Many people mistake the word consolidation for paying off debt when instead it is moving debt from multiple creditors to one creditor. Debt Consolidation is a term for taking out a loan in order to lump together debt. Consolidating debt is not paying off debt.
If your goal is managing debt more easily and you have great credit then consolidating debt is a good strategy to get organized. Conversely if you are not able to secure a low interest consolidation loan or zero percent interest credit card then you may get yourself into more debt by consolidating.
Many people mistake the word consolidation for paying off debt when instead it is moving debt from multiple creditors to one creditor. Often consolidation loans can carry a higher interest rate than the underlying debt that is being consolidated.
Often consolidation loans can carry a higher interest rate than the underlying debt that is being consolidated. The fact that consolidation payments hit one time per month and are often higher than the combined payment amount from multiple cards it can then make it difficult to keep up with. The recently emptied credit cards now have room to hold more debt, which can lead to doubling or even tripling the amount of debt a person can have.
While targeted marketing may spark interest in debt consolidation, the reality and outcome of debt consolidation is mixed. Those with a strategy to earn more income and pay down debt with a prime consumer credit score may be able to secure a low interest loan and make larger payments to pay down their debt. For consumers with less than a 700+ credit score consolidation can have largely negative impact on their debt problem by allowing them to incur more debt rather than solving the problem.
There are five factors that impact your credit score to different degrees:
Payment history – Your recorded payment history includes on time or late payments, charged off accounts, and accounts that have not been paid.
Your credit score is a risk assessment tool for your future lenders. While it is important to have good credit as a rule it is far more important to build wealth. Credit allows a person to borrow money for instance to purchase their first home and buy their first asset. Credit also allows borrowers to spend money they do not have.
Credit is important in a young person’s life but later in life credit should be far less important as savings and wealth take the place of credit. Those with credit scores in the 800’s are people who pay their credit card balances in full at the end of the month to avoid wasting funds on interest, and those who have the majority of their assets paid off with money in the bank or investments. Relying on credit lines as part of a household budget is strongly discouraged as living in debt is costly and unsustainable.
Consumer protection laws were created by congress to protect consumers from illegal practices by collection agencies. The most powerful tool under the federal Fair Debt Collection Practices Act is the right to demand that a collector reporting information to the credit bureaus prove the account is really your responsibility and that the balances are accurate. Resolution programs focus on exercising these right. Several laws are utilized throughout the process to assist in invalidating the debts legally with collectors.
Resolution programs are often document processing battles fought by either processing companies or attorneys. Program length varies but is typically shorter than the life of a debt settlement program or consumer credit counseling.
Debt Management or Credit Counseling companies focus on working with your budget to try and help you pay your bills. They will evaluate what your income is vs your monthly bills to determine what you can cut back on, (cable, internet, cell phone ect). They will also attempt to reduce your interest rate with the creditors you have.
In a Debt Management Program the first step is for your accounts to be closed. Several factors including your credit rating contribute to the rates you will receive in a management program. Typically after management fees a client will experience a 2-3% reduction in rates, not a substantial savings after you factor in the cost of the program. With the help of a debt management program it will take 6-10 years to complete the program.
If you pay minimum payments and have debt that will be with you for the average of 15 years then debt management could shave 50% off of that time frame.
If time management has been challenging in managing debt or you have a perfect credit score then debt management could help a person get out of debt faster. If you pay minimum payments and have debt that will be with you for the average of 15 years then debt management could shave 50% off of that time frame. Essentially debt management is paying someone to take over your finances when it comes to debt and you pay a fee for that service.
A settlement on debt occurs when a debtor negotiates a payoff amount for less than the total balance owed on a debt. This lower amount, agreed to by a debt owner, grants their debtor a more affordable way of resolving their obligation.
Debt settlement programs involve a company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings to ultimately pay one settlement.
When a settlement occurs and a creditor agrees to reduce the amount you owe and “settle” the debt for less a payoff takes place, often utilizing the funds you have put into an escrow account. Creditors routinely settle accounts for less than the amount owed and anticipate a percentage of accounts defaulting on debt. While your accounts are awaiting settlement and an accumulation of funds in your escrow account there is risk of creditors taking action on your accounts. That is one of the downsides to debt settlement is the length of time that accounts sit in collections, which heightens the risk of lawsuits and liens.
Negotiating with creditors on your own can be a long and laborious process. That’s why many people turn to professional debt settlement companies to negotiate on their behalf. All debt settlement companies charge a fee to handle a settlement program. This fee is typically based on the debt amount of the client and number of accounts in the settlement program.
Most debt settlement companies and programs have you start the process by accumulating savings in a special purpose account they own. A client will receive a monthly payment amount and program budget that they will need to complete the program. The special purpose savings account will hold the funds that will ultimately be used to settle each account, and a portion of each client payment will go towards fees to settle the debt as well as the settlement itself.
There are certain times when a Bankruptcy becomes a good option. Judgments, garnishments, and liens can only be resolved through a bankruptcy, settlement, or payoff but that comes with consequences. In most cases there are better options without having to deal with all the added stress of filing Bankruptcy.
Bankruptcy is expensive with filing fees and attorney’s fees, with no guarantee of getting a chapter 7 to fully release you from all debt obligations. Approximately 32% of all bankruptcies from 2005-2017 were chapter 13. The success rates on chapter 13 are about 33%. There are a multitude of factors to consider when contemplating filing for Bankruptcy.
You can expect your attorney to fill out the court mandated your paperwork for your bankruptcy filing by using all of the information you have provided. i.e. bank statements, pay stubs, along with a value of everything you own down to the value of your furniture and clothing. You will also have to double check to make sure that you have remembered everything you’re trying to include as not all debts always report to the three credit bureaus.
Bankruptcy is going to appear as a public record on your credit report ten years so you need to take into account of what your personal financial goals are and whether bankruptcy will help you meet them in both the short and long term. Certain types of financing option are completely unavailable during this process up to several years after the process ends.
This is a very time and labor-intensive process that is always on the clock of the courts. At anytime you could be asked to provide a multitude of other paperwork to in order to make sure that you meet all the deadlines. Missed deadlines can result in delays or dismissals of your case.
Just like with anything, bankruptcy cases have varying degrees of difficulty. The more you have that you are potentially trying to protect the more potential pitfalls you could face with your bankruptcy filing. It’s important to have a solid attorney representing you. The best attorneys run will charge considerable retainers up front for competent advice throughout the process.
Bankruptcy is going to appear as a public record on your credit report ten years so you need to take into account of what your personal financial goals are and whether bankruptcy will help you meet them in both the short and long term. Certain types of financing option are completely unavailable during this process up to several years after the process ends.
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