You are here: Home / Archives for debt consolidation

debt consolidation

Double Jeopardy on Your Credit Reports

by Leave a Comment

If you are looking at your credit reports, and seeing a duplicate account appear on the same report, you could be a victim of what I refer to as double jeopardy. This can skew your debt to income ratio, and cause other domino affects. It can also make it look like you have more unpaid collections than you actually do.

One of these duplicate issues is easy to fix, while the other seems unfair, but sticks to you for up to 7 years.

Some of you may be wondering how an unpaid collection account even gets to appear on your credit more than once, and I will get to that below, but first…

What is double jeopardy if not just a question on a game show?

The “double” is an extra credit reporting trade line. A duplicate entry for the same thing.

What can you do when duplicate entries end up on your credit report?

The “jeopardy” can come from the duplicate entry jeopardizing how much you pay for credit, or whether you can get credit at all!

Fixing Duplicate Credit Reporting Mix Ups

In over two decades of working with people to fix debt and credit problems, I do not see much trouble with getting a mistaken double entry deleted from your credit. You do not need to hire a credit repair company for a simple mix up like this. You can quickly and easily dispute incorrect items off your credit yourself.

Should you bother getting something off your credit if it is not necessarily a negative?

I would.

You may think there is no harm with leaving a positive duplicate on there if you are paying your debts on time, all the time. I can see viewing it as another feather in your credit cap. But the exact same balance showing as owed on your credit reports could skew your debt to income ratio on a future loan, or credit card you may want to apply for. That could result in:

  • Paying a higher interest rate than may have been the case otherwise.
  • Getting approved for your new credit card, but at a lower credit limit.
  • In some instances you can even be declined!

Reviewing your credit at least once a year is just good credit hygiene! Even when you are not looking for new credit. This is a perfect example for why you should do it!

There are many free credit monitoring apps out there, like Credit Karma. You can also get your credit reports from the three main credit bureaus for free every twelve months. During Covid you can get your free credit reports weekly.

When Debt Collections Show Up Twice

Here is where I see the most common type of duplicate credit entry, and the one that comes across as unfair and punitive. One debt collection item on your credit is bad, and it stands to reason that two is worse. Or is it?

Lets say, for example, you have an unpaid credit card with Capital One for six thousand dollars. You could no longer afford to pay them monthly, so you stopped sending any money to them 8 months ago.

Next thing you know you see Portfolio Recovery and Associates on your credit reports. They are now reporting your Capital One balance as being owed to them. It is a duplicate of an already existing negative item on your credit.

If this happens Capital One can still legitimately report that you did not pay them for all those months. But once they sell the legal rights to collect to that debt buyer, they should then show a zero balance owed to them. The debt buyer, in this case PRA, would legitimately be showing the money is now owed to them.

The above example is going to seem unfair to many of us. We are getting two negatives on our credit, when there should be only one. Unfortunately, it is legitimate that you see these two negatives.

It Could be Worse than Double Jeopardy

Before summer of 2017 you could have seen TRIPLE jeopardy if you were sued and a court judgment for this same Capital One account appeared in the public records section of your credit reports.

Luckily, most state civil court judgments no longer appear on our credit reports.

If both Capital One and the debt buyer above were reporting negatively on your credit, and with each of them showing a duplicate balance due to them, that would be double jeopardy!

You can dispute the duplicate and inaccurate information with the credit bureaus in the same way I refer to above.

Both Capital One and the debt buyer will organically fall off your credit reports after 7 years from when you stopped paying the bank. The debt buyer does not get to show on your credit longer than the bank that sold them the debt.

In fact, the particular debt buyer I used in the above example, Portfolio Recovery Associates, currently agrees to be deleted from your credit once you resolve the debt with them. So while PRA could take themselves off your credit before the 7 years is up, Capital One is not likely to. Capital One would still be showing with a zero balance owed in this example.

You can still accomplish most major credit and finance goals if collections on your credit are not showing a balance owed.

If you want to talk to me about any of your debt and credit issues you can post in the comments below, schedule a call with me, request a settlement estimate, or submit your own question using the boxes below.

Get Out of Debt Before it Gets Out of Control

by Leave a Comment

If you’ve already read my first article, 5 Steps to Get Out of Financial Purgatory, you know that we’ve reached step #3 on the list. And, although, I am definitely not an expert on getting out of debt, life has taught me that you can’t wish it away or bury your head in the sand. I know, because I’ve tried. Debt, like the notorious bully, will become more aggressive, punk you for your lunch money, and may even morph into something scarier as time goes on.

Debt, as a whole, may contain an array of both secured and unsecured debt, but debt is debt and there are solutions for most debts that have gotten out of hand. How do you know it’s out of hand? Well, can you save money? Are you paying your bills on time? No? Then, it’s time to take a closer look at your finances. Is it worse than that? Are debt collectors breathing down your neck? Were you surprised by a Summons at your door? You’re not alone, and there is still hope.

Credit card debt, specifically, is the third largest debt in the U.S. and can be pretty damned sneaky with introductory rates, annual fees, late fees, and the promise of “rewards”. And, I bet when you applied for that credit card, you probably thought you could pay off the balance every month, or at least pay more than the minimum payments, and it would be paid off in no time. No harm, no foul. Unfortunately, that’s not always the case, as life (or other bills, debts) can and does get in the way.

“All told, the average American today owes about $225,000 in debt, in a country where the median household income is just barely more than $53,000.” – Credit.com

Debt can grow fairly fast.

When introductory rates fall to the wayside, debt can grow bigger due to interest rate hikes, late fees, and annual fees. That can set you back a bit, but if it goes to collection, that can be when you’ll really see the fees add up. If you let it go long enough, it will get so big, you may be inclined to throw your hands up and give in, but I would caution you in doing that.

Debt can steal from you.

When debt starts to spiral out of control, it will start to affect other areas of your life, and even steal things from you, now and in the future. As many of you probably already know, money problems can create friction in your relationship and stunt your family’s ability to do the things you need to do. Being delinquent can also hurt your credit, making it more difficult for you to  purchase a home or vehicle.

Debt can morph and change direction.

What I mean by this is that your debt (credit card debt, medical bills, etc) can be bought by debt buyers, be turned over to lawyers, and you can be sued. All of the sudden that debt has become a judgment, which now has to be dealt with differently. Judgments are more complicated to settle, and can cause more damage if you don’t take action (garnishments, liens, etc).

Debt can start small, but grow into a seemingly unmanageable size. Get help.

Options for Getting Out of Debt

Pay it Off

The most obvious thing to do is to not acquire anymore debt and pay off your current debt by any means necessary. I’m sure you’ve heard of the debt roll-up, stacking, the ladder or avalanche method, or the ever popular, debt snowball. Most of these repayment methods all follow the same basic principle, and focus on the debt with the highest interest rate (you can also try a balance transfer to lower interest rates). For some, this may be hard to do if their highest interest rate debt is also their highest monthly payment. If you need to start small, then do the “snowball” and make more than the minimum payment on your smallest debt (regardless of interest rates) and roll it up from there.

Additionally, you may have some savings you don’t want to part with, but putting it towards your debt will most likely save you hundreds (if not thousands) of dollars in interest charges. Another options is to borrow money from friends and family to pay off debts in full, then repay the loan to your brother or parents interest free. Or, maybe you have a car, furniture, or jewelry you can sell that will enable you to throw some more money at your debts – the faster you pay it off, the better. Where there’s a will, there’s a way, my friends!

If paying is not an option for you, then keep reading.

Credit Counseling

The time to consider credit counseling is when you’re just starting to miss payments on your credit card bills, store cards, or medical bills. When this happened to me several years ago, I walked in to a local CCCS office and asked for help. They asked me to fill out some paperwork, then cut up my credit cards right there in the office (ouch). They then explained how they would get lower monthly payments, then consolidate them altogether so I could just make a single payment.

I’m proud to say that 18 months later, things were back on track, but you do have to qualify for credit counseling services. This is not necessarily difficult, but it’s worth noting, and you can learn all the details by reading Michael’s report on lowering monthly credit card payments.

Having been in credit counseling taught me a valuable lesson at a fairly young age (that would, unfortunately, revisit me later in life):

“Mistakes are the growing pains of wisdom.” – William Jordan

Debt Consolidation

Consolidation is for those who want to save on interest, but haven’t fallen behind on their credit card payments. It’s not for everyone, and consolidation isn’t as easy to do as it used to be, but if you’re 1) not behind on your credit card bills – yet 2) want lower interest rates 3) are willing and able (credit qualified) to open up a 0% interest account with a large enough credit line to cover your high interest rate balances, then this might work for you.

Consolidating your credit cards can be a bit tricky, as you may have to bounce from one card to another (to maintain those nifty intro rates), and you can’t become delinquent, as that would affect your credit score, thereby affecting your ability to open the large line of credit that would help you in the first place. If you have a credit card with a lower interest rate and some room to spare, you might be able to do a balance transfer. And, depending on your current rates and credit score, you might also consider a consolidation loan through peer to peer lending such as Lending Club or Prosper.

If you can walk the fine line, then by all means, start walkin’.

Debt Settlement

This option is for those who have already fallen way behind on their credit card bills. Getting a good settlement requires communication, timing, a lump sum payment, and hardship. You can call your creditor on your own or you can hire someone to do it for you, but you should first consider whether debt settlement is an appropriate solution for your situation and learn the fundamentals of getting a good settlement.

Debt settlement is for specific financial situations and will not work for everyone, and is something you do before considering bankruptcy.

I have settled debts in the past. The discounts I was able to negotiate were because the debts had gone so long without payment. I was lucky to not have been sued for collection. I could have filed for bankruptcy, but the balances on the debts I had to quit paying were relatively small. Had my debt load been bigger I would likely have chosen to wipe the debts out with a chapter 7 bankruptcy filing.

Bankruptcy

Bankruptcy is used when your credit card and other debts have become overwhelming. It’s considered a last resort, and although bankruptcy has negative connotations, that’s not how it should be viewed. People in my family and some of my friends have been through bankruptcy. I don’t view them as failures, but as people who looked at their situation and made the best financial decision they could for themselves.

If you’re considering bankruptcy, keep in mind that you will be filing for Chapter 7 or Chapter 13 (7 will require a means test to qualify, depending on your state). There will also be a cost involved when you hire a bankruptcy attorney, but your initial consultation should be free and it’s highly recommended to get your questions answered, even if you decide against this route.

More importantly, consider bankruptcy as a second chance. You have the opportunity to get rid of your debt and start over, and this time you can do things differently!

Doing Nothing

This really isn’t a viable option for anyone. Debt is like cancer…early detection and immediate action to eradicate the problem is vital for your success. In doing nothing, you’re allowing the banks, collectors, lawyers, and courts to decide your fate. And, believe me when I say that they do not have your best interests at heart.

The only time doing nothing might make even a little bit of sense is if you’re having hardships such as medical issues, divorce, brief unemployment, or some other temporary life event that would consume income that would otherwise be used to pay off your debts. If you are judgment proof (little to no income and/or assets that are exempt in your state), doing nothing about collection debts can mean looking over your shoulder…. forever.

Look, dealing with debt is, at best, a real pain in the ass. And, the longer you let it go, the harder it’s going to be to get rid of it. BUT, no matter what method you choose to use, when all is said and done, I promise you’re going to feel like you just crawled out of a 6-foot hole to see your first ray of sunshine.

Stand up for Yourself

Debt can definitely come off like a bully, pushing you around and making your life miserable, but only if you let it. Take control of the situation, be brave, and fight back! Bullies all have one thing in common: they have a deep-rooted fear that you will stand up to them one day.

Do your homework. The above-mentioned methods for getting out of debt can be extremely helpful, but you have to pick the right tool for the job. So, assess your financial situation, find where you fit in, and get to work.

 

How Low Interest is Affecting Canadians

by Leave a Comment

Back in January 2015, the Bank of Canada made the surprising move of lowering the key interest rate from 1 per cent to .75 per cent, shocking those who thought a rise was inevitable. But surprise factors like an oil price plunge forced the Bank’s hand, as they made the first adjustment to the key rate since September 2010.

The business section of your newspaper has been filled with stories about it ever since, still peppering in reminders of the “inevitability” of a rate increase, and filling us up to the brim with graphs and pie charts about the economy at large.

But what has it done to your life? Are fractions of percentage points actually meaningful? Are there ways to take advantage of low rates? Are there dangers or risks? Let’s take a look at some of your options.

How Low Interest Rates Might Affect Mortgages

Mortgages are the single biggest piece of debt that most of us will ever have, so if you want to take advantage of low interest rates, this is probably the place to start. If you’re in the market to buy, this is a great time. A recent Bank of Montreal home buyers survey found that more than a fifth of millennials have shortened their time-frame for home buying, thanks to the low rates.

People shopping for mortgages might want to consider taking the fixed-rate option. Historically, variable rates have been better for homeowners, but some financial experts think now is a time to lock into a fixed-rate. Ted Rechtshaffen, president at TriDelta Financial, argues that a lot can change over a 5-year period, and the risk of variable rates are not worth the reward of the small premium you get when choosing them.

Current home owners can also take advantage by making their mortgage payments as if there was no drop at all. The Canadian Association of Accredited Mortgage Professionals said over a third of Canadians were able to bump up their payments in 2014, with some renewing their loan at a lower interest rate. More money going toward the principal instead of interest means faster repayment and a lot of savings.

A Lower Mortgage can Create Opportunity for Credit Card Debt

If your mortgage payments aren’t as high as they used to be, there are other ways to spend the difference. The key interest rate may be low but your credit card APR is still astronomically high. If you are only making minimum payments on your credit card, you are not making very efficient use of your money. If your mortgage payment has dropped by $150 a month, putting some or all of that toward your credit card will dramatically reduce your debt and save time and money.

Consolidated Credit’s credit card debt calculator illustrates this idea. If you’re making the minimum payments on a balance of $3,720 (the average Canadian credit card debt), at 19 per cent APR with a minimum monthly payment calculated at 2 per cent of the balance, it would take nearly 50 years and cost you $13,000 in interest.

Add your monthly mortgage savings of $150 to your minimum payments and your debt will melt away. You’ll repay the balance in two years instead of fifty, and you’ll save over $11,000 in interest payments. It’s a no-brainer.

Tread Carefully

Before we get carried away, let’s not forget about the “inevitability” of interest rates rising. If you’re taking advantage of lower rates, make sure your budget can handle the eventual bump in rates. Try stress-testing your finances by pretending the rates have increased, and see whether or not you can still meet your financial obligations. Chances are, any actual increases will be gradual and will allow you the chance to make your own budgetary adjustments. But it is still a wise move to tread carefully and try not to over-extend yourself. Make hay while the sun shines, but keep an umbrella handy.

Credit Card Consolidation with a Lower Interest Rate Loan

by 82 Comments

Get comfortable, because debt consolidation is, first and foremost, about consolidation loans, which will take a little bit of time. You’re on this page because you have recently realized that your debt is too high, or it may start to become difficult to deal with if you don’t take some kind of action soon.

It’s important to know how consolidation has changed over the last several years, so you can better understand where it stands today, and how you can best benefit from the personal loan markets. This post may be long, but it’s simplified to be easily digestible, to cover the basics and allow our readers to come in and share with each other, which is integral part of this website.

Consolidation Loans of the Past & Present

The opportunity to consolidate high interest credit card debts into a loan with a more affordable monthly payment became increasingly difficult as a result of the recession. Prior to 2008, it was not a problem for a home owner to get cash out refinancing or take out a home equity line of credit (HELOC), to pay off higher interest credit card debts. This was a popular option, even though it meant taking unsecured credit card debts – converting those balances into secured debt – using debt consolidation. This is not always a wise decision.

If you run into a financial setback with unsecured debt, such as credit cards, you have more options, and often more time to manage the situation, than you would when unable to make payments on secured debts. There are fewer options and often less time available to you when falling behind with payments on secured debts.

It had become more difficult to consolidate high interest debt using real estate. Home values had declined for many, but are bouncing back in several areas. If you do have enough equity in your home, you may look to consolidate credit card debts by taking out a HELOC or the cash out refinance option. But you may find other alternatives to reduce your monthly payments (explained later in this guide) to be a better option than putting your home on the line – which you would be risking if you later experience financial setbacks. It would be a good idea to read through the full guide about consolidating credit card debt before committing yourself to debt consolidation that involves taking on more “house debt”.

Unsecured Debt Consolidation Loans

It seems like just yesterday we regularly had CRN members come to us seeking assistance with credit card debt loads that were frequently in excess of fifty thousand dollars. Sometimes much higher. These types of credit card debt profiles often consisted of at least one large balance credit card that was opened in order to consolidate higher interest credit card balances. By large balance, I mean $25,000 or more. Several banks offered large credit limits designed to allow you to consolidate all of your credit cards over to just one balance, and one payment. Bank of America is a good example of offering high limit and low interest balance transfer credit cards.

This was at the height of the credit fueled crack up boom that came to an abrupt halt in 2008. High limit balance transfer credit cards and signature loans were being taken out of lenders product lines even prior to that.

In 2008, with the collapse of Lehman Brothers, the credit markets froze. Not just inter bank lending between all the big banks and wall street-ers. Credit products to main street (loan products to you and me) froze up too. It took a few years for the credit card market to return to even a fraction of its former pre-approved credit card junk mail glory.

What does all this mean to the person looking to consolidate credit card debt today?

Credit card lenders just came through the highest default and charge off levels they have ever seen. As a consequence, it can be more difficult to qualify for debt consolidation loans from major banks, and even your local credit union. Larger consolidation loan amounts are just not available like they once were. If they are available to you, it’s often because you look like you don’t need one.

There are certainly some options available to consolidate credit card debt with unsecured loans. But the traditional debt consolidation loan market has changed. What used to be a loan option you would pursue from a brick and mortar bank has been replaced, in large part, by peer to peer, online lenders, and personal loan companies.

There is probably more personal loans and online lenders competing for your business today than there ever were banks offering consolidation loans and large balance credit cards you could transfer to.

What About Companies Calling Themselves Consolidators?

Many years ago, a Google search for the term “debt consolidation” would have shown the top 3 results (which are typically  paid ads) to be offers for consolidation loans. But for some time now, that same search in Google, or any other search engine offering paid positions for the top listings, will most likely show credit counseling companies, a debt settlement company, or a call center selling bankruptcy alternatives. Why?

Debt relief companies started to muddy the definition of debt consolidation when they recognized the benefit to marketing themselves that way led to more people contacting them. The term debt consolidation is searched for much more often than the term debt settlement or debt management.

Why point this out to you? Mostly, as a caution for how debt settlement companies have sold their service as one easy lower monthly payment. Representing debt settlement as making one lower monthly payment sounds like consolidating credit card debt, but nothing could be further from the truth. The process for settling debts requires you to stop paying your bills on time. It is not for the faint of heart, and should be viewed as an alternative to chapter 13 bankruptcy. It is not a form of debt consolidation.

Now that you know some of the history of consolidation, and what to look out for, we move in to the actual debt consolidation loans. Consolidating debt is traditionally defined as taking out a large enough low interest loan in order to pay off all of your high interest debt – like credit card debt. You then have just one lower, more affordable, and convenient monthly payment. This is the way most people still define consolidating debt today.

If your interest rates and the balances owed on your credit cards are getting too high or too complicated for you to manage, you have multiple options. Conventional wisdom suggests you first look to consolidate your debts into one loan, but understand that it’s not “one size fits all”.

You should also know that debt consolidation loans are often not your only, or best, path to get control of your bills.

The Advantages of Consolidation Loans

There are some good reasons to consider consolidating your debt with a loan, but it’s definitely not for everyone. Generally speaking, this particular method of consolidation works best for someone who is still current with their monthly payments, has an excellent credit score, a stable and consistent income, but is caught up in high interest rate credit cards. If this isn’t you, then there’s a strong possibly that a consolidation loan could make matters worse. If this is you, then here are some of the benefits:

  • DIY: Although debt consolidation service providers are everywhere, they aren’t needed, because you can absolutely do this yourself. You’re doing this to save money, so don’t pay erroneous fees that will just drag you down financially – that’s not the point.
  • Credit: You are using the consolidation loan to pay off several accounts, so that should reflect positively on your credit reports and in your score once they’re paid.
  • Convenience: A single monthly payment will always be more efficient and easier to manage than multiple account payments, and it allows you to be more organized.
  • Savings: If you qualify for the right loan, with a lower fixed rate, you may save big money just in interest, long-term. This is usually one of the main reasons for doing debt consolidation.
  • Lower Monthly Payment: This allows a little wiggle room, which could be an even bigger benefit if you use the savings to build an emergency fund, invest, or add to your retirement account.

Consolidation Loan Drawbacks and Concerns

The major caveat of a debt consolidation loan is this: The more you need the loan, the less likely you are to get it. On paper, you have to look like you don’t need the loan. What I mean by this is you need a strong income, to have paid all your bills on time, and have excellent credit to qualify for a large (usually) loan with low interest rates. If you’re already struggling to pay your bills, or have missed payments, your credit is already taking a hit, which means you may only qualify for mediocre rates or low limits. In this case, the loan may not make sense for you after doing the math, because the savings just won’t be there.

  • Credit: You need excellent credit (score) to qualify for the best rates and larger credit limit needed to consolidate your debts for the best savings outcome. As far as after you’re approved, that new loan may drop your credit score temporarily for a few months, but it will go back up as timely payments are made.
  • Habits: If you decide to consolidate your debts with a loan, please do yourself a favor and close most of the accounts, so you don’t end up in the same situation later. The oldest accounts are the most sacred for credit reporting, so leave those open if it makes sense.
  • HELOC: If your unsecured debts are rolled into a secured loan, like a home equity loan, you’re gambling with your house, and it’s a very real risk if you’re unable to make the monthly payments.
  • Math: Does the math work out in your favor? If you didn’t do the loan, how long would it take you to pay off those accounts (including the interest rate), and what would your monthly payments add up to? If you consolidated them into a loan (get a quote), how much could you save, taking all those same things into consideration PLUS the length of the loan (how long you’ll be making payments). Does it still make financial sense for you to consolidate?

NOTE: Don’t be afraid to walk away from a consolidation loan if you start the process, but begin to question the wisdom, or if the rates are not going to benefit you.

Getting Creative with Debt Consolidation

Thinking outside the box about debt consolidation.

Before we get into the actual loans, let’s talk about a few creative ideas that we can incorporate that may help us pay down this loan faster or save even more money in the long-run. There’s no reason why we can’t combine a few different strategies found throughout this site, and guide, to achieve our financial goals. Let’s look at a few examples.

Generate some additional income by side hustling or selling unused or unwanted items around the house, and use that extra cash to:

  • put towards your existing loan principle (with the highest rate) to save on interest.
  • pay down an existing low-interest credit card balance to free up space for a balance transfer.
  • pay down other balances, reducing your debt-to-income credit utilization ratios, allowing you to qualify for a debt consolidation loan.
  • throw extra cash at a debt roll-up strategy, which will help you pay down debt faster and save the most money getting out of debt.

Personal Loans to Consolidate Your Debt

As mentioned above, taking out a secured loan, like a home equity loan (HELOC), puts your home at risk. A home equity loan is usually chosen for it’s convenience and low interest rates, and can be a good option for those that have a strong and stable income. However, even for those people, it’s important to realize that overspending may already be a problem for you, and even unintentional overspending can make or break it. And, don’t forget that life likes to serve up the unexpected — job loss, illness, personal loss, or other hardships, so I urge you to weigh this decision carefully.

There are some great loans to be found through peer-to-peer lending, and Lending Club is the largest in the nation. They offer loans up to $40,000, and their interest rates are competitive, although you will need a pretty excellent credit score to get your hands on them. They’re available just about everywhere in the U.S., but loans are limited to 36-60 month terms. Prosper is another peer-to-peer option, and very similar to Lending Club, but they do charge some additional fees.

Upstart is relatively new, and unique, as it caters to the college grads when it comes to peer-to-peer lending. They look at much more than just your credit report, considering your education and experience, among other things. Their APR’s are slightly higher, with loans ranging from 3k to 25k for a 3 year term (only term offered). If you need a larger loan than what these other online lenders offer, SoFi has personal loans from $5,000 to $100,000 with fixed rates of 5.95%-12.99% and you can choose 3, 5, or 7 year terms. No fees. You do have to use their AutoPay to get the lowest rate, but that’s a small price to pay when you’re saving on interest.

Personalloans.com is an easy way to apply for exactly what you want – long or short term and the loan amount. The rate will be based on the your creditworthiness, like most loans, but you will have many more options available to you through their network, including peer-to-peer, personal installment loans, and personal bank loans. This should give you a good idea of what you can qualify for, at up to $35,000.

We are not affiliated with any of the above-mentioned companies and highly recommend that you peruse their websites for details on the loan process, the fine print, fees, terms, rates, and other pertinent information before applying. Some of the best consolidation loans can easily be found online, so do your research before applying. It’s also in your best interest to know what your credit report and score say about you, so be sure to pull your reports to know what to expect.

More Debt Consolidation Resources and Tools

Debt consolidation is mostly applicable to those who can no longer maintain regular payments on one or more credit cards. The educational resources are here for you if you need some type of payment concession; a reduction of interest charges; a reduction of outstanding balances; or to confirm with certainty that bankruptcy is the right debt solution for you.

There are also free technology tools online to help you accomplish better budgeting and payment discipline.

Debt Roll Up (aka Debt Snowball) Approach to Paying Down Credit Card Debt

by 34 Comments

The Debt Roll Up process (often referred to as debt snowball) is simple to understand and implement. This method to pay down credit card debt requires commitment and discipline. The approach is straight forward. You simply pay more than the required minimum payment on one credit card until it is paid off.

Once you knock down the first account, you use the same amount of money you were using to pay the first card and apply ALL of it in addition to the minimum you are paying on card two – until it is paid off.

You then take the same amount you were once paying to card one and two and combine ALL of that money with the payment you were already making to card three until it is paid off.

You repeat these same steps until all credit cards are paid down to zero. In other words, you are rolling up you money to pay off each successive balance, or using additionally money to gain momentum on paying off the next debt until your last remaining debt is being paid off with the largest amount of money, like a debt snowball rolling down hill grows in size.

Many people have success with this method. In fact, after the credit cards are paid off, some will go on to apply the money that was being used to pay credit card debt and use it to accelerate the payoff on vehicles and mortgages!

The debt roll up strategy is used by someone with the monthly cash flow that supports an ability to pay roughly 20% more than the required minimum payment on the credit card that receives the first “roll up”, or “debt snowball” treatment.

Successful use of this strategy is not just about having the money in your monthly budget to support the debt payoff effort. It can often include making sacrifices.

How to Pay Off Credit Card Debt Quickly with Debt Roll Up

  • Changes in spending habits
  • How you think about money
  • Tracking daily spending
  • Curbing any tendencies to spend impulsively
  • Delaying gratification.

The use of a credit card, or any form of debt for that matter, can be looked at as “pulled forward demand”. You are buying something that you either cannot, or choose not to, pay for in full. Delaying purchases that can be put off or eliminated entirely will help you plan around the debt roll up strategy.

The key to aggressively paying off credit card debt using money from your available budget is not to create any new debt!

Here is a basic example graph of what a debt roll up strategy would look like with 6 accounts:

What a debt roll-up looks like.

Download the Debt Rollup Calculator Here (.xls file)

The CRN debt relief program is designed to offer debt solutions that involve one on one support, guidance and service. It is rare for someone implementing a debt roll up strategy to need to pay anyone for support. If you are working with a debt roll up strategy, and have a unique situation where CRN membership would be of value, call us and we can talk about it.

Otherwise: If your credit card and other debt is a problem, but you have room in your household budget to use the debt roll up method, you may benefit from joining a community that supports this approach. Check out some of the fantastic technology tools available for free!

Debt Roll Up became more popularized by Dave Ramsey and John Cummuta. Ramsey is likely responsible for the term “debt snowball” becoming the most familiar way debt roll up is described.

If you are a Dave Ramsey fan, have questions or comments about variations of working through a debt roll up process of your own, or simply want to share your successes with other readers, you are welcome to participate in the comments below.

If you are new to the CRN site and would like to get comprehensive information about different options for dealing with problem debt, we recommend starting your review of our free online debt relief program with: Introduction to Debt Relief.

Hardship Payment Plans for Credit Card Debt

by 229 Comments

What are bank sponsored credit card hardship payment plans? Banks reach out through the phone and with mailers in an effort to get accounts that have fallen behind back on track. Large credit card banks are willing to work directly with you shortly after you miss a payment.

Hardship payment programs are a bank’s loss mitigation effort for credit card debts. The larger lenders have well established and effective strategies that are often fair and measured to your ability to pay. The problem is… they only offer them to you when you fall behind.

I cover the many issues with missing payments, and hardship repayment plans in general, in more detail below. You will want to be aware of potential drawbacks before agreeing to the plan with your lender.

First I want to dig in to how and why banks offer to reduce your monthly payments, and that you do not have to wait for an offer to come to you, but can be more proactive in asking your credit card bank for help.

Talk to Your Bank About a Hardship Plan

The first step is to talk to your creditors about your situation. You may have already tried talking to your credit card banks about lowering your payment in the past. The hardship you explained to the customer service rep probably did not seem to matter. That is primarily because the person you are speaking with is generally not empowered to make any changes to your payments, even if they wanted to, if your payments on the account are current.

Your bank that was unwilling to work out lower and more affordable monthly payments with you when you were current is often willing to work with you if you have fallen behind.

Talk with your bank about getting a hardship repayment plan.

If you’ve missed credit card payments, you already know that banks start reaching out to you with phone calls, emails, and letters right away. Banks know that constant “reminders” that you are late with a payment increases their potential to get your credit card back on track with some type of payment. Many of the larger credit card issuers will reach out to you and offer lower monthly payments within days of missing a payment, while some banks won’t offer a lower payment option until you are a few weeks to a month or more late.

We have previously discussed how lower monthly credit card payments are available through consumer credit counseling services and companies offering debt management plans. More banks began making direct offers to account holders when payments were missed after the economy began dipping into recession. The payment reduction a bank may offer directly to you comes from their willingness to reduce your interest rate temporarily, or over the life of the repayment plan.

You Do Not Need to Send a Hardship Letter

Drafting and sending a hardship letter to your credit card bank is typically unnecessary. Hardship letters are something more consistent with what you would include when you are looking at a home mortgage modification, a short sale, or qualifying for some type of benefit or adjustment on your home loan. Qualifying for a hardship program with credit card debt is literally just a matter of a phone call, and qualifying in your credit card banks system for the payment reduction.

If you bank representative asks you to send in something in writing that outlines your hardship, it is typically not a problem to send them what you would convey over the phone, but detailed in a letter or email.

The vast majority of us will be able to answer one of our credit card lenders frequent calls, or place a call ourselves, in order to discuss lower monthly payment options.

How Temporary Credit Card Payment Plans Work

Hardship repayment plans will be different from one bank to the next. How late your payments are, how much you owe, your household expenses, all will contribute to what type of lower payment the bank will offer you in one of their internal hardship plans.

Bank-sponsored lower monthly hardship repayment plans are accomplished by reducing your credit card interest rates.

Some hardship payment options have a temporary timeline. The temporary plans will often last as little as 3 months and go as long as 12 months. Your payment is reduced because the creditor is willing to lower your interest rate for several months while on the the temporary hardship plan. Interest rates may be as low as zero percent and typically will not exceed ten percent.

Your bank will often waive or eliminate any fees and penalties that were charged to your account when you are repaying through one of their hardship plans, but only after you make several payments on time.

Some, but not all banks, will allow the account to stay open when you are on a temporary hardship repayment plan. This would mean you could resume using the card when the temporary plan is over and you successfully made all of the payments.

The temporary reduced payment plans are useful to someone who is only experiencing a hardship that is not expected to continue for any significant period of time.

How Long Term Hardship Payment Plans Work

Longer term hardship repayment plans offered by credit card lenders did not become popularized until the economy started to take a dive several years ago. Those banks offering long term plans, at the time of this writing, will close your account, freeze your interest rate at between zero and 10%, and amortize your monthly payment using your current balance. Your new lower monthly payment will be the same every month over a 60 month time period (federal regulations prevent these plans from exceeding 5 years).

Some banks offered long term plans during the worst of the recession, but now only offer temporary plans.

These “life of the balance” repayment programs closely resemble debt management plans available through a nonprofit counseling agency. Some of the differences between using a credit counseling service, and setting up the hardship plans yourself will be:

  • How many creditors you will have to contact in order to achieve the same result.
  • You may not be able to get the same results a counseling agency would get for you.
  • The credit counselor will only have to get your account details and your income and expense information from you once.

If you have many credit cards, and some of them do not offer the longer term hardship plans, you are often better off getting the lower monthly payments through a credit counseling service, rather than making all of the efforts on your own. And because talking to a certified counselor to get an exact quote of what your credit card payment will get lowered to is free, and you DO NOT have to be late with payments, I recommend you speak to one at 800-939-8357, ext 1.

Getting Approved For a Repayment Plan

Approval for reducing your monthly payments is not automatic just because you are late with payments. You can be turned down, and for predictable reasons. Your bank is going to want to discuss your ability to make any lower payments, and this will typically involve answering a series of qualifying questions. The information you will be asked for will focus on your monthly income and household bills.

Be ready to answer questions about what you pay for rent or a mortgage, how much you pay for phone and cable (cell phones too), utilities, groceries etc. How you answer these budget questions will impact what plan you qualify for, or if a reduced payment plan will be available at all. If your monthly cash flow shows money is too tight after you pay typical living expenses, you obviously cannot reasonably commit to any plan, no matter how good the terms.

Your bank, who you assume wants nothing more than to collect on what you owe, may actually tell you that they don’t want your money!

If your income and expense exercise shows you have too much money after your regular bills are paid, the lower payment plan your bank offers may not be as good, or may not be made available to you at all. Mainly due to the fact that you do not appear to them to be in a hardship situation using their preset criteria.

There are many situations I see where your bank may not offer you a hardship plan, but would allow your account to be enrolled in a credit counseling plan, which accomplishes the same long term payment reduction.

Some banks that offer the 5 year long hardship repayment plans may require that you recommit to the plan every year.

Additional Benefits to These Plans

Depending on how many months you have missed payments, your creditor may agree to “re-age” the account after 3 or more timely payments on the plan. This means they will bring your account current in their reporting to the credit bureaus. This takes the sting off of the 30, 60, 90 and longer late pays, that may already be on your credit report, and prevents them from affecting your credit in perpetuity. There are limitations to the re-aging benefit. Once your account is 3 months late, some banks don’t re-age.

If your account is not charged off (typically 6 months late), you can still get lower monthly payments from banks offering them.

As a general rule, whether you work through a credit counseling service, or work directly with your bank(s) to set up a hardship payment plan, it is best to do so before you reach 90 days of consecutive nonpayment.

Warnings About Credit Card Reduction Plans

I already mentioned how these payment reduction plans are generally not available to you until you miss a payment (depending on the credit card lender). That can have credit reporting impacts if you allow an account to go more than 30 days late. But here are some warnings to consider before you try to get set up with a reduced payment, or call in to see if you qualify.

  1. If you make calls to your bank asking about a payment reduction plan, you’re basically telegraphing to them that you are at risk of missing payments. This may result in the bank lowering your credit limit to what you currently owe, or possibly closing the account. If you still have the means to make your normal monthly payments, calling your creditors to discuss your hardship, or any available lower monthly payment options, is not recommended. The hardship repayment strategy should be reserved for the banks and accounts you are already late with, or know that you soon will be.
  2. Some of the smaller banks, credit unions, department store cards, and fuel station credit cards, do not offer hardship payment plans to you directly, but do generally offer the lower monthly payments to you if you go through a credit counseling service.
  3. In nearly all instances of banks offering credit card hardship payment plans, whether temporary or long-term, they will want the payments to be pulled through electronic access to your bank account on the same day of the month. So, you must be prepared for those payments being pulled (always leave yourself a balance cushion). If the money is not in the account, causing the payment to fail, you may not get another chance at it, and your payments can revert to the higher interest rates.

The biggest concern you should have with starting a hardship repayment plan directly with your creditors is the same drawback to getting lower monthly payments with a credit counseling service – the inflexibility. You must make your monthly payment on time, all the time. If you miss a monthly payment on either of these plans, it results in losing the lower payment benefits, and the lower interest rates. The worst part of falling off of a payment plan will be the lost time and money that gets wasted on a strategy that did not relieve your debt problem.

Credit card debt repayment hardship plans and getting them set up with your bank.

Credit Card Hardship Payments are Not Flexible

I mentioned that any credit card payment plan you agree to will require you to never be late in order to keep the benefits. It is rare to get your bank to forgive any payment failure and keep your payment reduced. But you can often be more flexible with how you use hardship payment programs with your different credit cards. You can be deliberate with your planning from the outset.

A good example of this would be enrolling one or more of your higher balance, or higher interest cards, into a hardship plan while maintaining normal payments to others. Due to passage of the CARD Act, creditors can no longer arbitrarily raise your interest rates based on your payment performance with other creditors. They can only raise your rates if you miss payments on your account with them directly (and after 60 days). But be careful with this, as it would not prevent them from lowering credit limits if, during a periodic review, they see that you are behind in payments to other creditors.

Conclusion

Creditors often will not set you up in lower payment plans, or offer any form of payment concession, more than once over a set period, or perhaps only once… ever (though you can often negotiate and settle the debt for less after dropping the hardship payments). A temporary credit card hardship plan today may keep the bill collector at bay – but be sure you have a real plan for your debt and not just some one time band-aid.

You may have multiple credit card accounts that you are trying to juggle. You can use a creative and flexible approach to managing your bills through selectively enrolling only some accounts in creditor-sponsored hardship plans. Alternatively, combining lower monthly repayment plans with budgeting and money-saving strategies can also work as a debt solution for the right person. There are also instances where I have worked with people to settle some credit card debts, and then do a hardship payment plan on others accounts.

How a Credit Card Balance Transfer can be Used For Debt Consolidation

by 15 Comments

If you have landed on this site because you are searching the internet looking for credit card debt relief, you may already be familiar with a term we describe below called the credit card “balance transfer boogie”. By familiar, I of course mean you have already danced to that tune. Many people looking for debt relief and credit card payment solutions have been there and done that.

If, by chance, you’re looking for debt relief options and still have the ability to effectively use credit card balance transfers in a manner that truly makes your monthly payments more affordable, it’s worth talking about. You can take credit card balances that have high interest rates, and transfer those balances to a lower interest credit card you already have open, or apply for a new card with a low introductory interest rate.

Consolidating credit card debt with a balance transfer.

Concerns when considering a credit card balance transfer:

  1. If you need to open a new credit card to transfer balances on to it – your credit needs to be in good shape.
  2. Your list of accounts and amounts owed are such that you can transfer balances from high interest credit card(s) to lower interest account(s), get the lower payment, that then leaves you money to put in savings every month.
  3. You should be certain that you can maintain the lower credit card payment until the balance is paid off before using this strategy. This would mean that you consider your income to be stable.
  4. You should put the credit card(s) that now have a zero, or lower balance due on them, in a drawer and not use them until you are out of credit card debt.

Spoiler alert: Credit cards with recent balance transfers made to them, while negotiating a settlement for less than the balance owed on the card, is not a great idea. It can be done, but often at a higher cost that can be planned for.

The Credit Card Balance Transfer Boogie

This would be when your special low-introductory credit card interest rates end, and the increased payment that comes later causes either the inability to pay, or finds you looking to make more balance transfers. This dance can end similar to a game of musical chairs where you find there are no balance transfer options left after the music stops. If you have already, or later find yourself dancing to the tune of “the balance transfer boogie”, you have likely either not been honest with yourself about your credit card debt; not maintained a commitment to reduce your debt; or have experienced an unfortunate financial setback.

As discussed in a previous article about debt consolidation, there are far less opportunities to consolidate credit card debt given today’s economy. Likewise, there are much more limited opportunities to play the credit card balance transfer game. Banks have returned to risk adverse lending standards. You may need to already have an open and low interest credit card account with the room to transfer higher interest balances on to it. You need to be able to transfer enough of the balance from higher interest accounts to get the payment relief you need.

If your credit is tarnished, or your current debt-to-income ratio and credit utilization is high, you could find it difficult to open a new account with a credit limit that would provide enough lower payment benefit after balances are transferred.

Using credit card balance transfers as part of a debt relief tool, like the debt roll-up strategy, requires discipline. The discipline will be to not use the credit cards at all. Not the credit cards that now have a zero amount owed after you moved the balances, nor the accounts you transferred balances to.

Unsecured credit markets froze up pretty solid at the start of the recession. This portion of the consumer lending system has thawed a bit at the time this article is being published. The credit card balance transfer options of a few years ago, the ones that allowed for 25k credit limits to transfer balance to, won’t likely return for most people.

If you have questions about using, or having used balance transfers, to manage credit card debt, or you have a balance transfer story to share, post in the comments below. Include any of your favorite balance transfer cards with the best deals, and any offers that gave the worst deal.

Best Debt Solution Options – An Overview

by 51 Comments

Because the options available to eliminate problem credit card debt are limited, I often find it more productive to use a process of elimination to help determine what would be the best debt solution. Most readers will find they can narrow down the list of debt relief options to one, or perhaps two, using the same process I have used during one on one consultations for more than a decade.

People tend to have a bias toward a particular debt relief solution, or even contempt toward some of the options available (cough… bankruptcy). Researching and choosing the option that will work for you is not a great place for emotion, or even preconceived notions. There are tens of thousands of websites, and probably more than a few thousand finance writers out there, so no shortage of coverage about debt relief. Most suggest avoiding bankruptcy at all costs, which is just silly. But I cover all of your options below.

There is also an extraordinary number of web sites that raise HUGE concerns about debt settlement, but provide little detail about settling credit card debt, or the benefits. Perhaps they do not know much about it, or are too lazy to cover the topic in the detail needed to inform their readers, or maybe it’s a little of both.

I suggest checking your emotions and biases at the door. The numbers are unemotional and without bias, so I suggest working with your household income and expenses first. Using your current monthly cash flow as a qualifier will help you to eliminate debt relief options you cannot afford.

Along the way, you may recognize that some debt solution options offer you a way to accelerate getting out of debt and moving on with your financial future more quickly.

Calculate Your Debt & Monthly Cash Flow

The following briefly summarizes how to weigh your current income and monthly cash flow and compare your financial ability with legitimate options for debt relief.

Add up all sources of income you have on a monthly, quarterly and yearly basis. Next, add up all of your debts. Include all unsecured debts like credit cards and all secured debts like a mortgage or car payment. You will also want to itemize all monthly expenses such as insurance, utilities, groceries etc. Don’t forget about quarterly and annual expenses such as property taxes. You can use the income and expense sheet I do.

Tip: You cannot fully grasp the best way to resolve your debts until you have completed this math.

When you have completed adding up your bills, separate the monthly payments you may be making toward unsecured accounts (like your credit cards) then add up all other monthly expenses and calculate the total. How does the total amount of monthly expenses without credit cards and other unsecured bills (personal loans, medical bills) stack up next to your monthly income? What amount of money is left over after subtracting your monthly bills from your monthly income (remember – do not include credit card and other unsecured debts)?

What are some of your debt solution options when it comes to debt?

The amount of money you have left after all typical necessities are taken care of can be referred to as your debt solution fund. The amount of money in your monthly debt solution fund is what you should start with when evaluating which debt option can best apply to your unique set of current circumstances – weighed beside your personal and family goals over a 2 to 5 year time frame.

Snowballs and Roll Ups as Your Debt Solution

This debt solution works when you have a dependable and predictable income combined with a disciplined monthly budget and spending outline that you can confidently commit to.

Establish if you can consistently pay 20% over your required monthly minimum payment toward just one of your unsecured debts each and every month. If you can do this consistently while maintaining all of your other monthly obligations then a debt roll-up (sometimes referred to as debt snowball, debt stacking, debt avalanche) approach can work for you. Review the Debt Roll up Report and create a graph similar to the visual chart you see. If you have the monthly cash flow to apply this strategy on debts you are still current with, you may be surprised with how quickly you can pay off all of the credit card debts you list. If this debt solution can work for you, it may motivate you to take the same approach to quickly pay off car loans, student loans, or even a mortgage – once you completely pay off higher interest credit card debts!

There are innovative technology companies that come up with really great online tools to help you in your efforts using a debt roll up strategy. Many have several different ways they can work with you. You can automate your snowball debt solution and simplify the process. Use their smart phone apps and more. Check some out if your finances have not reached a place where debt roll up has to be crossed off the short list of debt relief options.

Credit Card Consolidation Loans for Affordability

This debt management option keeps you in control, and is a non-confrontational approach to help you get out of debt quickly. Credit card debt consolidation works when you are able to qualify for a lower interest loan that is large enough to pay off your higher interest debts like credit cards.

With the credit card consolidation loan comes the benefit of a lower monthly payment and the convenience of sending money to one lender instead of several. Using consolidation as a debt solution to resolve a high debt load is best when you have a dependable source of income and can keep your commitment to pay down debt while not creating new debts.

Consolidating credit card debt into a lower interest loan with a single payment can solve a monthly budget shortfall. This should create a monthly cash surplus that can be used to pay down the consolidation loan quicker. As an alternative to paying the debt down quicker, you can also set aside money in savings so that you can pay cash for unexpected expenses instead of using credit. If your credit card debt consolidation effort does not yield extra cash flow for savings each month, and you resort to using the credit cards again to cover monthly expenses, you may soon find credit card consolidation has only given you a temporary debt solution. You may in fact be reading this after learning this first hand.

Debt Consolidation Through Credit Counseling

You have to be able to qualify for this debt solution option. Not with a decent credit score (your FICO will not matter) and debt-to-income ratio, like when seeking debt consolidation loans. You need to make sure your creditors participate in these repayment plans (most credit card lenders do). It is a method for consolidating credit card debt into one payment through a DMP (debt management plan) traditionally available through a nonprofit credit counseling agency. Run your monthly budget numbers with a certified counselor over the phone and see if this debt solution would work for you.

Will your current cash flow allow you to pay roughly 2% of your current credit card balances monthly? If yes, look into consolidating your bills with a credit counseling agency. You can lower your monthly payments through credit card interest rate reduction. There is a great deal more to learn about debt management plans offered through credit counseling services. Additional information can be found in the related debt consolidation sections in the above menu.

If you would like to speak with a licensed counselor at a nonprofit credit counseling service agency, please call (888) 317-8770. It is a free call and you will walk away with an exact to the penny quote of what your consolidated monthly payment will be for all of your debts in the plan.

Settling Credit Card Debt for Less (Negotiations)

This strategy requires you to save up money and settle your debts (credit cards and personal loans mostly) over a reasonable time frame in order to keep from filing bankruptcy.

Can you accumulate money from monthly cash flow and other resources in order to raise a portion of your current credit card balances over the course of a set period of time? If so, negotiating lower balance pay offs with creditors can work for you. The process of credit card debt settlement is predictable, for the most part. A large portion of this website is dedicated to helping you better understand this particular debt relief option. Debt settlement is not complicated, but it does require you to be informed, and to be a participant in the process. Whether you negotiate the deals yourself, or request professionals to settle credit card and collection accounts for you, take the time to understand this option thoroughly.

Debt settlement candidates are encouraged to begin this process by completely reading all of the debt settlement content. Start with our simple settlement guide, then follow the links and use our search bar tool in the sidebar to further your negotiation education. When finished, you will know that you should try to raise roughly one fourth to half of your debt totals over the shortest amount of time possible.

Debt settlement is the more confrontational approach to debt relief, but it can help you avoid bankruptcy, and the quicker you are able to negotiate and fund settlements, you can completely avoid being sued for collection.

Filing Chapter 7 & Chapter 13 Bankruptcy

This option is regarded as the nuclear debt solution – the last resort. Filing chapter 7 or 13 bankruptcy can help you get freedom from debt and more immediate relief than other options and is legally binding on your creditors:

Can you qualify for chapter 7 bankruptcy given your states income means test?

Many people will look at all other available options before finally contacting an attorney about bankruptcy. Many readers are here because they want to avoid bankruptcy. At the conclusion of your full review of the debt relief options we have laid out for you, you may learn that a chapter 7 bankruptcy provides the most immediate and lowest cost relief from your debt troubles.

You should speak with an attorney that specializes in bankruptcy to learn more about how this option can benefit you. Most bankruptcy attorneys will offer an initial consultation at no cost. In fact, virtually every form of debt solution you look into will have someone available to talk with you about it for free. There is really no excuse for not looking into each debt relief option – that you can afford – by reaching out to professionals.

An uncomplicated chapter 7 bankruptcy can cost between $1,500 and $2,000. Let’s assume your bankruptcy will have a total cost of $1,800 from start to finish. It’s affordable, and if you simply can no longer meet your required monthly minimum payments, or have already missed credit card payments, you will typically focus on debt settlement or bankruptcy as a workable debt relief solution.

Combining basic math with all that you will learn will put you in the best position to make informed decisions about options for debt relief. I already mentioned that there is a great deal of misinformation and bias about different debt intervention options. But when you distill your current situation down to what you can do vs. what you heard you could or should do, you can better filter out incomplete information and the biases that abound.

The Credit Score Bias to Avoiding Bankruptcy

Many will have a concern about debt solutions and the credit report and score impacts of each. You may be wondering how long it will be before you can access fairly priced credit products again.

Combining credit reporting and scoring concerns with your current financial abilities (the math) may cause some readers to rule out bankruptcy. But once you understand the cost benefit of bankruptcy and dispel some of the myths about how different debt relief strategies affect your credit, you may find chapter 7 bankruptcy to be a mathematical winner.

You may also learn that bankruptcy would actually provide you access to fairly priced credit products in a time frame consistent with your goals, and sooner than using either a credit counseling service, or by settling your credit card debt.

Not Choosing a Debt Solution – Doing Nothing

If you’re not paying debts now, or soon will not be able to, doing nothing at the moment can be a temporary and necessary part of your debt solution plan.

Not being able to come up with a realistic and workable plan to tackle debt is not that uncommon. There are many situations where doing nothing for a few months, while you wait for your situation to stabilize, will make perfect sense. Doing nothing is not a debt solution, but can often be better than committing to a debt relief path now, only to be forced to leave it for another in the near future.

Two examples where doing nothing with your credit card debt at the moment could make sense:

  1. You were laid off or lost a job, and are currently looking for work. If you return to work soon, you would be able to qualify for credit counseling or have the ability to accumulate money to settle debts that went unpaid while you were unemployed.
  2. Your medical concerns have created large debt. Your condition has not fully stabilized, which may mean the full extent of the medical bills is not yet known.

Debt solution options for much needed relief can be simple and straight forward. Some debt relief solutions require you to meet a set of qualifications. Other debt options methods give you flexibility. There are non-confrontational approaches, and ways to get out of debt quicker that require more of your personal participation. Our website provides detailed information and resources for evaluating and assisting you with all of the above debt solution options.

Top Drawbacks to a Debt Management Plan

by 12 Comments

In my first article on credit counseling, I outlined the many benefits you get from working with a credit counseling agency in a debt management plan. But there are also drawbacks to enrolling in this form of debt consolidation. And the concerns are not minor.

There are many debt relief options discussed throughout the CRN website, and each should be weighed by the benefits and drawbacks, so you can set beside what you’re able to afford to commit to.

Many people fail and drop out of their credit counseling debt management plan (DMP). Additional financial pressures that can come along after you start a DMP are certainly a leading cause of having to cancel out of a plan, but over the years I have been working with people who drop out of credit counseling, I have formed the opinion that about half of them should have never even signed up.

Understanding why you may want to avoid a debt management plan, and a comprehensive understanding of the alternatives available to resolve credit card debt, can help you avoid becoming a debt consolidation statistic.

Credit Agencies to Help Manage Credit Card Debt

Credit counseling is one of the least confrontational ways to get credit card debt relief. It is the “safe” thing for financial professionals to reference online, on TV and radio, in print, or in person. The nonprofit debt consolidator helps you pay your full balances back to creditors, which is the right thing to do when that effort does not cause harm to you or your family.

There is also the sense of obligation for paying back debts. But blanket encouragement to seek out advice from consumer credit counseling services is, in my opinion, done out of laziness and/or a complete lack of understanding of how a debt management plan is structured with limited application and suitability.

Roughly 70% of people who call in to speak with a credit counselor cannot qualify to be served by a credit counseling agency.

The formula I provided in the first article in this series, and that is repeated a bit differently below, can show you in less than 5 minutes that credit counseling is not a good option for you, or how your budget is a good fit for using a debt consolidation plan to get out of credit card debt.

Mainstream media and financial pro’s waste the time of 70% of consumers they send to a credit counseling company. That waste is also enjoyed, at the same rate, by the credit counselors picking up the phone on the other end.

I can understand why people lean toward credit counseling instead of facing the reality that bankruptcy could be a better option, or that you may have to gut-out dealing with debt collection calls for a while, until you can settle your credit card bills. But I want to help you avoid wasting time and money committing yourself to a debt solution that can be identified upfront as not workable for you.  So… let’s dig into credit counseling program drawbacks.

Missing Payments in a Debt Management Plan

If you agree to a monthly consolidated payment and start working with a credit counseling agency, but you later are unable to pay on time, you can lose the benefits you get from being enrolled in the plan. After missing a payment to the counseling agency, you may be able to get a creditor to give you a second chance, but not all will. Third chances are very rare.

If you lose the lower payment benefit, you may find you are back where you started, but with somewhat lower balances owed on the accounts – depending on how long you were making payments.

Disadvantages to a debt management plan with a credit counseling agency.

If you make your new lower monthly credit card payments in your DMP for any significant period of time, and are suddenly unable to continue, you will have wasted time and money – both are a precious commodity in debt relief. Wasting months or years in debt consolidation that ultimately does not work can be avoided.

For example:

You have $20,000.00 in unsecured debts and you are able to get your monthly payment down to $400.00 by enrolling in a credit counseling service. You make payments for 6 months, but then something unexpected occurs preventing you from continuing with the plan. You will have paid $2,400.00 over those 6 months. That money could have been used to help fund one or more negotiated settlements, or more than covered the costs of a chapter 7 bankruptcy filing.

Enrolling Collection Accounts with a Nonprofit Agency

Depending on how long an account went delinquent before enrolling with the credit counseling service, and whether your account was with a debt buyer at the time you started your DMP, missing a debt management plan payment may mean losing interest rate benefits and having them reapplied retroactively.

I do not advise enrolling charged-off credit card debts (typically accounts that are 180 days past due) into a credit counseling service unless, or until there are more conforming account treatments when accounts are already placed with outside collectors. There are clearer benefits to using debt settlement as a method to resolving debts placed with a collection agency or sold to a debt buyer.

It is also important to note that not all credit counseling agencies train their counselors to understand collection accounts. Credit counselors are certainly not trained to help you understand alternative and creative ways to manage collection accounts at the same time you are dealing with accounts not in collection. This fact leads me to the next warning.

A Debt Management Plan is Not Creative

Debt management plans can be inflexible.

They fit into four corners and cannot step out. Depending on your perspective, this fact can be seen as a major strength, or a huge weakness. I see it as both.

The limitations on who can budget to repay their debts through a counseling agency make the lines less blurry for you, and for the counselors that pick up the phones at these companies when you call in.

  • A counselor cannot enroll you into a debt management plan when it is obvious you run out of money before you run out of month (income is not enough to cover your monthly expenses and pay back your unsecured debt – like credit cards).
  • This means calling a credit counselor can help you learn whether you qualify for a DMP, or can quickly cross it off the list of your available debt relief options.

There is nothing wrong with not qualifying for a debt management plan with a counseling agency. Knowing it won’t work for you means focusing on something that will. Banks have preset criteria they give to the credit counseling companies who screen your income and budget to fit the lenders standards for payment and interest rate reduction. This is an unfortunate inflexibility.

  • The preset criteria that are programmed into an agencies computer system only allow so much left over money each month.
  • One bank may say they will reduce interest on their credit card to 6% if you have $300 left over after all bills are paid, while another bank won’t lower your interest rate much unless your budget shows you have $150.00 dollars left at the end of the month.

If you are only marginally suited to sign up for a credit counseling services debt management plan, or have a fluctuating monthly income that makes your monthly budget more like guess work, then credit counseling repayment plans may not be right for you. Going ahead with one, when you are only left with something like $100.00 each month after your bills are paid, means you are one flat tire away from failing in the plan.

Should you still speak with a counselor and do a full income and budget analysis? Yes! Why?

  • Its free. Call 888-317-8770 to speak with a counselor today.
  • There may be special reductions available with some of your creditors that you would not have learned about otherwise.
  • There is no other way to get an accurate lower monthly payment quote.

With very little time invested, you could learn that credit counseling DMP has solid potential to help you with your debt, or end the call knowing that the option cannot work for you – allowing you to cross it off the short list of debt solutions. You can save yourself (and a credit counselor) time by using the example I gave in the first article on credit counseling to determine if your budget and bills are just too far gone.

The counselor you speak with is pretty much only going to offer details about what a debt management plan will look like for you. They are not allowed to cross into other debt solution territory like bankruptcy and debt settlement. So do not rely on them for feedback on your remaining options if a DMP cannot be offered to you.

Can a credit counseling service help you?

Credit counseling services have worked for millions of people over the years. There are many hundreds of thousands of people succeeding with a debt management plan while you are reading this. All of this detail should help you understand what credit counseling is, how credit counseling works, and whether it is an approach you can use to get relief from your debt. If you reach out to speak with a credit counselor at this point, it should be because you know you can budget between 1.7% and 2.5% of your combined credit card balances (and other unsecured debts), as your new lower monthly payment.

If you are faced with a situation where something has got to give in order for you to resolve your debt, you will find limited options. These options consist of the kinder, gentler, and non-confrontational approach of credit counseling, all the way to bankruptcy. A good place to start learning which debt solution can work for you is speaking with a certified credit counselor.

If you would like to connect with a credit counseling services provider with high standards for customer satisfaction call 888-317-8770 and speak with one now.

If you have questions or concerns about working with a credit counseling service, or are working with one now, post in the comments below for feedback.

What kind of debt relief can you afford?

by Leave a Comment

Is your current monthly cash flow either now, or in the near future, not enough to meet your monthly debt obligations while allowing for a set amount of savings taken from income each month? If not, you are currently, or soon could be, in a financial bind.

What can you do about it? What is the right debt solution?

Providing an answer to these two critical questions often requires a detailed individual analysis that is best delivered one on one. That said, here is a list of general questions and criteria to help you determine which path is most suited to your specific set of circumstances when starting on your journey to healthier finances.

Can you consistently pay 20% or more over your minimum payment toward your unsecured debt each and every month? If yes, a debt roll up program (sometimes referred to as debt snowball) can work for you.

Can I consolidate my credit credit card and other unsecured debt into one debt consolidation loan?

The goal with debt consolidation is to take multiple higher interest credit card debts and consolidate them into one loan, with one payment, at a lower interest rate. In today’s tightened credit markets, it is increasingly difficult to get approved for a debt consolidation loan with major banks, especially when already carrying too much debt. If you have a credit score of 660 or higher, you may be able to qualify for a peer to peer loan through LendingClub. I will have more on LendingClub in an upcoming post.

Will a credit counseling service’s debt management plan work for you?

Can you consistently (without any skepticism) pay roughly 2 to 2.5% of your current credit card balances monthly? Can you commit to doing so for the next 5 years? If yes, look into credit counseling where you can lower your monthly payments through available interest rate reduction programs.

Here is a simple tool you can use to calculate what your debt payments are just making the minimum payments compared to the average lower payment with credit counseling. Compare the monthly payments and time it will take to be credit card debt free.

Will a debt settlement plan work for me?

Can you identify sources of funds in order to raise approximately 50% of your current balances over the course of a set period of time? If so, debt settlement can work for you. If not, look into bankruptcy.

Typical sources of money you can seek in order to fund credit card debts you settle:

  • monthly savings
  • supplemental funds from home equity
  • retirement accounts (IRA, 401k, etc.)
  • insurance policies or annuities
  • sale of unneeded vehicles or household items
  • private assistance from friends and family
  • side jobs
  • tax refunds

Should I File Bankruptcy in order to shed debts I cannot afford to keep current?

Can you qualify for chapter 7, given your states median income means test? If so, will chapter 7 force the sale of your home or other items of value that could have been sold and assisted in funding settlements in the prescribed debt settlement program time frame thereby allowing you to stave off filing for bankruptcy? Consult with an experienced local bankruptcy attorney and find out.

Bankruptcy is too often incorrectly considered a consumers last resort when dealing with problem debt. For many, it will prove to be the most obvious solution and option of first resort. Chapter 7 bankruptcy provides the most immediate relief and the quickest path to a financial fresh start.

You need to learn how each of these options fits in with your current financial ability and you’re future goals. Choosing the correct path at the beginning of this journey could mean the difference in reaching your destination, or remaining lost in a jungle of debt.

Anyone looking for expert feedback about the direction you can take to resolve debt, with the income and expenses you have to work with, can post in the comments below for feedback. You can also call me for a consult at 800-939-8357, and press option 2.