your credit card debt?
There is no hard list of criteria to determine who can and cannot negotiate a better rate, or a reduction of balance. But one of the sad but true facts of credit card debt is that most issuers won’t bend down to lend you a hand up until you’ve already been knocked down by your burden. It may seem nonsensical, but most credit card companies only start offering real solutions once you’ve fallen behind on payments and racked up serious fees and interest penalties.
Once the card holder has fallen behind 3 months or so, many companies begin offering forbearance or hardship programs that temporarily reduce interest rates and minimum payments. These programs typically last 3-6 months.
If you fall even further behind, you may be offered entry into a program to lower your interest rate or card balance for a year or more. This should be thought of as a second chance since further late payments can whack 100 points or more off your credit score and add even more fees and penalties. They could also send your account to a collection agency if you have stopped making minimum payments completely.
Debt consolidation and settlement companies are other options, but those can hurt your credit score even more and you may be better off doing things on your own.
Obviously, the best course of action is to avoid this situation completely and do everything you can to consolidate your debt on your own and pay it down ASAP.
Failing that as an option, you can press on with negotiating with your credit card company yourself.
Here are a few guidelines that may give you a shot at negotiating a better deal:
- Be clear and honest about the state of your finances and what you can afford. Any negotiation is a meeting on middle ground, where both parties are satisfied with the less than desirable situation. If you don’t approach the negotiation honestly, then the credit card company has no reason to trust you, and that means you’re stuck.
- Understand the timelines involved. Be aware of the credit card issuer’s definition of timelines. When is an account considered to be in default, and not just behind?
- Be willing to take a hit on your credit score. Whatever deal you get, it’s likely to have a negative impact on your credit score. Just know that going in, and you’ll have one less nasty surprise from the whole affair.
- Be proactive. Although the credit card company is unlikely to offer hardship programs until you start falling behind, you can start negotiating before that point – and you’re much better off doing so.
- Ask for a reduced interest rate. If you have a steady history of making payments on time, but you are finding it harder to do so then you may be able to work a lower rate. Even if this is only temporary, it will help free up some cash and let you gain some ground on paying your balance down.
- Ask for a pass on fees. Some credit card issuers are surprisingly open to forgiving fees associated with (slightly) late payments, or even balance transfers.
- Ask for an out on the total balance. Offer a lump-sum deal for a percentage of your outstanding debt. Try to get them down to 25% of your balance, but anything under 50% is a win.
- Get it in writing! ‘Nuff said.
Lastly, be sure to stick to your end of the deal or you will have little recourse if the credit card issuer files a lawsuit, and they will be much less inclined to work with you further.
It’s not impossible to work out a lower interest rate, or a temporary rate freeze or even forgiveness of a certain amount of your credit card debt but it’s not like wavy a magic wand either. And you need to seriously examine your spending habits to make sure you don’t fall into the same credit card trap further down the road.
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Posted: January 5th, 2010 | Author: Joe | Filed under: Debt, Tips | Tags: Debt, debt consolidation, debt management, debt settlement | 3 Comments »
Many people realize too late that they have a problem managing their money. This epiphany usually comes when a 5 figure credit card bill is staring them in the face. It happened to me, and it can happen to you. I was lucky in that mine was a low 5 figure amount, and I had the income to pay it off myself with some belt tightening and 0% balance transfer offers from another credit card company.
But not everyone is so fortunate.
Many people have no where else to turn but to a debt management agency. The main problem with doing so is that they end up going to a debt settlement agency instead.
What’s the difference between debt settlement and debt management?
Ah, a fine question – and as it turns out, a very important one to ask.
A debt management company will begin making payments directly to your creditors immediately upon hiring them, while working with you to develop a budget to affordably pay back the entire amount you owe.
A good debt settlement company will work with your creditors to forgive a certain amount of your outstanding debt and work with you to pay off the remainder over time through regular payments you can afford.
A bad debt settlement company will charge you excessive fees, while placing your income and assets at legal risk and leave you owing almost as much in the end as you did in the beginning. Here’s how…
They tell you not to contact your creditors, while taking your payments.
This is a sneaky way to get their up front fee. They tell you to make 6 months of payments before they start sending money to your creditors. This is the same thing as you not paying your creditors for 6 months. This will irritate the creditors, most likely to the point where they will pursue legal action against you. Depending on the state you live in, the creditor could begin garnishing your wages.
This could lead to you still owing your creditors AND being out the money you sent to the debt settlement agency.
A good debt settlement company will work with an attorney and notify your creditors to send all communication through him.
You will probably owe uncle same a chunk of change also.
Assuming your creditors don’t sue you and garnish your wages, and that the debt settlement company does what they say they will, you could still end up owing a sizable amount to the IRS.
Once some amount of the debt has been forgiven, and the rest has been paid off you should get a Form 1099 from your creditors reporting to the IRS the amount forgiven on your debts as income.
You read right – as income.
The IRS considers any forgiven debt to be income for you, and depending on the amount forgiven and your tax bracket, that could be a lot.
For example, if you owe $45,000 and manage to settle the debt with a $25,000 forgiven and you’re in the 25% income tax bracket then you would owe an additional $6,250 in federal taxes – not counting any state income tax!
The lesson is clear – carefully read any agreement and be sure you understand it fully before signing!
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