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Budgets, Debt Management, Consolidation, Settlement, Counseling and Bankruptcy
Wish you could get an application approval for a government debt relief bailout grant?
Unfortunately, the government isn't yet offering such a personal debt bailout loan, yet there are other ways to get relief.
If you don't already have a budget, you're likely already in financial trouble, so that alone should tell you something about the importance of a budget. Not only can a personal budget help you stay above debt, but can also help you recover quicker.
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It's very likely you; like most of us, are also aware that there are ways you could save money by stopping wasteful spending. But you cannot cut out all spending... you've got to keep the lights on, a roof over your head and food on the table. When you create a budget, you list your income and then itemize your expenses, starting with the necessities and finishing with the luxuries.
Make budgeting fun. Once you see; on paper, what you have coming in (income), minus debits (expenses), and the resulting sum (balance), it can be fun; almost like a game, to eliminate debits so you can increase the balance. The balance is your future. It's a goal you can aim for. It's a reward that's waiting for you.
You may have difficulty; however, in identifying all your expenses. Most of us don't have a real grasp of how much money we waste each month, particularly in regards to impulse purchases.
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Our free expense tracking software makes identifying spending much easier. It's simple to use, just like an electronic checkbook register. All you do is input each bill (or purchase), and our software does all the math for you. You can also sort entries so you can see in which areas you spend money the most.
Not only can a budget get you out of debt and keep you financially secure, it also offers the benefit of relieving stress. You know how much you have; what you owe, and where you can reduce wasteful spending to increase your savings.
If you're way past a personal budget bailout plan, there are other debt relief solutions to consider, including debt management, debt consolidation, debt settlement, credit counseling and; of course, bankruptcy.
Debt Consolidation: Debt consolidation is combining all your separate debts under a single debt umbrella. People commonly do this with a debt consolidation loan, a low interest (or low compared to the rates of the credit to be paid off) long term loan that has the specific purpose of being used to payoff debts, particularly high interest unsecured loans like credit cards.
Another form of debt consolidation is the non-loan version. If you have a credit card with a high enough credit limit, you can use a balance transfer to put all your debts onto that single credit card. Other common ways of consolidating debts are taking out a larger mortgage with your home purchase, taking out a second mortgage, using a home equity loan or a student loan. Regardless of the method, the goal of consolidation is to combine all your debts into one.
Advantages of Debt Consolidation:
- * Lower monthly payments. In some cases, debt consolidation can lower your monthly debt payments. Typically, this is because you can spread your payments over a longer period of time. The lower payments can help ease a tight budget.
- * Lower interest rate. You may be able to consolidate your debts with a lower interest rate loan or credit card. When you're able to do this, you lower the interest paid on the debt.
- * Easier to manage debt. After consolidating your debts, you can manage one debt payment instead of several different ones. You don't have to worry about various billing statements, payment amounts, and due dates. Managing a single debt will certainly relieve some of the stress of debt.
Disadvantages of Debt Consolidation:
- * Risk of losing your home. You could put your house at risk if you consolidate your debt with a loan that's secured by your home. If there is ever a time that you can't make your payments, you could face foreclosure.
- * Higher cost of the debt. While extending your debt over a longer period of time can lower your payments, it also increases the cost you pay for the debt.
- * You may need a co-signer. If you don't have good credit, you probably won't qualify a debt consolidation loan on your own. You'll have to find someone who's willing to co-sign the loan for you.
What to consider: Debt consolidation may be right for you if you can do it at a low cost, without risking your assets or the assets of others. Assessing the advantages and disadvantages of debt consolidation puts you in a better position to decide whether to consolidate your debts. Many people don't realize while consolidation can make it easier to pay off your debt, it doesn't solve actually solve your debt problem. For many people in debt, the real problem is that they've overextended themselves, lived without money for emergencies, and used debt to fund a lifestyle they couldn't afford. Consolidation just fixes the effects of these problems, not the causes. If you don't fix the habits that led you to debt in the first place, you can easily find yourself back in the same situation. After consolidation, make sure you replace your bad spending habits with good ones that will discourage debt in the future.
Debt Settlement: Debt settlement is when you chargeoff a percentage of what you owe, instead of completely, 100% defaulting. Basically you offer the creditor a 'take it or leave it' payoff offer. For example, you could chargeoff credit card debt by as much as up to 80%.
A debt settlement company will negotiate with your creditors, or you can read our tips on how to do-it-yourself free debt settlement. A company; however, might be able to negotiate a higher chargeoff amount.
Advantage of Debt Settlement:
- Get out of debt the fastest way possible (other than bankruptcy). Let's say you owe a total of $10000 in debt, and you negotiate a settlement of only $2000. You payoff the reduced balance and you're free and clear.
Disadvantage of Debt Settlement:
- Bad credit report - during the time you are negotiating with creditors; and not sending in your bill payments, your account(s) is being reported to credit bureaus as "delinquent". And; even after you successfully negotiate a settlement, it's very likely your creditor will report the account as "Charged-Off Settled" Or "Paid-Settled", not as a "Paid in Full" account. It will be very hard for you to obtain new credit for up to 7 years. Any credit which you do get approved will come at a very high cost (high interest/fees). Also, any creditors which you still have may increase your interest rate since you'll be considered a very high risk.
Credit Counseling: Credit counseling is financial education and debt counseling according to your situation, and has become a federal law that you receive credit counseling before being allowed to file bankruptcy.
A credit counselor can assess your debt level and work out a payment plan based on your income. Some credit counselors can negotiate lower interest rates and set up a debt management plan with your creditors. Note we said 'negotiate lower interest rates', NOT 'negotiate a chargeoff' as in debt settlement.
A credit counselor analyzes your credit situation including number of accounts, balance, minimum payment, balance due, and any past due account. The counselor then considers your monthly income and bills. Using this information, the counselor puts together a debt management plan (DMP) for paying off your debts. The proposed plan is sent to each of your creditors for approval. Once your creditors agree to the DMP proposed by your counselor, you begin making payments to the credit counseling agency. The credit counselor disburses payment to each of your creditors in accordance with the DMP. In most cases, your credit accounts are closed to future charges as long as you are on the DMP.
Does non-profit mean 'no cost'? Just because it may be a non-profit credit counseling agency doesn't mean its services are free. In many cases there's some kind of fee involved. Some agencies use your first payment to cover their fees, while others deduct a flat amount from your monthly payment.
As with debt settlement, a credit counselor doesn't have any rights that you don't have, they just have experience.
Advantages of Credit Counseling:
- Lower monthly payments
- Lower interest rates (possibly)
- More favorable for your credit report than negotiating a debt settlement or filing bankruptcy
Disadvantage of Credit Counseling:
- Takes longer to get out of debt than negotiating a debt settlement or filing bankruptcy
Bankruptcy
Thankfully, Americans do not have to fear being thrown into a debtor's prison. Under the U.S. Constitution, you have the ability to relieve all or part of your debts when you can no longer meet your obligations to creditors and lenders. Two major types of bankruptcy apply to consumers. Chapter 7, which allows debtors to discharge all or part of their debt, and Chapter 13, in which debtors repay all or part of their debt based on a payment plan.
Chapter 7 Bankruptcy: Under Chapter 7, you can have all or part of your debts discharged, after your liquid assets are used to repay some of the debt.
Chapter 13 Bankruptcy: Under Chapter 13, you repay all or part of your debt through a three to five year repayment plan. When you make the bankruptcy filing, you will also submit a repayment plan to the court. After submitting the plan, you should begin making payments to the court (who then pays your creditors). This is required even if your plan hasn't been approved.
Filing Bankruptcy: Since bankruptcy laws are complex, it's a good idea to seek advice from an attorney before filing bankruptcy. This is the best way to ensure your paperwork is filed completely and accurately.
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Advantage of Bankruptcy:
- You get out of debt legally
Disadvantage of Bankruptcy:
- Your credit report will be damaged for up to 10 years. It will be very hard for you to obtain new credit, and any credit which you do get approved will come at a very high cost (high interest/fees). Also, any creditors which you still have may increase your interest rate since you'll be considered a very high risk.
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