Getting Out Of Debt
In the credit counseling industry, we hear many different reasons why people got into debt and more importantly, why they are having problems getting out of debt. Issues range from life events such as death or divorce making it difficult to pay bills on time to loss of a job or what seems to be the prevalent of all reasons, that is, simply overextending themselves.
One size does not fit all when attempting to get out of debt, but the reality is that there are several options consumers have to resolve the situation. Getting out of debt options are as follows:
- Taking Care of it on your own: If you can afford it, it is best to always pay more than the minimum balance. When you pay the minimum balance, approximately 92% of the payment is applied to the interest, while 3-4% is applied to other charges. Only 3-5% is actually applied to the principal balance. Always pay the bill on time, as credit card companies are very quick to charge late and over-the-limit fees. If creditors are offering special deals for transferring balances, or lowering interest rates, make sure you read the small print before taking advantage of the offer. It may be only a short term solution and may not assist you over time. If you are late on your bill or you are simply trying to reduce interest rates on your own, please be advised that it is sometimes difficult to get a “live” person on the other end of the line and many times, the solution that you might achieve can be very short term in nature. Whatever deal you get, make sure that they put it in writing, preferably signed by a manager or supervisor.
- Bankruptcy: There are two forms of personal bankruptcy. The first is Chapter 13, which is known as a partial bankruptcy and includes a repayment plan, which generally accounts for approximately 33% of the total debt and is paid between 3-5 years. This option is preferable for debtors who do want to pay their bills, but cannot afford the total amounts. The disadvantage is that the bankruptcy will appear on your credit report for at least 7 years and you will have to reveal the bankruptcy on any application for credit. The second option is Chapter 7, which liquidates your entire debt. This option is preferable for debtors who want to wipe out the debt and start over as soon as possible. This also stays on your credit report for 7-10 years, but is discharged more quickly than the Chapter 13. You must research bankruptcy attorneys and make sure that you understand the legal aspects of either form of bankruptcy. Keep in mind that since October 2006, the new bankruptcy law has been in place and there are specific stipulations that you must adhere to in order to file.
- Debt Settlements: This option can sometimes be extremely harmful to your credit health although there are some instances where a settlement can be to the debtor’s advantage. Some of the negatives include: A notation on your credit report that the debt was “paid as settled” and not paid in full. Lenders have a tendency to view this as a situation where the debtor was unable or unwilling to pay the debt in full and sends a “red flag” on any application for credit. Second, for any amount of money you save on the debt totaling over $600, you may be sent a 1099 tax form the following year, as the savings are considered “earned income.” Third, even when you settle the debt, the remaining balance may be sold to another collection company and in the future, you may be contacted and/or harassed by them regarding the debt. Finally, there are a number of debt settlement companies that will take payments from you over a period of time, but not make regular payments toward your debt. Companies such as these are attempting to build up a fund so that they can contact creditors and offer a specific amount based on what is available in it. If your credit has been questionable, this method will make it even worse and it can then be extremely difficult to regain your creditworthiness. (Note: You need to research any company you do business with by contacting the Attorney General’s office in the state in which they do business)
- Refinancing your home: If you are a homeowner with reasonably good credit, you probably have received offers for refinancing or have seen or heard the commercials for it. While refinancing can work for a number of people and assist in paying off credit card or unsecured debt, there is a danger involved. Some debtors pay off the debt, but then begin to use the credit cards again, sometimes to the point of maxing out the cards, thus having a much worse situation than when they refinanced. It is advisable to either cut up the cards at the time of the loan or at the least, put a freeze on the cards for a specific period of time. If you have a low credit score and have had offers of credit from lenders who promise loans no matter what your situation, you must research those lenders, as you may end up paying a much higher rate of interest. There has been severe problems in this regard over the past several months in the sub prime loan industry.
- Do nothing: While this is undoubtedly the least favorable option, you can choose to not pay your bills. The negatives include ongoing harassment from collectors, your account(s) being placed in the legal system, judgments against your credit or garnishments against your wages. If you own property, liens may be placed against the property, preventing you from selling it until the debt is satisfied. Judgments may stay on your report for up to 21 years, while a lien will stay on until it is satisfied. This may have an effect on the people to whom you leave your property, as they will have to satisfy the lien before they can benefit from any sale or disposition of the property.
- Debt Management Program: This option is best for those who can afford to pay some or all of their debt, but wish to take advantage of lower interest rates generally offered by creditors to 501 C-3 Not-for-profit credit counseling companies. Advantages include the lower interest rates, waiving of late and over the limit fees and in most cases the re-aging (or return to current status) of the account after three consecutive on time payments. As always, you must research any company that you do business with and make sure that they give you the terms and conditions in writing. Be advised that some lenders do consider debt management programs to be a negative. In some cases, the fact that you are in a program may be indicated on your credit report, however, it should be considered a neutral notation. If a lender turns you down for credit, you can ask the debt management company to intercede on your behalf, or you might have to shop for a lender who is educated as to the meaning and advantages of debt management.
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