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Credit cards debt and consolidation of debt

Are your credit cards maxed out? Worried how to pay off bills? Getting worrying letters from creditors? Are you going to lose your home? Well, these are the questions people when they find themselves in deep trouble with finances. Unplanned spending, loss of job, illness in family and unexpected expenses are the common reasons to get one get into deep debt problems. Now that one has got into credit card debts and other forms of debts, there are ways one can follow to get out of these financial problems.

The options, depending on the level of debts or loans outstanding and level of discipline, are:

• Self control and budgeting

• Consolidation of all debts into one debt consolidation loan

• Credit or debt counselling from reputed organizations

• Bankruptcy

Self control and budgeting:

One can exercise strict control of money matters and by following strict discipline in spending, can get out of debts in course of time. First a list of “must” pay bills need to be generated. The “must” pay would normally include mortgage payments if any, rent, car payments, insurance payments etc., Then a list of expenses that can be avoided is to be generated. This list would normally include entertainment expenses, restaurant expenses, outside lunch during office days, dinner expenses etc., Cancel all unnecessary credit cards. Based on the necessity, a priority list of spending has to be made. Now comes the acid test. Check whether you can balance the budget with your income. If the gap is narrow, then revisit the list of expenses and bring the income and expenditure to level. Discipline in following the prioritized list is a must.  Next is to consider opportunities for savings each month. These savings should go towards clearing high interest rate debts or loans.

In doing the self disciplined approach to manage the debts, one may still get letters from creditors or even calls from creditors. You can contact the creditors and request them for time to pay off the loans. Explaining the situation to creditors may work. Prevent the creditors from handing over the debts to a debt collection agency. It is possible that you may already been facing problems from debt collectors. Per Fair Debt Collection Practices Act, debt collectors may not call you before 8 AM and after 9 PM. Debt collectors may not harass you, make false statements, or use unfair practices when they try to collect a debt. You can send a written request not to call you. Collectors are expected to honour your request. Collectors also cannot call you at work, if your employer does not want you to be contacted.

Consolidation of debt

With interest rates being low, as is now, it makes sense to look for a consolidation of all debts into one debt consolidated loan. The main advantage of a debt consolidation is that just one cheque only need to be given to the creditor. The debt consolidation agency will pay off the earlier debts and offer one consolidated loan to you.  The lower interest rates will save you some money each month and this extra money can be used to pay off debts soon. Invariably if you own a home on which mortgages are being paid, then a debt consolidation loan can be taken against the equity being held on the home at that time. Home equity loans are offered and this can be availed. You can go online and find sources that offer debt consolidation loans at lower interest rates and apply online. Even a second mortgage can be thought of, if offered.

Credit Counselling

Contacting credit counselling service should be resorted only if you are not able to create a workable budget or if you cannot plan a proper repayment to your creditors. It is possible for creditors to accept a reduced repayment plan only if you sign up with reputed credit counselling organizations. In these plans, you deposit money each month with the credit counselling service. One of the important requirements for these types of plans is that you should not apply for any other types of loans as long as you are participating in these types of programs.

A successful repayment plan requires one to make regular payments without default. In most circumstances, the repayment plan would extend to 48 months. There could be charges for the credit counselling service to be paid monthly or there could be none. These types of charges cannot be avoided.  As mentioned above, strict discipline need to be exercised over expenses as any default in debt repayment will affect credit worthiness very bad. A debt repayment plan takes the stress out of one person but the responsibility still rests with that person only. Being in a debt repayment plan will not change the status of credit report. Creditors will report to the credit bureau that you are in a debt repayment plan. Unless the debts are paid back as per plan, the credit score will go from bad to worse. On the other hand, if repayments are paid on time, one can get credit during the later part of tenancy of the debt repayment plan.

Loans which are secured are not included the in the debt repayment plans. That means if you have a loan outstanding against your car or home, these will not be covered under debt repayment plan. One has to make arrangements to repay monthly instalments to these types of secured loans. These payments have to be made directly to the lenders of secured loans. Most auto financing contracts would enable the lender to repossess the automobile if one is in default of making payments. There is no notice period in these types of loans. If the automobile is repossessed, then you have to pay back the balance of the loan, all expenses for storage and towing to get back the automobile. If one finds it difficult to make payments towards the automobile, it is worth selling off the vehicle and pays back the loan. At least this will not harm the credit report.

In the case of non-payment of mortgages, then it is better to contact the lender and explain the situation. The lender may work out a plan for reduced monthly payments if the financial problem is a temporary one. There could be additional charges in situations like this. A housing counselling agency can be contacted if a workable solution cannot be arrived with mortgage lender. Governmental agencies are available that can come to the help of housing counselling. You can contact the nearest agency and seek their help. Do not let home be repossessed by the mortgage lender. This should be last resort if nothing else works out. 

Bankruptcy

This should be the last option one can think of. A bankruptcy stays on credit report for 10 years. This will make availing further loans impossible. It even makes it impossible to get a job. Individuals who follow the bankruptcy rules receive a discharge-a court order that says they do not have to repay certain debts.

There are 2 types of bankruptcy – Chapter 13 and Chapter 7. Each must be filed in federal bankruptcy court. There are fees associated with filing of bankruptcy. Attorney fees are additional. Chapter 13 allows persons with a steady income to keep property, like a mortgaged house or a car. Under this the court approves a repayment plan that allows one to use future income to pay off debts over a pre defined period of time. The property will not be surrendered. After all payments are made, a discharge is issued by the court. This information will stay in the credit report for 10 years. Chapter 7 bankruptcy allows liquidation of all assets except automobiles, work related tools and some household furnishings. Court may appoint an official or a trustee to dispose off assets. After the debts are cleared a discharge of debts will be issued by the court. Chapter 7 discharge can be given once in 6 years only.

Both types of bankruptcy may get rid of unsecured debts and stop foreclosures, repossessions, shut-off of utilities and debt collection activities. Both also provide exemptions that allow people to keep certain assets. But these exemptions may vary. Also personal bankruptcy usually does not erase child support, alimony, fines, taxes, and some student loan obligations. And unless you have an acceptable plan to catch up on your debt under Chapter 13, bankruptcy usually does not allow you to keep property when your creditor has an unpaid mortgage or lien on it.

Getting into financial problems is very easy but to get out of these problems is not. Prevention is better than cure – as the saying goes! If one has control over spending and manages finances without getting into deep trouble, then that person has a better chance of maintaining good credit history and hence a good credit report. You can browse over the internet and get all help needed to solve your financial problems.

If anyone has a problem or a dispute with the credit report he or she can call the specific credit bureau that issued the report and mail a letter with the following information:

• Full name including first, middle, last and any suffixes you may have;

• Current mailing address;

• Social security number;

• Date of birth;

• Name and account number that is in question

• Reason for requesting an investigation;

• Signature.

The addresses of the 3 major credit bureaus are:

Equifax Information Services
P.O. Box 740256
Atlanta, GA 30374

TransUnion Consumer Relations
P.O. Box 34012
Fullerton, CA 92834

Experian Consumer Assistance Center
P.O. Box 2002
Allen, TX 75013

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