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Free Debt Advice and Tips to Manage and Payoff Bills or Negotiate Settlements
"How am I going to pay all these bills?" Sound familiar? It's not difficult to get ourselves into deep debt before we realize the full extent of what we've done to our financial security.
Here are some common debt signs that you may be getting deep into debt and need to seek relief options:
- Must use a credit card or payday loan in emergencies instead of having money in a savings account for emergencies.
- Shuffling debts from one paycheck to the next paycheck.
- Paying just the minimum due for debts.
- Using credit cards for basic expenses.
- Don't open credit card statements or throw them in a corner.
- Don't have a goal to paydown debts.
- Bills are over due.
- All credit cards are over the credit limit or maxed out.
- Constantly balance transferring debts onto other cards.
- Constantly applying for store cards or other cards.
If you find yourself in debt, the #1 Tip is "Don't Panic". With a clear mind you can better decide which debt relief path is best for you, your short and long term goals. You need to weigh every option, benefit, pro and con. Some people's main goal may be to get out of debt the fastest way possible, such as by negotiating debt settlements. Meanwhile, others' main objective may be to protect and improve their credit. In such situations, credit counseling or debt consolidation may be the better choice over debt settlement.
To help you decide which debt relief option is best for you, review these articles and weigh the pros and cons.
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Debt Settlement Negotiation
Although debt settlement can adversely affect credit for up to seven years, it is nonetheless a viable option for people who have more debt than they could ever repay, and who would still suffer with a bad credit score for seven years.
Admitting you have more debt than you can ever repay may be a blow against your pride, yet suffering with debt could be a far worse strain not only on your budget, but also your feeling of financial security. Another thing about debt settlement, is that is does not require you to first attend credit counseling, as does bankruptcy filing.
Basically, with debt settlement you and your creditors agree to a payoff of your existing debt balance. For example, if you have a $10,000 credit card balance, the issuer may settle for a debt payoff of only $4,000. Many creditors will agree to reducing the debt balance by as much as 60%.
While that seems a great way to relieve yourself of the burden of debt, it can; and mostly will, adversely impact your credit score for seven long years. And, even if you can get approved for credit, it's likely you will have to pay exhorbitant interest rates because you will considered a high risk.
Before engaging in debt settlement, ask yourself these questions:
*Is it likely I will be able to repay my debts?
*Can I get credit now, and at low interest rates?
*It is likely that I will be able to not only repay my debts, but also to make timely payments and improve my credit score within 7 years?
If the answer is 'no' to these questions, debt settlement may be your best option. Face the facts: If you cannot timely repay your debts and improve credit within 7 years, what would you have to lose with debt settlement? If your credit is already damaged anyway and you can't get additional credit, why continue struggling to make ends meet with the burden of existing debt on your shoulders?
Can you perform a 'do it yourself debt settlement'? Yes, but many people are not comfortable with the negotiation process, and some fail to keep accurate records of negotiation agreements. For such people, a debt settlement counselor can be very helpful not only to negotatiate settlements on your behalf, but may also get the biggest settlement possible.
Do It Yourself: Contact your creditors and let them know your situation. If you cannot agree to a repayment plan of your debt while also protecting you against negative credit report entries, then negotiate for a debt settlement. Keep records of all conversations/correspondence, and get written agreements before sending in your settlement payment.
For professional assistance, use the Credit Federal menu at the top of this page, and select the Credit Counseling option. Submit our helpful form, and if you meet the minimum requirements Credit Federal will refer you to a debt negotiation specialist. If not, Credit Federal will refer you to a credit counselor.
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Unsecured Debt Consolidation Defined, Pros and Cons
Which is better; or easier... Making one big payment per month, or a bunch of smaller payments that; when added up, are less than the one bigger payment?
On the surface, the one bigger payment sounds better, as well as easier. But now add up all those bigger payments and compare it to the total of all the smaller payments. What if in the long term, the one bigger payment; though less total per month, actually is a larger sum than all the smaller payments? Doesn't sound so good afterall.
Yes, it can happen. Your one bigger payment; although smaller than the sum of all the smaller payments, could cost you more if it has a longer term. For example, paying $500 per month is a lot less (per month) than paying $200 for one credit card, $300 on a second credit card, and $100 on a third credit card. In fact, the one lump $500 monthly payment is $100 less than the three smaller payments. But, the one lump $500 monthly payment is for 48 months, versus 38 months for all the little payments. That means the one lump payment of $500 per month totals $24,000, whereas the little payments total only $22,800.
Or, a different problem could occur. What if the total to be paid back is less with the debt consolidation plan, but still takes a longer payback time? Or what if the debt consolidation causes your credit score to be lowered? With a bad credit report score, you could end up paying higher interest on other lines of credit (loans and credit cards), even on existing cards and loans and could prevent you from getting new lines of credit.
Next picture this... you agree to a plan presented to you by some debt management company. After several months in the plan you apply for a new car loan but are rejected, or you get approved but at a high risk interest rate. Why? You discover that the plan was actually a type of debt settlement, which often negatively impacts credit scores. So who's to blame? If you received full disclosure, complete Terms and Conditions from the company, then you are to blame for having not read and understood them.
But what if it was a legitimate unsecured debt consolidation plan drafted for you, and the reason your credit report score was lowered was due to the re-structuring of the payment plan. Often a creditor will agree to modifying how, when, and by how much you repay the money you owe but only if you agree in return that doing so will adversely affect your credit report. Once again, did you fail to note that particular item of the Terms and Conditions? Or maybe the creditor agreed not to make a negative entry on your credit report, but your debt management company did because you failed to pay them in full; or on time, for their services? It may be best for you to restructure payment plans directly between you and the creditor to avoid any confusions and to help you fully understand the Terms and Conditions.
The variables of what could happen to you are many, and could be worse than the debit itself. So maybe its best to take the tedious approach of simply paying your bills as they currently are, at their current amounts, when they are scheduled due.
As you can see from our examples above:
- Debt consolidation may not get you out of debt any faster than normal repayment, nor save you any money nor reduce monthly payments.
- Debt consolidation is often confused with other debt solutions that are far more aggressive and potentially hazardous to your credit score.
- You might be better off consolidating debt on your own, directly between you and your creditors.
What is debt consolidation? In simple terms, when you consolidate debt you place multiple piles of debt into one huge pile. You get the convenience of one payment instead of many, but that payment won't necessarily be less than what you were previously paying. And if it is, you may find yourself paying for months or years longer than if you'd just paid under the original terms.
Here are examples of what debt consolidation is not:
Debt consolidation is not debt management or credit counseling. With debt management, a credit counseling agency reviews your finances and puts you on a repayment plan to retire your bills in three to five years. These agencies have agreements with credit card companies that can lower or eliminate your interest costs. Entering a debt management plan can have consequences for your credit scores, but if you pick a legitimate counselor affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies, any impact should not be long term and should be easier to recover and improve credit scores. If you've already fallen behind on your payments and think you could get out of your hole if you could just get your interest charges reduced, a debt management plan might be a good option.
Debt consolidation is not a credit card chargeoff plan. With chargeoff, you simply stop paying on the debt. This is the worst thing; next to bankruptcy, you can do to your credit ratings. This can prevent you from getting further credit for up to 7 years, and can cause the interest rates on any existing credit to rise and will cost you high risk rates if you get approved for new credit.
Debt consolidation is also not debt negotiation or debt settlement. With negotiation and settlement, you repay dramatically less than what you owed. As with chargeoff, this can also destroy your credit rating. And, like the chargeoff, you risk being sued by your creditors if they did not agree to it.
WARNING: Debt elimination is a scam. Debt elimination companies claim you can legally erase your debt with high-priced documents you can buy from them.
Before you leap, first ask if you really need to consolidate?
If you've got a credit card with a decent rate and a high credit limit, you might consider transferring your other balances to it. Your issuer might even help by giving you a lower, promotional balance transfer rate or raising your credit limit to accommodate the extra debt.
But beware of the following:
- Your rate could change. There's no such thing as a true fixed rate with credit cards. Issuers can change terms at any time with 15 days' notice.
- You'll need to put the card away. You should be careful not to use this card for purchases until you've paid off the debt because those new charges will accrue interest at a much higher rate, and your payments will go toward paying off the low rate balances first.
- You'll need to be disciplined about paying down the debt. Revolving lines of credit such as credit cards don't force you to pay off much of your principal, so you could still be in debt decades from now. If you opt for this solution, you should make hefty payments each month, not just the minimum.
- You could damage your credit scores, which can raise the interest rates on your current lines of credit, deny you future credit, or cause you to pay high risk rates on new credit.
NOTE: FICO, your credit report score, is better (higher) if you have wide gaps between your balances and your credit limits, particularly on credit cards. Typically it's better to have small balances on a number of cards than a big balance on one card.
Other options instead of consolidating debt:
Home equity loan: Use the equity in your home for a low interest loan, and payoff credit cards starting with those that have the highest interest rate.
A 401(k) loan: Many employers allow you to borrow up to half of your retirement account balance and pay back the loan at a relatively low interest rate over five years. You're essentially paying yourself interest, rather than a lender, and the loan doesn't even show up on your credit reports, which could be good for your scores (all that debt disappears from your credit cards). But there are serious potential disadvantages. What if you lose your job? If you leave your employer, it's likely you will be required to repay any 401(k) loan in a short period of time. Any unpaid balance would be turned into a withdrawal, which means you'd pay taxes and penalties and lose all the future tax-deferred returns the money could have earned. Another drawback is an idle 401. Your retirement account funds would probably earn more over time invested in the stock and bond markets than what you're saving on interest payoffs. And you could end up deeper in debt if you continue charging.
Unsecured personal loan from your bank: Unfortunately these types of loans typically require a very good credit rating, and are only for a few thousand if you don't own a home or other security.
Summary: Don't immediately jump on the debt consolidation bandwagon. Each household has unique variables, different types of debt and needs as well as long term goals. Review all those variables carefully, as well as all your options.
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Debt Settlement Vs Debt Consolidation
What is the difference between a Debt Settlement Program and Debt Management Plan (DMP)?
With debt consolidation; also called a Debt Management Plan (DMP), you continue to agree to pay back every penny of the debt you owe, plus interest although the interest may be reduced. Many debt management companies tack a monthly service fee onto your monthly payment. With the full debt, interest and fee, many people in a debt management program end up paying up to 130% of the total debt over a 5 to 6 year period. As for the impact on credit scores, debt management/consolidation has a much more favorable, postive affect on credit report scores.
With debt settlement, you negotiate to pay back only a percentage of the debt you owe, such as half. Again, a professional agency will tack on its fee. People in a debt settlement program end up paying far less than what they originally owed, but typically must repay the agreed total over a short term versus the long term of a debt management program. As for credit score impact, debt settlement typically has a very negative, damaging affect on credit report scores. Debt settlement is not recommended unless you have too much debt to ever repay and if your credit score is already damaged and if it will likely remain damaged for at least 7 years.
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More free tips and advice:
- Sample Debt Settlement and Negotiation Letter to be used as a comprise letter to creditors.
- Joint credit report debt - loan and credit card bills a Tale of Bad Credit
- Balance transfer credit card debt How to balance transfer credit card debt.
- Zombie debt collectors are companies that buy bad debts for pennies on the dollar and then hassle you to pay, many operating in violation of federal law.
- Debt Settlement Facts Is debt settlement right for you? Learn about the debt negotiation process.
- Debt Consolidation and Debt Settlement Learn the differences between bankruptcy, debt settlement and credit counseling.
- Divorce and Debts Facts about Divorce and Paying Debts on an Individual or a Joint Spouse Account.
- Pay Off Debt Options When you have available funds, should you pay off debt? What should you consider.
- Unknown Debt Collection Agency Is a debt collection agency calling and harassing you about a debt you do not recognize? Know your rights.
- Payoff Credit Card Debt Solutions and alternatives to payoff credit card debt and stop more debt.
- Good Debt Relief Company How to choose a good debt relief company; for credit counseling or to negotiate debt settlement. Avoid debt relief scams and reduce high monthly bill payments.
- Payoff Debts Without Loans Bills may be sticking up, but there are simple ways to payoff debts and without using credit cards and loans, and without counseling or to negotiate settlement.
- Long Term Plan to Pay Off Bills Long term plan to pay off bills and be debt free within one year without counseling, settlement, nor a consolidation loan.
- Manage Debt Yourself Do-It-Yourself tips on how to manage debt to get finances under control. Should you chargeoff or payoff bills, consolidate or negotiate settlement?
- Debt Solutions There are many debt solutions. Which one is right for you; and best, whether a debt consolidation loan, complete chargeoff, credit counseling or to negotiate settlement, depends upon your financial situation, goals, and personality.
- Calculate Debt And Payoff Should you get a secured or unsecured loan to payoff debt, hire a nonprofit credit counseling agency to setup a repayment plan, combine bills with debt consolidation or negotiate settlement?
- Debt Collection Statute Of Limitation Are old bills and debt collection agency phone calls troubling you? Read our article about the debt collection statute of limitation for how long creditors, bill collectors and debt collection agencies may legally pursue repayment.
- Money To Payoff Debt Personal budgets are stretched thin. Here are ways to get money to repay debt. If you still have high debt balances, consider debt consolidation to combine and reduce monthly bills, credit counseling, or perhaps negotiate settlement to chargeoff debt at a lower amount.
- Short and Long Term Debt Relief Even bad credit people have more than one option to get short or long term debt relief. Here are some options; other than asking family and friends for money, and a few warnings.
- Debt Collection Agency Negotiation Cannot repay bills? Free tips for debt collection agency negotiation and sample payoff letter. Before you agree to a loan or credit card debt settlement chargeoff, read our advice.
- Debt Collector Verification Free sample letter and advice on how to get a debt collector to prove you owe money.
- Can Debt Collectors Put Me In Jail (Blog) One question often received is: Can debt collectors put me in jail for not paying my bill?
- Stop Debt Collection Agency Calls (Article) You have the right under federal law to stop debt collection agency calls. Tools and sample letter for you to send to stop harassing collectors. Also consider credit counseling and debt settlement.
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