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Debt Consolidation Loan, Chargeoff, Credit Counseling or Negotiate Settlement - Debt Solutions Exami
The commonly known debt solutions of a debt consolidation loan, chargeoff, credit counseling or to negotiate settlement are examined in an example scenario.
Our pretend person (we'll call him Bill) rents an apartment and has these debts/assets:
*Monthly Income: $2,000
*Monthly Bills:
Rent/Utilities/Food/Etc: $1,200
Auto loan: $500 per month (with 18 months to go)
Credit card #1: $350 ($6,000 debt at $17% with 20 months to go)
Credit card #2: $450 ($5,000 debt at 19% with 13 months to go)
Balance: $0
As you can see, Bill is just getting by, living paycheck to paycheck. He could stay the course and within 18 months he'll have an extra $500 because his auto loan will be paid off. But what if Bill faces a disaster? What if he needs an emergency loan to cover a dental bill, car repair, illness that loses him valuable work hours or; even worse, loses his job? Should he gamble his financial security for the next 18 months, or should he take action now?
Let's assume Bill is on his own, and has no family who can bail him out, nor does he have any savings. Unfortunately, this is a quite common scenario for many Americans living from one payday to another. So the answer is, yes, Bill should take action now while good, less desperate options are still available to him.
What can Bill do? What should he do? Get a debt consolidation loan? Chargeoff one or both credit cards? Let credit counseling combine and reduce his monthly bills? Negotiate settlement? Combine a mixture of debt solutions? Let's consider some of his options:
Solution 1:
Secure an auto refinance loan for $5000 for 1 year at 6.67% and use the money as a debt consolidation loan to fully payoff the second credit card with the highest interest rate. He will now have a $431 per month car refinance loan (at 6.67% for 12 months), but look at what he's gained: He's saving $19 per month; which may not be much but now he only has to pay $431 for 12 months instead of $450 for 13 months! He's now one month closer to reaching payoff for that debt, and it's costing him $19 LESS per month! And what if he had $6,000 in equity in his car? Not only could he payoff credit card #2 's debt, he could also put $1,000 on credit card #1. His new car refinance payment would jump to $518 per month. Although he would now have only $282 per month available for the credit card, he is still coming out better. Bill could take $250 of that $282 (leaving $32 per month for savings; twice as much as before!), and put that only the remaining credit card per month. Although the lower monthly payment would require another 4 months to payoff the balance, Bill would still save over $1,000 and now his monthly payment is less. But here's the bonus... his auto refinance is fully repaid in one year, which means he can place that $518 per month towards the outstanding credit card and knock it off in no time.
Solution 2:
Balance transfer the two credit cards to one card that offers a six month, 0% introductory rate on transfers. However, continue making the payment of $800 per month during those first six months of no interest. This will reduce debt down to $4,800, leaving a balance of $6,200 when interest charges begin. Even if Bill drops his monthly payment down to $500 and has to begin paying 20% APR, he'll get the debt paid off in 15 months while saving $300 per month. Bill is out of debt about the same length of time as the previous solution, but with a lot wider safety margin. Unfortunately, not many people qualify for a high limit balance transfer credit card. For some, more aggressive debt solutions are necessary.
Solution 3:
Let's imagine Bill lost his last paycheck and had to take out a payday loan which is now past due. He's 60 days late on both credit cards, his cupboards are bare, but his car loan is current. Is there anything Bill can do? Yes, but it won't be very pleasant. Bill isn't likely to get approved for a balance transfer credit card, yet he may still qualify for a car refinance loan. Bill may want to negotiate debt settlement on the credit cards and use his car's equity as a debt consolidation loan to come up with the settlement cash. With a settlement, Bill would offer each credit card company a payoff offer, typically half or as little as 20% of the balance. So for credit card #1, he could offer a debt settlement amount of around $1,500, and for credit card #2 he could offer a settlement of $1,000. First he needs to secure the car loan, because if the credit card companies accept his offer they'll typically give only a few days for remitting the settlement payment. Bill will need to secure the refinance loan, get the credit card issuers to agree to his settlement offer and to get the agreements in writing before sending in the final settlement payment. As for the payday loan, Bill may also want to pay it off with the refinance loan. If he wasn't able to borrow enough of his car's equity due to his bad credit, then he may want to just think about charging-off the payday loan. Although a chargeoff; whether a loan or a credit card chargeoff, is viewed much more negatively than a debt settlement, Bill's credit is going to take a long term blow anyway due to the credit card debt settlement agreements. But once Bill gets those cards paid off and closed, he needs to start the journey to rebuild credit. Wait a few months, then reapply for credit. Since credit cards got him into trouble in the first place, at least until he can exercise restraint he should avoid them. Instead, he should consider a prepaid credit card, one that reports his responsible use to the credit report agencies. After repaying the auto refinance loan, maybe wait a few months and borrow against the car once again.
Credit counseling: As you can see, for the same person and situation we presented three debt solutions to demonstrate the various ways to seek relief. For those who are not financially savvy, credit counseling agencies may be a wise consideration to help review available options.
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