7 Steps to Managing Debt

Debt is probably the largest threat to your financial stability. For this reason, you have to approach your debt aggressively and make a concrete plan to reduce -- or ideally, eliminate -- it. Attacking your debt sometimes is overwhelming, but you can make it less so if you break your approach into distinct, smaller steps.

Assess the Debt Picture

Know exactly how much debt you have. Look at your bills and any statements from lenders and creditors and write down what you owe on each account. Then add up all the amounts to get the total, current amount of your debt. Next, go back and look at your interest rates for each account, as well as the minimum payment you're permitted each month. If you have joint accounts or are married, talk to your partner and make sure you've counted every debt for which you legally could be liable.

Track Expenses

Tracking expenses shows you where your money is going and whether you need to cut spending in certain areas. Write down everything you spend, even something as small as a gas station coffee. If you can't write down the amount you spent right away, keep the receipt for later.

Create a Budget

Once you have an idea of what you are spending compared to your income, design a budget. If possible, treat the debts you have as inflexible expenditures you must pay, the same as your rent or the cost of food. Stick to the budget once you have it -- people often stay in debt trouble because they don't enforce the budgets they make, not because there's anything wrong with the way they've budgeted.

Review Your Options

You can reduce what you owe through negotiation, resolution, settlement or bankruptcy. If you have trouble staying organized, paying a debt management company to pay creditors and lenders on your behalf may help. You also can refinance, consolidate, apply for new loans, tap the equity in your home or ask friends for help.

Get Counseling

A debt counselor will look at your debt situation and advise you on which one of the financing/debt management options is best for you. He will give you tips and tools to track your money and avoid debt problems in the future. The Federal Trade Commission offers free counseling, as do nonprofit agencies.

Select Your Debt Payoff Method

Pick one of the debt payoff methods available. Begin working with your creditors and lenders according to the method you choose.

Pay on Time and Snowball

Once you've made arrangements to pay your debts, make payments on time and in full every month. Snowball the debts to pay them off. This means you attack the debt with the highest rate of interest first, throwing any extra cash you may have at that debt. You pay at least the minimum on all other debts and move on to the debt with the next highest rate of interest until all debts are eliminated.

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Definition of Reasonable Debt

Reasonable debt is something that you have to define for yourself. If you ask a real estate broker or jewelry salesperson what is reasonable debt for you, the answer will probably be different than if you ask a financial counselor. You must decide for yourself what is reasonable for your own circumstances using sound financial guidelines and planning, preferably by keeping a budget.

20 Percent Rule

Some advocate using the 20 percent rule when considering how much debt is reasonable. This means that the amount of your monthly payments for debt, not including your house, should never exceed 20 percent of your take-home pay. If you take home $4,000 per month, you should have no more than $800 in monthly payments. Using the 20 percent rule forces you to budget and review your finances regularly, but it still may be too much debt depending on your circumstances. Also, it considers payments only, and not the total level of debt, which is more important to your long-term financial health. Everyone tends to spend more money when only considering monthly payments.

Mortgage Debt

A mortgage banker will probably say that you can handle a mortgage payment of 28 percent of your monthly income. A real estate broker may say that you can purchase a home that has a purchase price of 2 1/2 times your yearly income. Who is right? It depends on your situation and what works best for you. The 28-percent-of-income payment and the 30-year mortgage are considered the norm in home financing. However, a 15-year mortgage will get you out of debt on your house in half that time, with somewhat higher payments. Overall, mortgage debt is one of the most reasonable forms of debt if the payments and debt level are kept within your budget.

Consumer Debt and Credit Cards

Many consumers say that you will always have a car payment. How much of a payment you have is another matter. If you want to take on a car payment, have a written budget outlining what gets spent on everything before you go to the car dealership. Consider carefully what you can spend and don't be tempted to exceed that amount per month. Get a car loan of no more than three to five years. Credit card debt, on the other hand, is generally considered a bad idea, yet millions of people carry credit card balances with high interest rates. If you choose to do this, rely on a written budget to let you know what is reasonable for your income.

Debt-Free Living

Many people choose to live debt-free lives, or at least free of debt except for a mortgage until they pay that off. The disadvantages of this lifestyle are that you may have to defer purchases until you can afford to pay cash for them and that you will not maintain your credit or FICO score. The advantages of a debt-free lifestyle are many. When you are not making debt payments, your income is freed up to invest and build wealth. You can save up for things that you want more quickly because you are not paying debt. Debt-free people have less stress about finances in general. For people who choose to live debt free, no debt is reasonable.

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Can You Put a Secure Debt in a Debt Settlement Program?

A debt settlement program takes your debt and reduces the amount you owe. This means that your creditors will forgive a portion of your outstanding debt. Most creditors will not agree to debt settlement unless you have fallen behind on your payments. It is an option if you are overwhelmed with debt, but it will negatively affect your credit score. Secured debt cannot be included in a debt settlement program.

What Is Secured Debt?

Secured debt is debt that has an item that stands as collateral for the debt. A mortgage, a car payment or a title loan are all types of secured debts. You cannot include secured debt in a debt settlement program because the item that you used for collateral will need to be turned in if you default on the loan or try to settle the loan for less than you owe. This is true even if you have paid off most of the loan.

Ways to Get Rid of Secured Debt

It is difficult to get rid of secured debt unless you are willing to turn over the item you used as collateral on the loan. Often you are better off selling the item and paying the difference on the loan than voluntarily giving up the item to get rid of the debt. If you are having difficulty making your payments, contact your lender to see what options you have to reduce the debt.

Set Up a Debt Payment Plan

A debt payment plan is the best way to get rid of both secured and unsecured debt. This payment plan will help you pay off your debt more quickly, without negatively affecting your credit score. List your debts in order of your highest interest rate to your lowest. Find extra money in your budget to pay on your debts and apply all of it to the first debt on your list. Once it is paid off, move to the next debt on your list, applying all of the money you were paying on your first debt to it. Continue until you have paid off all of your debt.

Avoid Moving Unsecured Debts to Secured Debts

Many debt consolidation loans are tied to your home as a second mortgage or to a car as a title loan. When you use a debt consolidation loan to pay off your credit cards, you may move your unsecured debts to secured debts. This means if you have trouble making payments in the future, you can lose your home. Although the interest rate is higher if the loan is unsecured, you are not putting your home on the line.

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Can I Still Get a Credit Card on Unemployment?

When you lose your job and begin collecting unemployment benefits, your income is greatly reduced, since unemployment benefits pay between 50 and 60 percent of your average work pay. For many people, this means they have trouble paying their bills. Having a credit card to use would act like a loan and allow you to continue making payments, though you are also creating additional debt for yourself that will have to be paid back.

Regular Credit Cards

You may still be able to get a regular credit card if you are receiving unemployment benefits. The decision on whether you will be given credit will be based on your credit score, income, assets and how much you are paying in mortgage/rent. So if your credit score hasn't dropped because you have not fallen behind in your debt payments, and you are keeping up with your mortgage, you may be able to qualify for a credit card. You will also need to still have a sufficient income with your benefits and a high level of assets.

Prepaid Credit Cards

If you don't qualify for a regular credit card, you may still be able to get a credit card from a bank that specializes in high-risk credit cards. These are cards that are for people with limited credit, such as a person receiving unemployment benefits. Many times, these cards require you to make a deposit to act as a security deposit to protect the bank in case you don't make your credit card payments. These cards are primarily for people who are rebuilding their credit scores, but if you need a credit card and can't get one another way, prepaid credit cards are an option.

Effect on Credit Score

If you are receiving unemployment, it should not affect your credit score. Your credit report does not show if you have filed for unemployment or are making claims. The only way unemployment benefits will affect your credit score is indirectly because you miss payments to your creditors due to a lack of money. This means that unemployment will also not affect your credit score so you no longer qualify for credit cards.

Use Caution

If you are apply for a new credit card while you are unemployed, you need to use caution if you do get one. It would be easy to use the credit card in place of your lost income. This will only add to your debt until the point when your payments on your credit accounts will be impossible to make while you are collecting unemployment benefits. At that point, your unemployment will begin to negatively affect your credit score.

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Debt Risks

Americans owe billions in debt, most of which is wrapped up in real estate -- that is, mortgages -- and revolving debt like credit card debt. The commonality of debt, however, doesn't negate the problems of being financially in the red. Although it's sometimes not possible to live an entirely debt-free life, awareness of the risks associated with debt helps you be responsible with the debt you accept.

Future Financial Instability

When you take on debt, you must designate a percentage of your future income toward debt repayment. With a smaller percentage of your income available, you have less flexibility to deal with financial emergencies. That, in turn, increases the risk you'll have to rely on additional credit to make ends meet, perpetuating the debt cycle. In the larger perspective, debt means you have less to contribute to the economy. When the inability to contribute happens to thousands or millions of people, such as in periods of economic recession, businesses suffer. They may have to cut jobs, which makes the debt problem worsen for affected workers.

Property Loss

When debt is secured -- that is, when it is attached to some type of collateral -- you face the risk of losing the property you put up for collateral. Even if you have unsecured debt, if you don't pay, a creditor has the right to collect what you owe through the court. If a judge finds the creditor has a valid claim, you may have to liquidate your assets to pay what you owe, or the judge may garnish your wages or bank accounts.

Emotional, Physical and Social Distress

The anxiety associated with debt can cause major health problems like ulcers, headaches and even heart attacks. It can keep you from enjoying other areas of your life, including your social relationships. In some cases, debt problems even can end relationships including marriages.

Legal Problems and Harassment

When you become delinquent on a debt, your creditors will contact you to rectify the problems with your account. Some creditors are very aggressive and even if a creditor avoids harassment, you still are obligated to respond to legal notices the creditor sends you. You may have to appear in court and defend yourself, and if you have to hire an attorney legal fees may dig a deeper debt hole.

Ways to Reduce the Risks

The best way to reduce the risks associated with debt is to have a clear budget. Track everything you spend, and enter into debt only when you are in an emergency situation. Seek debt counseling and be upfront with your friends and loved ones about the debt you have -- let them help you. Negotiate with your creditors as soon as you think you're in trouble so they are less likely to pursue legal action. Know the difference in interest rates between unsecured and secured loans, and never enter a debt without a repayment plan -- think like an entrepreneur, not a debtor.

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How to Write to a Credit Reporting Agency

Credit reporting agencies require many requests to be made in writing -- to dispute information, to request a security alert be placed or removed in your file. You need to be thorough and include all necessary data for your correspondence to be recognized.

Instructions

1

Visit each of the three major credit bureau websites, Experian, Equifax and Transunion online. Each of them will have a unique credit file for you, and you will need to correspond with each one. Their websites should have their current mailing address for consumer correspondence.

2

Begin by requesting your credit report, to know what information they have. By federal law, you are entitled to a free credit report every 12 months from each of the three credit reporting agencies. You can get these reports from a central site sponsored by the three agencies, Annual Credit Report.com.

3

Draft a letter to each bureau explaining your situation. If you are disputing information, include your entire account number and name of the company or organization that reported it and other important information such as dates or amounts.
If you feel you have been the victim of credit fraud, ask them to put a credit "freeze" or security alert on your account. Include your name, address, telephone and Social Security number on the letter.

4

Include a photocopy of your driver's license or current identification card. Without this, they may not consider your correspondence secure and could ignore or return the letter to you.

5

Visit your post office personally and mail each letter, one to each bureau, certified mail. Keep your receipts. When your letter reaches the credit bureau, they will have to sign for it and you will receive a returned signature card. This is your proof they have received your letter. By law, they have 45 days to respond to you and your request from that date.

6

Mark the date on the calendar that will be their deadline dates. If you don't hear from the bureaus by then, you should call them directly. You have the right to take legal action and may want to consult an attorney depending on the seriousness of your request. For example, a fraud or security alert is something that should be addressed immediately, while misinformation may not be as threatening.

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How to Transfer a Credit Card Balance From a Bank Overdraft

Many major banks offer overdraft protection as an additional credit line attached to a bank account. These overdraft accounts are considered credit accounts, and how you pay on the overdraft will be reported to the three major credit bureaus (TransUnion, Experian and Equifax). If you want to transfer the balance in your overdraft account, you first need to get a new credit account.

Instructions

1

Review the terms for your current overdraft account. If it is a credit account it will have a rate and monthly payment. Find out what the interest rate is, what the term is (length) and if there are any applicable fees. You'll want a new credit account to be more beneficial than your current account.

2

Access a copy of your credit report. This will help guide you as you seek new financing (see the site in Resources). This will provide you with a free credit report. You can also pay for a copy of your FICO score, a three-digit number between 300 and 850. Scores above 720 are excellent; scores below 600 are poor.

3

Research new credit accounts. This can include new credit cards or personal loans. Make sure the new account allows for balance transfers. Review each prospective account's balance transfer policies and fees. You do not want to rack up enormous charges simply for moving one balance onto the account.

4

Open the new account. Use one of the checks provided for balance transfer. Write a check in the full amount due for the overdraft account (contact your bank for a payoff amount). Some companies allow for electronic transfers. Contact each creditor to discuss this possibility.

5

Obtain a paid-in-full letter from your original bank. This will confirm that your overdraft balance is satisfied. Begin paying on the new account as agreed.

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The Do's and Don'ts of Settling on a Debt Resolution Company

When you're in debt, finding the right debt resolution company entails examining the different options available. Some companies will offer debt consolidation, as well as credit counseling. Some companies also offer the option of debt negotiation. Before engaging with any company, always check out the history of the company and investigate them through the Better Business Bureau.

Options

Several options are available when you're considered finding the right debt resolution company. There are a variety of ways to resolve your debt problems, including taking out a debt consolidation loan, credit counseling, engaging in debt negotiation, as well as attempting to reach a debt settlement. You can find the debt resolution company you want to work with by examining your options.

Debt Consolidation

Taking out a debt consolidation loan has the advantage of having a single monthly payment, rather than several smaller payments each month. There won't be different due dates, which can sometimes result in late charges, costing you more money. It has the advantage of allowing you to concentrate on paying off the one loan. In addition, you'll have a longer period of time to pay off the debt, which can result in having a smaller monthly payment than if you were to pay each bill individually each month.

Credit Counselors

Part of helping you resolve debt issues is helping you manage your money. This is where a credit counselor can be useful. A reputable credit counseling company can give you advice on handling your money, as well as showing you how to develop a budget and keep within it. Some companies will also give you material to instruct you in helping stay out of debt. Before using any credit counseling company, ask for references and contact your local Better Business Bureau to determine the background of the company.

Debt Negotiation

A debt negotiation company claims to contact credit card companies and get your payment reduced. Some of these companies are not legitimate, unfortunately. Never pay upfront costs for a debt negotiation company and make sure that everything told to you is provided in writing. You should also know that you could contact any credit card company yourself and attempt to get your debt reduced, without having to go through a debt negotiation company.

Credit Scores

If you want to make sure your credit scores do not suffer, debt consolidation will not lower your scores, since you will pay off all of your debts. Finding a good credit counselor who can help work out a debt consolidation plan is one option available.

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How to Request Free Yearly Credit Report From Three Major Credit Bureaus

Under the Fair Credit Reporting Act, every consumer has a right to request a free yearly credit report from the three major credit bureaus. These three companies (Experian, Equifax, and TransUnion) jointly sponsor Annual Credit Report Service. This service is the sole provider of free credit reports authorized by the Federal Trade Commission. The credit reports you get won't include your credit score (you have to pay for that) but do include all of the information that is currently in your credit history.

Instructions

1

Decide how you want to order your credit reports from the three major credit bureaus. You can get your report immediately online (see Step 2). Alternatively, you may call (877) 322-8228 toll-free and, through an automated process on the phone, order your report. It will take about 15 days for a phone request to be processed and mailed to you.

2

Get your free annual report instantly by using the online facility, www.AnnualCreditReport.com. On the webpage, you'll be asked to select your state and then select "Start."

3

Enter your name and birth date in the boxes provided. You also must provide your Social Security number and your current address. If you have lived there for less than one year, you'll need to enter your previous address as well. At the end is a box with a set of random numbers and letters. Enter these in the box provided and choose "Submit."

4

Choose to receive one, two or all three credit bureau reports when the screen comes up. Choose "Submit" and the system will link you to the website of the first credit bureau you picked. You'll be asked to enter the last four digits of your Social Security number.

5

Look carefully at the credit bureau webpage. The credit bureaus like to place ads here urging you to buy your credit score and credit monitoring services. Hunt until you find the link to the free report. Usually this is at the bottom of the page, so scroll down. Double-check to be sure you are choosing the free report option.

6

Answer the questions that will appear on the screen. The system will generate several questions based on your credit report in order to verify your identity. Choose "Submit" and your credit report will come up on the screen.

7

Decide if you want to save or print a copy of your report. Be sure to record the report number. This will enable you to return to the website and access the report again if you wish or file a dispute if you find information you believe to be inaccurate. You can also add explanatory notes if you wish.

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About Hardship Loans

Credit card debt in America is a swirling, unending problem. The consumerism embraced by citizens--and politicians--creates an atmosphere of insatiability. Customers must have the new "it" thing, and lenders are all too willing to finance such purchases. Later, lenders may be called on to help strapped consumers pay down overwhelming debt -- often by the use of so-called hardship loans.

Basics

A hardship loan can take many forms. Most lenders offer a hardship or "rescue" loan of some variety. These loans serve to help consumers get back on their feet and begin paying down debt. Most hardship loans are not regulated by the federal government, but rather controlled internally by each individual bank or creditor. Applying for hardship loans usually means speaking with a loan counselor.

Types

Hardship loans can be simple reductions in debt. They can cancel credit lines or reduce interest rates. Often hardship loans are short-term--designed to allow a window of time for consumers to catch up on their payments. Sometimes hardship loans are complete restructures. For example, if a consumer is struggling to pay a revolving loan, a lender may change the loan into a closed-end variety so that a consumer cannot take on more debt and has a standard monthly payment.

Mortgages

Hardship loans are most common on mortgages. Keeping a borrower in his or her home is in the best interest of all parties involved with the mortgage. Sometimes a lender will grant a hardship loan, or a grace period, in which a customer can catch up on the interest payments. For example, if a customer is behind one payment, a lender may drop his or her interest rate to zero percent for six months.

Deferred Interest

Sometimes rescue loans readjust the payment schedule. For example, if a customer is behind two or three payments--and in dire risk of foreclosure--a lender may take the back interest due and place it at the end of a loan. This interest is added to the loan principal and re-amortized into the loan repayment schedule. This is the least desirable hardship loan, as it does not eliminate problems, just delays them.

Warning

Some unethical lenders will offer hardship loans that do not work in the best interest of the borrower. Such loans are designed to appear beneficial, but in fact sap more interest payments and fees from a vulnerable borrower. The Federal Housing Authority warns of such scams, and red flags can be seen on its website. (See Resources.)

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Advice on Improving Credit Ratings

Your credit history tracks how well you've maintained your adult financial life and can help determine whether or not you can get a new car, a new home and---in some cases---a new job. Whether you've faltered and need to improve your credit score, or you feel like you need to keep better tabs on your credit, paying attention to the details is one of the most important steps you can take.

Payment History

Paying your bills late is often one of the biggest contributors to low credit scores. When you receive your bills, particularly utility bills, credit card statements and loans---personal, auto or student---put the bills in a prominent place where you will remember to pay them. Set yourself up a reminder system to pay those bills in a timely fashion. You can set up your email or cell phone to receive reminders about due dates. Or you can set up your bank account so that it automatically pays certain bills on certain dates. Make sure, though, that you have enough money to cover the bills when they get paid.

Debt Management

Reduce your overall debt. Keep your credit card balances low and try and reduce yourself to only one or two credit cards. If you are working to establish credit, make one of your cards a gas card, so that you can't use it to overspend. When you are working to pay off debt, don't move the balance around a lot to take advantage of a better rate. It's better to pay off each debt in full on it's own, rather than consolidate it into one large debt.

New Credit

Don't apply for accounts you don't need. Just because the department store you visited offers you 10 percent off your purchase for applying for a new card, that doesn't mean it's a good deal. Be careful of how many accounts you apply for. Your credit score can actually drop if you apply for too many cards within a short period of time.

Monitor Your Credit

Look at your credit reports often. Make sure you get a copy of all three (Experian, Equifax and TransUnion) of your reports. If you have made a lot of changes recently, you may want to look at it as often as once a month. Otherwise, once every three or four months is probably sufficient. Make sure that accounts you are paying on are reporting your good credit and take note of anything negative. Try and make arrangements to rectify anything negative as soon as you can. If you have trouble negotiating an arrangement on an account you've had trouble paying, you may want to consult an attorney or a non-profit consumer credit counseling service.

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How to Legally Cut Your Monthly Mortgage Payment in Half

The only way to legally cut your monthly mortgage payment in half is to rework the terms of the loan. Banks, credit unions and mortgage companies have programs for reducing mortgage payments. However, a reduction of 50 percent is an extremely aggressive goal and is sure to require some shrewd negotiation and creativity. You may have to settle for a mortgage payment that is reduced by 50 percent over a temporary period and then escalates to a higher but affordable level from there.

Instructions

1

Make an appointment with a nonprofit housing counselor certified by the U.S. Department of Housing and Urban Development. The counselors are experts in negotiating loan modifications. The Federal Trade Commission recommends that you use a nonprofit counselor and avoid for-profit companies. Many scams have been reported nationally involving for-profit "foreclosure rescue" and loan modification firms, the FTC reported in 2011. Find a HUD counselor in your area by checking the agency's website.

2

Tell the housing counselor you need to cut your mortgage payment in half. Loan modification allows your payment to be reduced by changing key terms in the loan, such as the interest rate, the length of the loan and, in some cases, even the amount due. However, loan modification by a lender is generally considered only for people on the verge of foreclosure because of severe financial problems. Your mortgage company will not modify your loan simply because you'd like to free up some money for other purposes. The housing counselor can tell you if you have a good reason for loan modification.

3

Authorize the housing counselor to contact your lender to formally request a 50 percent cut in your mortgage payment through loan modification. Have the counselor state your case.

4

Reduce your payments another way if you are not having financial problems but have some extra cash. Although it does not happen often, you can cut your monthly payments 50 percent by doing a "cash-in" refinancing. An insurance settlement, for example, or some other windfall might have resulted, allowing you to refinance your mortgage by paying off a chunk of the balance. Contact your mortgage company to ask how much money you would have to pay on your loan to reduce the payments by 50 percent.

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Colorado Statute of Limitations on Credit Card Debts

Colorado places some limits on how creditors and debt collectors pursue residents to collect old credit card debts. The state restricts the length of time that consumers can be subjected to legal action over credit card debts. Yet, Colorado laws don't erase any debts that residents may owe their creditors.

Colorado Statute

The statute of limitations on credit card debt is the amount of time that a card issuer has to take legal action against consumers to collect unpaid debts. That legal action includes filing a lawsuit to collect the debt or garnishing a person's wages. Wage garnishment requires a court order, which allows an employer to withhold a specific amount of a worker's wages as repayment for a credit card debt. In Colorado, the statute of limitations on credit card debt is six years. Therefore, a card issuer can't legally sue a Colorado resident to collect credit card debt that's more than six years old.

Federal Law

Any creditor or debt collector who threatens to sue a Colorado resident or any other consumer to collect credit card debt after the statute of limitations has expired is violating the U.S. Fair Debt Collection Practices Act. However, consumers still owe credit card debts they haven't paid even if they can't be sued by a company to collect the debt. The only exceptions to that are when debts are erased because they've been forgiven by the credit card company or discharged by a bankruptcy court.

Restarting the Statute

The MSN Money website recommends that people avoid acknowledging that a credit card debt is theirs or promising to make payments if they can't pay a debt in full. That's because people who make a payment or agree to a repayment plan may restart the statute of limitations if it has expired. That would allow a collection agency to continue to pursue full payment of the debt and file a lawsuit to collect it.

Handling Collectors

Colorado residents need to know when they last made a payment on a credit card debt and when they last charged a purchase to the card in question. The six-year state statute of limitations is based on the latest date that a payment or charge was made to the card. People who are sure the statute has expired on a credit card debt in collection can send the collection company a letter to tell the company to stop contacting them. The company essentially has no further recourse, since a lawsuit can't be filed. Nonetheless, you may want to consult with an attorney to ensure you handle the situation correctly because some debt collectors look for loopholes in the law to continue collection efforts.

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How to Settle Debt With a Collection Agency

When a debt has went to a collection agency, bill collectors will try to pressure you into paying more than you can afford. This is because they have bought your debt at a reduced amount and want a return on their investment, and quick! Most bill collection agency debts have been bought for pennies on the dollar. You can use this to your advantage when trying to settle debt. Here's how!

Instructions

1

Do not agree to pay more on your debt than you can reasonably afford each month. Even if it is five dollars a month, something is better than nothing, so long as the payments are made each month and on time. Do this until you have reached a point you can settle this debt.

2

Figure out what it would take to settle the debt. Most collection agencies will take a payoff of 70% of the original debt. To find this amount, multiply the original debt by .7, and keep track of any payments made toward that amount.

3

When you have enough cash on hand to make the pay off, call the collection agency and offer to settle your debt for the amount of money it would take to pay 70% of the original debt. Collection agencies are more apt to agree to this toward the end of the month, when they are trying to close out as many debt accounts as possible.

Use tax returns, have a yard sale, or sell other items of value to acquire enough money to settle the debt. You don't need this debt hanging around on your credit score weighing you down.

4

Make sure your file with the collection agency is marked paid in full, instead of charged off. Your goal is to settle the debt while preserving as much of your credit score as possible.

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How Can a Woman Build a Good Credit History?

Women need to build and manage their own credit histories in order to have better financial options when it comes to borrowing money or financing large purchases. Often, women assume that their credit history is combined with their spouse's credit history. However, that is not the case. Each individual has his own credit history and credit score.

Credit Report Basics

Your credit report is attached to your Social Security number. Your report should list your correct name, past addresses and current address. If you have changed your name due to marriage or divorce, you can elect either to keep all of your credit in your birth/maiden name or to switch credit to your new name. It is best to be consistent with one name on all of your credit accounts.

Joint Credit

If you share most of your credit with a spouse, make sure that you are listed as a joint account holder and not just an authorized user on all accounts in good standing. As a joint account holder you share ownership in the account and will build a credit history based on those joint accounts.

Use Credit Responsibly

You must have credit in order to build a credit history. You can start off with a secured credit card, which allows you to deposit your own money into an account which can then be borrowed against to make purchases using a credit card. You can also apply for department store credit cards, which are easier to obtain than major credit cards. Make sure to open new accounts gradually. because having too much credit all of a sudden will negatively impact your credit score. Limit yourself to just two or three credit cards.

Manage and Monitor Your Credit

Make sure to pay all credit payments on time. Set up automatic payments to make sure that payments are never overdue. Also, always keep credit cards balances below 50 percent of the available credit. You should review your credit report annually at the Annual Credit Report website recommended by the Federal Trade Commission. Correct mistakes online or by writing to individual credit-reporting agencies.

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Overwhelming Credit Card Debt

People with overwhelming credit card debt face a few unpleasant options. They include getting yourself deeper into debt or taking a major hit to your credit rating. If you believe you can eventually pay off the debt, consolidation under the lowest interest rate is the best choice.

Put Away the Credit Card

Stop piling on more loans. Put away the credit card and do not accept loans from friends or relatives. Be especially wary of payday lenders that charge heavy interest rates. The best option is to use debit cards or cash to make payments. If you need a credit card to survive, try to shop around for a lower interest rate card.

Debt Consolidation

Consolidate your credit card debts into a lower interest loan. If you have a mortgage, your interest rate is probably closer to 5 or 6 percent. The mortgage can be used to finance the credit card debt to reduce the 15 to 20 percent interest rate down to manageable levels. Mortgage and financial consultants can work with you to complete this process.

Debt Restructuring

Work with the lender to restructure the payments. It will usually prefer this over your defaulting completely. Work with a counselor from a nonprofit center to determine what you can pay and how long you can pay it. You may even be able to reduce the principle balance, although that will impair your credit rating.

Bankruptcy

If you have exhausted every alternative then Chapter 11 bankruptcy may be the best option remaining. You will be unable to use credit to buy an automobile or home for up to 10 years. In addition, if you receive a credit card it will have a low credit limit. On the other hand, your debts will be wiped clean and you will no longer be enslaved in overwhelming debt and interest payments.

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Debt Help Information

Anyone interested in emerging from debt may find it difficult to find accurate information from trustworthy sources to help them get on their way to financial freedom. By getting the right information the first time around, consumers may avoid not only lots of time and frustration, but possibly thousands of dollars that could easily be lost to scams.

Federal Trade Commission

The Federal Trade Commission (FTC) website contains useful and accurate information to help those in debt get help. In particular, the article "Knee Deep in Debt" details the different options available for digging yourself out of a bad financial situation. The article also differentiates between different types of debt relief strategies to help consumers avoid being pulled into a scam. The website's articles also contain links directly to government resources so consumers don't spend hours trying to find legitimate information through other means.

Bankrate

Bankrate provides answers to specific questions, including many about debt relief. The articles "The Dangers of Debt Consolidation" and the series called "Debt Management Basics" help to steer consumers toward the right courses of action through advice from professionals in the finance industry. In addition, the website is a useful resource for information on how to build and maintain a healthy financial standing and credit score.

Kiplinger

The personal finance and business forecast website, Kiplinger, also houses many articles related to understanding your debt and managing your money. The writers help to answer tough questions such as whether it makes sense to save while paying down your debt ("Cut Debt Now, Save Later"). Readers also get first-hand accounts from those who have paid off their debt, like in the article, "How I Kicked the Credit Card Habit."

National Foundation for Credit Counseling

You may need information very specific to your situation, and in those cases it's best to get it straight from a credit counselor. The National Federation for Credit Counseling website will direct you to reputable credit counselors in your area. A good credit counselor will not only work with you to create a plan of attack to eliminate your debt, but will also help you to create a budget and identify where you've gone wrong to avoid falling back into financial duress again.

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How to Challenge a Debt

Constant calls from a debt collection agency are bothersome, especially if you are wrongly accused of a debt. Bill collectors who call you in an attempt to collect debt must be in compliance with the Fair Debt Collection Practices Act. Avoid answering questions or admitting to any debt over the phone. Inform the collector that you wish to handle the matter directly with the creditor. Insist they follow the FDCPA and send you information on the debt so that you may review its validity. To challenge a debt, follow a few simple steps.

Instructions

1

Know your rights. After initial contact, the collector has five days to send you a letter stating the collection. The letter must also include how to proceed if you do not owe the debt. If you tell the debt collector to stop calling, they are only allowed one more phone call to explain how they wish to proceed. Keep records of all phone calls and letters. If the collector violates your rights, report it to your state Attorney General's office.

2

Write a dispute letter. The dispute letter should be a formal, legal letter. The tone should be professional and state the facts. Include documentation to support the dispute. Supporting documents can include identification, payment receipts or court documents. You must do so within 30 days of receiving the letter from the collector. Mail the letter to the address provided on the collection notice. In order to obtain proof of receipt, send the letter certified mail.

3

Monitor your credit report. As soon as you dispute a debt with a debt collector, they are required to report the debt to credit bureaus as "in dispute." The dispute will remain on your credit until the collector sends you proof that the money is owed.

4

Wait for a response. If the collector does not provide you with proof, they must cease contact. If the collection agency does not follow the proper procedure, contact the major credit bureaus to file a dispute. Equifax, Experian and Trans Union will allow you to dispute any debt on your credit report. You must have a valid reason and proof to back your statements.

5

Report violations. If the collector is not following the guidelines set by Federal Trade Commission, file a complaint. You can file your FTC complaint online or by calling the FTC at 800-382-4357. You can also notify the FTC by mail at Federal Trade Commission, Consumer Response Center, 600 Pennsylvania Ave., NW, Washington, D.C. 20580.

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What Are the Keys to Paying Off Bills in a Timely Manner?

One of the key elements to getting a mortgage or other large loan is your credit rating. The better your rating, in general, the better chance you have of getting a loan at an attractive rate. One of the best ways to establish a good credit rating is by paying off your bills in a timely manner. Good reports from many small creditors such as department stores and utility companies can add up over time to great numbers on your credit score when you need it most.

Keep Your Debt Small

Some emergencies are inevitable, such as medical bills and car repairs. While you may not be able to avoid all debts, consider your income when you use credit cards and spend disposable income. The latest sale on designer shoes might garner you the perfect pair of pumps, but if you're paying for them for months they're hardly worth the fashion impact they make on the occasional night out.

Organize Your Debt

Make a list of your outstanding bills and put them in order of the highest to lowest interest rates. Make the bills with the highest rates the biggest priority on your list. Pay the minimum amount on all your other bills while you pay extra on the top bill on the list. Once you pay this bill off, move your priority payments to the second bill on the list. You'll save more interest charges and end up paying less money in the long-run.

Pay Bills Online

Set up online bill payment plans for as many of your debts as possible. The easier you make it to pay your bills, the more likely it is that you'll pay them early or on time. It's much simpler to click a couple of buttons on a website than to get out a checkbook, envelopes and stamps for paying bills through the mail.

Pay Bills Weekly

Pay one or two bills every week instead of sitting down to pay everything once a month. If you pay a bill right after you get paid each week you're less likely to spend what looks like extra money in your account. Keeping hundreds of dollars in the bank for a month just waiting for bills can be a temptation to overspending. If you don't have the cash on hand because you've already paid a bill with it, you can't spend it.

Contact Creditors

Call your credit card company to try to negotiate a lower interest rate on your credit cards. Many companies are willing to lower their rates in the hopes of getting timely payments in return. Once you have a lower interest rate and minimum payment, keep paying the higher amount each month. This will lower your debt and help you to pay off your card faster.

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Refinance Vs. Prepayment

Debt is money that was borrowed from a person or business that you are required to pay back with set guidelines. Prepayment and refinancing are two ways to pay off one's debt.

Prepayment

Prepayment is paying some or all of your debt before it is due. This reduces the principal amount of the loan.

Refinancing

In refinancing, you pay off existing debt with a new loan for the same amount. This often involves using the same collateral that was used before. Sometimes refinancing fees must be paid up front.

The Choice

Whether to choose prepayment or refinancing depends on your situation and your goals. If your goal is to eliminate the debt sooner, and you have money you can devote to this purpose, prepayment will help you reach that goal. If you want to reduce your monthly payment, refinancing a loan at a lower interest rate or for a longer term will accomplish this.

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How Does Compound Interest Work to Relieve Debt?

Debt is enjoyable until the bill comes in the mail. At this point, individuals must find a way to repay the debt without paying too much interest. Compounding interest can make it difficult to pay off debt balances in a timely manner.

Facts

Compound interest enables lenders to increase an individual's balance each day. Using this interest method, the company adds interest to the principal and the previous days' interest. Most lenders levy interest on debt balances daily, growing the balance exponentially over time.

Function

To decrease debt, individuals should pay more money on the debt early in the month. This will decrease the balance on which the lender charges interest. For example, a credit card balance of $1,000 and a daily interest rate of .0003 percent (10 percent annually) will have a daily interest charge of 27.4 cents. Making early payments will reduce this interest amount.

Considerations

Individuals should try to pay a small amount of extra principal each time they make a payment on debt. This will reduce the negative effects of compound interest and allow more of the regular payment to go against principal, further reducing the balance.

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How to Increase Your Credit Score in 1 Year

According to Experian, the average consumer's credit score is between 600 and 750, and the credit reporting agency considers anything above 700 to be a good credit score. This means many people fall below the good range. Raising a credit score is not easy, but is possible. With a little diligence, anyone can raise their credit score in one year.

Instructions

1

Log on to www.annualcreditreport.com and complete the required information to obtain a copy of your credit report from each of the three credit bureaus. Print all three reports.

2

Review all three reports carefully. Circle any errors you find in the reports.

3

Complete a dispute letter for every error you find on your credit report. Provide as much information as possible proving why there is an error. Attach a copy of your credit report with the error circled.

4

Send the dispute letter certified mail to the credit reporting agency. Make a note of the date you sent the letter. If you have not received a response after 31 days, send a second letter certified mail requesting information on the disputed item.

5

Once you receive notification that the investigation of the disputed item is complete, ensure the credit reporting agency removed or corrected the item on your report.

6

Gather all of your current debts. Make a note of the due date, minimum payment due, and outstanding debt for each credit card or loan.

7

Gather all of your current living expenses. Make a list of the total amount needed for each expense. Subtract these amounts from your take home income. Make a note of any excess income.

8

Divide 10 percent of the total excess income and set this money aside each month to cover any unexpected expenses.

9

Divide each of the minimum payments due from the remainder. If an excess remains, apply this amount to the credit card with the highest balance.

10

Pay the minimum payment due on every debt by the due date every month for 12 months.

11

Pay the minimum payment due as well as the excess money amount to the credit card with the highest balance. Once this card is paid in full, repeat this process for the credit card with the second highest balance.

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Spousal Debt Responsibility

Separating couples must deal with issues of spousal support, child support and custody as well the division of their marital estate. While people tend to think about property division in terms of splitting up their assets, the debt division aspect is equally important. A party can be held responsible for some or all of the other party's debts in a divorce case.

Community Property and Equitable Distribution

States divide a couple's marital property and debt under the laws of either community property or equitable distribution (ED). The key difference is that community property jurisdictions divide property and debt equally, while ED courts have to divide it equitably, or fairly. Equitable and fair are not always the same thing, and so ED laws have a list of "distributional factors" that justify an unequal division in some cases. Both types of jurisdictions derive a net value of the marital estate by adding marital debt and property together. If a couple has more marital debt than marital property, the court will focus on equally or equitably dividing the debt. The name on the debt does not matter; if the debt is marital, the court can distribute it.

What Constitutes Marital Debt

Each state has its own definition of what constitutes marital property and debt. Marital debt generally consists of all debt acquired by either party between date of marriage and either date of separation or another date set forth in state law. Regardless of whose name the debt appears in, it will usually be marital if incurred between those two dates. A debt a party acquired before marriage or after the state's specified end date will be that party's separate debt and the court cannot order the other side to share in it.

Responsibility for Separate Debt

Although family law courts cannot distribute separate debt, the existence of separate debt by either party can still play an important role in the case. In ED states, the appearance of significant separate debt can constitute a distributional factor that influences whether or not the court makes an unequal distribution of the total estate. In terms of alimony, having separate debt makes a party more of a dependent spouse and less of a supporting spouse in the dependency analysis, as valid debt service obligations can be considered a valid expense.

Bankruptcy

A party can discharge marital debts, including his debt responsibility to an ex-spouse, by filing a Chapter 13 bankruptcy. If he follows proper notice procedures, a Chapter 13 can result in the unenforceability of a community property or ED judgment entered in the divorce case, and it can prevent the entry of a judgment if the case is still open. A party usually can no longer discharge his debt responsibilities to an ex-spouse in Chapter 7, although this prohibition is not absolute. In both types of bankruptcies, though, the debtor can discharge his responsibility to joint creditors, which means they will then look to the nonbankrupt, co-debtor spouse for payment.

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Definition of Credit Counseling

Credit counseling deals with helping consumers manage and control their debt load. One of the functions of credit counseling is to help educate and counsel consumers about the pitfalls of accumulating too much debt. There are several programs that counselors can use to help those who have amassed too much credit. These programs can help consumers pay off their debt in a shorter time period by reducing their costs.

Definition

Credit counseling educates and counsels consumers about the downfall of accumulating too much debt. If you cannot pay your debts, you start to accrue late charges, finance charges, over the limit fees and higher interest rates.

Debt Management

Sometimes consumers need to enter a debt management program as a part of their credit counseling. Consumers then allow credit counselors to negotiate with their creditors for lower balance, no fees and a lower rate of interest.

Purpose

During credit counseling consumers should be informed about the importance of using credit cards only for emergencies.

Balance

Credit counseling should consist of instructing consumers how to pay off their entire balance when the statement arrives.

Cash

Credit counseling should advise consumers about the effectiveness of paying for merchandise with cash as opposed to credit.

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Credit Card Cease & Desist Letter

The Fair Debt Collection Practices Act protects consumers from harassment or coercion by debt collectors, including those collecting credit card debts. Creditors cannot threaten or abuse debtors and cannot harass them by calling repeatedly or at unreasonable hours. In addition, if a debtor requests it in writing, the collector must cease all contact with him regarding the matter, except for sending required legal notices such as notification of a lawsuit.

Purpose

If you do not want a debt collector to contact you, you have the right to send him a cease and desist letter. This letter informs the debt collector that you do not want him to contact you again by mail, telephone or email. Under the Fair Debt Collection Practices Act, a debt collector must honor this letter and stop contacting you. This law only applies to debt collectors; you cannot ask the original creditor to stop contacting you about collecting the debt.

Considerations

Sending a cease and desist letter to a debt collector does not stop her from attempting to collect the debt; it just legally bars her from contacting you to collect it. If the debt collector cannot contact you directly to make payment arrangements, she is more likely to take legal action against you, such as filing a lawsuit or garnishing your wages. If a debtor is harassing you, file a report against her with the Federal Trade Commission rather than simply asking her to stop contacting you.

Consult Attorney

If you really don't want to talk to debt collectors, you should consult an attorney before writing a cease and desist letter. An attorney can advise you of the possible consequences of this action and help you determine your best course of action. Attorneys experienced in financial matters can also help you write the letter if you decide to go this route and can help you file for bankruptcy if you need relief from your creditors.

Contents of Letter

Address your cease and desist letter to the debt collection agency. State that you are asserting your right under the Fair Debt Collection Practice Act to refuse further contact with them and that if they continue to contact you, you will file a complaint with the Federal Trade Commission against them for harassment. Sign the letter and send it by certified mail to the debt collector so that you can obtain proof that he received the letter.

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Can a Pension Be Garnished or Seized by Creditors?

If you have a judgment against you, a creditor may attempt to garnish your wages to ensure that you pay the debt. To do this, he must return to court and get a court order that requires your employer to withhold the payments. If you aren't working and are retired, your creditor may try to go after your pension. Some pensions are exempt from garnishment by federal statutes, while others are subject to state laws.

Exempt Pensions

Certain pensions are exempt from garnishment by federal statute. These pensions include Social Security, Railroad Retirement, veterans benefits, federal civil retirement benefits, military annuities and foreign service retirement benefits. Each state has laws regarding the treatment of pensions for garnishment purposes; if you are collecting a private pension, or one provided by a local or state government, check the laws in your state to determine whether you are protected.

Pension Garnishment

If you do not collect a federally exempt pension and your pension is subject to garnishment in your state, your pension cannot be garnished like your paycheck, where the payment is taken prior to issuance of the check. In a pension garnishment, the creditor must go after the bank account in which the pension proceeds reside. To do this, he must get a court order that is sent to the bank ordering it to freeze your account.

Frozen Account

If your bank account is frozen, the bank will not honor any drafts that come through and you will not be able to withdraw any money from your account. Typically, this is done after the creditor files a discovery of assets, but in some states the court can freeze your account without notifying you in advance. When you return to court, the judge will determine how much the creditor can take from your account to pay the debt.

Exempt and Nonexempt

If you collect a nonexempt pension and Social Security or another exempt pension, and both are deposited into the same bank account, your state may have a form you can file with the court declaring that your bank account contains exempt funds. The judge will then decide whether to lift the freeze or make a determination as to which funds are exempt and which are not -- releasing the exempt funds back to you.

Your bank can help you prove this as deposit records have an indicator noting that they are exempt funds. If you suspect that you will be sued, you can avoid having your bank account frozen by not depositing the pension payments in the bank. This does not mean you will avoid payment, but you will not lose access to all of your money while the terms of the judgment are worked out.

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Mortgage Help for the Laid Off

Job layoffs are common during tough economic times, and losing your job usually means a drop in income, or loss of income altogether. Having a savings account for emergencies and taking advantage of unemployment compensation can help after a layoff. But rather than deplete your savings, consider talking to your mortgage lender to see if it can rework your loan and save you money.

Significance

Mortgage help after a layoff helps you remain in your home. Missing home loan payments for several months can prompt your mortgage lender to begin the foreclosure process. However, lenders feature numerous provisions to help distressed borrowers keep their property and avoid foreclosure.

Time Frame

The sooner you discuss your situation with your mortgage lender, the better. Assess your finances immediately after being laid off to see if you're able to keep up with your current payments. If not, call your lender's hardship department as soon as possible to discuss your options. Don't wait until the house is in foreclosure.

Considerations

Mortgage modifications can help after being laid off from a job. If you're eligible, your mortgage lender can reduce your mortgage payment to an affordable amount, which helps you keep the property. Modification requirements vary from lender to lender, and some loan companies consider this alternative only when borrowers are behind on their payments. Check with your lender to learn the requirements and steps involved in the process.

Benefits of Forbearance

A temporary layoff may bring only short-term financial problems, or you may find a job within a few weeks or months and solve your financial troubles. A forbearance option benefits borrowers who expect a change within the near future. They're unable to make mortgage payments now, but their income is expected improve, allowing them to continue making payments at the original rate. Rather than alter the loan terms with a modification, lenders may suspend or postpone payments for a few months.

Prevention/Solution

Unemployment isn't always a short-term problem -- you could be out of work for several months or years. Selling a home before reaching the foreclosure phase helps protect your credit rating, but finding a buyer who's willing to pay the needed price for the property can prove challenging. After reviewing your circumstances, your mortgage lender may approve a short sale and allow you to sell the home at a lower price -- less than the balance owed -- to avoid foreclosure.

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What Is the Max I Can Be Garnished on a Car Loan?

When you enter into a legally binding contract to purchase a car and then default on the payments, the lender will repossess the vehicle. If you don't "redeem" it and pay what you have to in order to get the car back, the lender sells the vehicle. If the car sells for less than the balance you owe, this is called a "deficiency," and in most states, the lender can sue you for this amount. If the lender gets a deficiency judgment against you, it can garnish your wages for the money.

Federal Law

The Consumer Credit Protection Act (CCPA) sets the limit for the maximum amount your auto lender can garnish from your paycheck. It can't take more than 30 times the federal minimum wage or 25 percent of your weekly income after taxes, whichever is less. At the time of publication, federal minimum wage was $7.25 per hour. Therefore, your lender can't take more than $217.50 from your weekly paycheck, or $7.25 times 30, and it can only take this much if your weekly pay is $870 a week or more, because 25 percent of $870 is $217.50. If your weekly net pay is $600, it can take only $150, or 25 percent of that amount, because this is less than 30 times the federal minimum wage. If your weekly take-home pay is $900, 25 percent of that would be $225. Since the lender must garnish the lesser amount, it would be limited to taking $217.50 because that number is less.

State Laws

Each state has its own individual laws regarding garnishments. However, these laws don't always apply because the CCPA dictates that if your state permits a greater garnishment than federal law, then federal law takes precedence. For example, if you live in Massachusetts, the law only exempts $125 per week of your earnings from garnishment. Title 3 protects more than that, so federal law applies. However, North Carolina does not allow any garnishments for car loans at all, so if you live there, state law would govern your garnishment. Utah, South Carolina and Pennsylvania exempt 100 percent of your earnings from garnishment. Florida exempts 100 percent if you're the head of your household, and Missouri exempts 90 percent under the same circumstance.

Statutes of Limitation

State laws trump federal law when it comes to how long your lender can pursue you for the deficiency judgment. Most states have a six-year statute of limitations for written contracts, such as an auto loan. However, Iowa, Missouri and Rhode Island will allow a garnishment for up to 10 years. South Carolina, Mississippi and the District of Columbia give the lender only three years. Because state laws can vary so much, if you're facing a garnishment, speak with an attorney knowledgeable with the laws of your area to find out where you stand.

Tips

Exceptions to federal law exist if your pay is being garnished for another loan in addition to the one for your auto. You have less protection in this event, and the terms of the CCPA don't apply. Speak with an attorney to find out how to mitigate your damages.

If you work for tips, these usually don't count as income that can be garnished.

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How to Write an Expense Account

Employees incurring expenses while performing their jobs are usually reimbursed after providing an accounting of the expenses. The employee must gather complete information about the expenses and submit the information in an expense report. Expense reports list various expense categories such as air travel and entertainment for clients. Some employers provide online tools for completing the expense report by computer and then printing it, if necessary, for submission.

Instructions

1

Review your company's policy for writing expense reports. Ideally, review the policy before incurring expenses. The company may have specific spending limits on air travel, hotels and meals. Also, the company may not cover all expenses associated with a trip, such in-room movies at a hotel or alcoholic beverages.

2

Gather receipts, if necessary. Company guidelines may require a receipt for every expense except for tips. Or the guidelines may require receipts only above a specific amount.

3

Get your employer's official expense report form. Write the expense report by filling out the form. Typical information includes your name, Social Security number, employer ID, department and purpose for the trip or expense. Also include details of each expense in the proper spaces on the expense report. Most expense reports have columns for air travel, hotels, ground transportation, meals, telephones and other expenses. Refer to your receipts as you list the information.

4

Use a calculator, if necessary, to double-check your math.

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How to Handle Cancelled Debt

Handling cancelled debt is a straightforward process for debtors and creditors. Debt cancellation occurs when a creditor and debtor agree to resolve a delinquent account through debt settlement. Usually, the creditor agrees to settle the account for less than the full balance, creating a savings for the debtor. The solution is often favorable for both parties. The creditor resolves a delinquent account that appeared to be noncollectable, and the debtor pays off a bad debt affecting his credit rating.

Instructions

1

Check the amount of the debt cancellation. As of 2011, creditors and debt collectors must report the transaction to the Internal Revenue Service if the debt cancellation creates savings of $600 or greater for the debtor. For example, a debtor may settle a $20,000 debt for $15,000. That's a savings of $5,000, and in most cases the IRS will treat that as income for the debtor.

2

Mail IRS Form 1099-C, Cancellation of Debt (see Resources) to the debtor and the IRS if you are the creditor and the transaction resulted in a savings of at least $600 for the debtor. Generally, credit card companies, banks and other lenders engage in debt settlement discussions leading to debt cancellation. However, the same tax rules apply to individuals and small-business persons settling debts, such as a plumber settling with a homeowner on an old debt.

3

If you are the debtor, include information from the 1099 form on your federal tax return -- if your savings was $600 or greater. The IRS requires you to supply the information even if you did not receive a 1099 from the creditor.

4

Ask the IRS for an exemption if you are the debtor and you were insolvent at the time of the settlement. A debtor who has more debts than assets is financially insolvent under IRS guidelines and does not have to treat debt settlement savings as income for tax reporting purposes. Apply for insolvency by submitting IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (see Resources). Submit the form with your federal tax return.

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What Is the Purpose of a Credit Report?

Few things in life follow you like your credit report does. Understanding the impact your credit report can have on your financial and personal goals begins with a look into the purpose of a credit report. From what goes on your report to who has a legal right to look at your report, consumers should understand the basics of credit reports.

Data Collection

The compilation and tracking of personal, financial and employment information over time represents one of the main purposes of a credit report. Personal information, such as name, address, date of birth and Social Security number, represent some of the personal information that will show up on your credit report. The three major credit bureaus, TransUnion, Equifax and Experian, use your credit report to record information provided to them by your various creditors. This includes your payment history with each creditor and the credit limits or loan amount associated with each creditor.

Credit Purposes

In the eyes of creditors, a credit report represents a tool for examining your ability to pay back a debt. The information on your credit report provides lenders with an insight into how you handled debt in the past and how you might handle it in the future. As a consumer, your credit report can mean the difference between getting approved or denied for a loan. Credit reviews for insurance policies and government benefits represent just a few of the other possible reasons an approved entity would review your credit report.

Employment Purposes

Your credit report also serves a purpose for current and potential future employers when you provide authorization for access to your credit report. While not all employers will use a credit report as a deciding factor, some employers place an emphasis on finding candidates who demonstrate responsibility in their professional and personal lives. In certain industries, specifically banking, real estate and finance, your credit report can help or hurt your chances for getting a job or license. In addition to information about your payment history, your credit report also reflects any potentially negative public records information, such as bankruptcy filings and monetary judgments.

Other Considerations

Overall, your credit report provides detailed information about you and your financial habits. Achieving and maintaining good credit requires work and attention to detail. Fortunately, credit reporting agencies allow information to fall off of your credit report as time goes by. Typically, negative information falls off after seven years, except for bankruptcies, which stay on your report for 10 years, giving you the chance to clean up your credit and get your financial house in order. Checking your credit report regularly for errors can ensure your credit report paints an accurate picture of you and your finances. Each credit bureau allows consumers one free credit report annually, through AnnualCreditReport.com (see Resources), which can help in identifying problems and inaccuracies before applying for credit or seeking new employment.

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Legal Issues with Debt Settlement

By taking advantage of a debt settlement, you may be able to satisfy an outstanding debt for much less than you actually owe. Both you and your creditor can benefit from a settlement agreement. The creditor benefits by receiving a payment it would not have otherwise received, and you benefit by avoiding a lawsuit. A debt settlement agreement can, however, give rise to legal issues that all consumers should be aware of in order to avoid unpleasant surprises later on.

Taxes

If your creditor forgives more than $600 of your original debt, you can expect to receive a 1099 form at the end of the year that details the amount of the debt that was forgiven. Because you did not pay the whole debt, the creditor is permitted to claim the unpaid portion of the debt as a tax loss--and you must pay taxes on it. Any forgiven debt is treated as taxable income by the IRS. Failure to pay taxes on the forgiven debt constitutes tax evasion, which can result in steep fines or even imprisonment.

Debt Transfer

In some cases, paying a debt settlement to a creditor does not stop the creditor from selling the debt to a collection agency. This is usually a case of mismanaged records, but until a creditor puts a settlement agreement in writing, the agreement is not official and binding. Thus, it can legally sell the debt to a collection agency which can, in turn, sue you for the amount you still owe. If you do not keep up with the paperwork proving that you settled the debt, you may be forced to defend yourself in court for a debt you already paid.

Debt Negotiation Companies

Although debt negotiation companies may claim to be able to help you negotiate with your creditors, the Federal Trade Commission warns that not all debt negotiation companies are legitimate. Consumers should beware of any debt negotiation or settlement company that makes claims of being able to settle your debts for pennies on the dollar and preserve your credit rating. Debt negotiation companies have been such a problem for consumers in the past that 12 states currently outlaw the practice of settling a third party's debts for profit. In addition, a debt negotiation company may claim that it will "handle" any collection accounts for you, but in the event that a collection agency sues you over an unpaid or unsettled debt, the debt negotiation company will not provide you with legal representation.

Accurate Credit Reporting

The Fair Credit Reporting Act requires that all creditors report their clients' debts accurately. After a debt settlement, the debt on your credit report should update to "settled" on your credit report. If it does not, you have the right to report the inaccuracy to the credit bureaus and request a full investigation. You may also add a consumer statement to your credit report explaining that the debt was settled. You even have the right to sue the creditor if it continues to refuse to accurately update your credit file.

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How to Assume a Spouse's Pre-Marriage Debts

It is not difficult to assume a spouse's pre-marriage debts. The law does not require you to assume your spouse's pre-marriage debts, and will divide them accordingly during a divorce. However, if you do assume the debts while you are married, you will be held responsible for them if you were to get divorced. One reason to assume the debts is if you are trying to improve your combined credit score to purchase a house or a car. Additionally, paying them off will put you in a better financial situation.

Instructions

1

List all the pre-marriage debts from your spouse, the interest rates and the amounts currently owed.

2

Decide which debts are worth assuming and which debts you could quickly pay off. For example, debts which are only a few hundred dollars would be easier to pay off than to transfer into your own name. Debts more than $1,000 may be worth the extra financing.

3

Shop your credit unions and banks for the lowest interest non-collateral loan you can find. These may also be called consolidation loans. If one of the loans is a car loan, you may want to refinance it separately since auto loan interest rates may be lower.

4

Apply for the loan that has the best interest rate. It would not make sense to transfer your spouse's debt into your name; rather, you should have a shared ownership in the debt. Transferring the debt solely to your name would put you at risk, if you were to get divorced.

5

Pay off each of your spouse's loans with the money received from the bank. Call the bank to get the correct payoff amounts. When possible, pay the lender directly at the bank or online.

6

Make a plan to pay off your consolidation loan as quickly as possible. The lower interest rates and lump payments could make it easier to pay off your spouse's debt quicker, but you should pay more than the minimum amount due each month.

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Advice for Cleaning Up Credit

A clean credit report can help you get better interest rates on your financing, give potential employers a better opinion of you and even help you to rent a nice apartment or home. There is a great deal of information on your credit report that is collected from many different sources. In some cases, the information may not be correct. It is a good idea to clean up your credit report at least once a year to help keep your credit score as strong as it can be.

Basic Credit Report Information

According to federal law, every United States consumer is entitled to one free copy of their credit report from each of the three major credit reporting agencies every 12 months. Use that opportunity to order your free report and review it for errors. Make a comprehensive examination of all of your credit reports. Be sure to check everything from previous addresses to the balances left on your old credit accounts. If you see a mistake, use the dispute process outlined on each credit report to get the error corrected. You can only include one item per dispute, so be sure to keep copies of all correspondence back and forth between you and the credit agencies.

Check Your Bills

One of the things that may be causing problems with your credit report is credit card scam. You may not even think you have been a victim of credit card scam, but criminals do not always make thousands of dollars in purchases when they steal a credit card number. Sometimes they make purchases as small as $30, but they do so every month. They do it that way because most people never check their credit card bills to see the activity on their account. Check every one of your credit card bills and make sure you recognize all of the activity. If you see something you do not remember charging, contact the credit card company immediately.

Tidy Up Your History

Many people have credit cards with small balances that are spent to their limit. You pay the minimum payment each month, but new interest and service charges put you right back to the maximum. Consolidate these small accounts, pay them off but do not cancel the cards. Old credit accounts are good for your credit rating, but maximized credit cards hurt. You can use a personal loan with a lower interest rate than your cards, or you can get one card with a low balance transfer rate to consolidate all of your cards on. With the balances eliminated on those old accounts, they can then begin to have a positive impact on your credit. You can then turn your focus toward paying off the consolidated balances.

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Financial Debt Management Planning

Debt management is something that can help you get control of your finances and make your life easier. In order to organize your debt, you need to have a financial plan. You can formulate your own financial debt management plan, or there are organizations that can help you.

Start as Soon as You Can

Debt management is something that you will be doing your entire adult life, and the sooner you start to put plans in place, the easier it will be in your later years. Begin a retirement plan as soon as you start working, and stay with it throughout your working years. Younger people in their early twenties sometimes fail to see the importance of long-term planning, but in order to conquer debt, you must plan for it at every phase of your life. Proper retirement planning early in life can help to set up retirement plans that defer taxes and help you avoid other debt pitfalls that may otherwise occur if you fail to plan. It also helps to get used to developing a personal budget that has a savings plan involved in it at a young age. Many times throughout your adult life, you will turn to your savings to help you out of debt, and if you plan and begin saving at an early age, you will have the resources to deal with the events that happen later in life, such as the addition of children to your family and all of their needs as they grow up.

Choosing the Right Debt Management Planner

According to the Federal Trade Commission, it is a good idea to ask questions of a credit counselor before you begin formulating a debt management plan with them. When you begin to talk to credit counselors, ask them about the services they offer and how they feel their services can best help you in your situation. Make notes of what they say, and then compare what they said to what you feel your situation may be. Ask the counselor if they are properly licensed to work as a financial consultant in your state. Ask about contractual agreements that the counselor may have you enter into and what kinds of fees will be involved with those agreements. The fee structure for counselors will vary, so always ask for a hard copy outline of the fees they charge. Ask the counselor what their policy is on keeping your personal information private and how they protect your important financial information from thieves. Before you take on a debt management planner, you are entitled to know everything you need to know about how they do business and how they intend to help you.

Credit

One of the quickest ways to create debt is through the use of credit. When you do your debt management planning, always set aside money each month to take care of your obligations and allow for entertainment spending as well. Set your limits and then stay within those limits. Having a credit account as a back-up source of funding is practical but only if you limit your use of that account to emergency situations. If you do not have the cash, then you do not need to make the purchase.

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Debt Cure Secrets

Many of us have to live with debt as part of our daily lives, whether it is mortgages, bank loans or credit card debts. If left unchecked, debts can create huge problems for the debtor, including damaged credit rating, high interest rates and an inability to secure future loans. Eliminating a debt often takes time and discipline. A few secret tips can make the process easier.

Reduce the Principal

After taking on debt, some people focus solely on their minimum monthly payments, which often constitute the interest only. That keeps the debt afloat but doesn't do anything to reduce the principal: the amount you actually owe. Make sure when you make your payments that you include at least a small amount to address the principal: reducing your overall debt instead of just treading water.

Don't Go Any Deeper

You need to ensure that your debt shrinks rather than grows every month. A strong budget can help you do that. Track every bit of spending you do in a given month -- everything from your mortgage to your morning cup of coffee -- and write down all of the figures on a spreadsheet. Then write down a second row of figures covering all of the earnings your household brings in. Do this over three or four months to get a good average, then see if you spend more than you earn each month. If you do, look for ways to either reduce your expenditures or earn more money until you have completely closed the gap. It will keep your debt from getting out of hand.

Look for Help

If you find yourself in serious debt, you don't have to face it alone. Third party agencies such as National Foundation for Credit Counseling and the Independent Consumer Credit Counseling Agencies offer advice and assistance for those in need. You may be able to negotiate with your creditors directly in order to reduce the interest payments, or take out a debt consolidation loan to reduce your payments to a single amount. Not only can such tactics help keep the amount you owe in hand, but they give you the feeling that you have someone in your corner, and that you're not facing the debt alone.

Stay the Course

Don't expect your debt to vanish overnight. In many cases, you need to reduce it in increments that take place over many months. Don't get discouraged and don't let your discipline slip. Set goals for reducing your debt and use the thought of a debt-free life to help motivate you to stay on task. Over time, it will become second nature to you, and allow you to reach your goals without undue stress.

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How Many Times Can You Forbear on a Student Loan?

Many lenders for student loans allow the borrowers to apply for forbearance. This is a special loan status that allows the borrower to make reduced payments or stop making monthly payments for a while. Putting a loan in forbearance can alleviate stress on your budget, without damaging your credit score with missed payments.

Total Limits

Federal student loans allow borrowers to have no more than three years, or 36 months, of forbearance. Federal student loans include Stafford, Perkins and PLUS loans. Private lenders set their own caps that might differ from the federal government limits. Contact your lender to find out the overall cap on how long you can receive forbearance.

Limit Per Request

Federal student loans allow borrowers to receive no more than 12 months of forbearance with each application. If the borrower requires another forbearance period, he must reapply to be granted another period of up to 12 months. If you only need forbearance for a few months, ask if you can forbear for a shorter period to save you from using up so much of your limited forbearance.

How to Forbear

Apply for forbearance through your lender. There might be an application on your online loan management page, or you might have to call the lender to receive an application. When you apply, fill out all required information, including the reason for which you are requesting forbearance. Submitting an application does not guarantee that you will receive forbearance. To avoid damaging your credit score and incurring late fees, continue making your payments as regularly scheduled until your lender has notified you that your loan is in forbearance.

Considerations

When you forbear on a student loan, interest still accrues on your balance at its regular rate, even if your loan was subsidized. Therefore, if you pay less than your interest payment each month, you will owe more when the forbearance ends than you did when it began. This will increase the overall cost of repaying your loan. If you have a subsidized federal loan, apply for deferment before applying for forbearance because the government pays interest on deferred subsidized loans. Deferment is usually granted for borrowers who are in school or who are suffering extreme financial hardship due to unemployment or other reasons.

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Debt Reduction Plan for Creditors

Debt reduction plans are commonly known as debt settlements and debt negotiations. A debt reduction plan works with both the debtor and the creditor in lowering a debt that is owed. At times a third party will assist in making these plans and can assist in lowering the debt owed by up to sixty percent.

How Debt Reduction Plans Work

Debt reduction plans vary based on the individual's situation. Some individuals will opt for claiming bankruptcy prior to trying to alleviate the debt themselves. This can be done by hiring an outside agency for assistance or by contacting the individual creditors and agreeing on a plan that is right for you.

Creditors

Creditors will generally work with debt reduction plans; this is because they want to be paid just as much as you want to be debt-free. It is important to remember to receive all agreements with your creditors in writing. Never agree to a plan that does not work for you; only agree to pay what you can afford. Take notes while developing your plan with the creditor, be sure to write down who you spoke with the date and time and what your agreement was.

When to Contact Creditors

The best time to contact creditors is at the end of the month because this is when creditors are more willing to compromise due to finalizing their accounting books. When dealing with creditors be sure to request the reduction plan in writing; always be sure to document each conversation.

Outside Agencies

Outside debt reduction agencies assist by analyzing the individual's situation. They ask several questions and determine what is best for you. Many agencies will request that you stop paying the creditors and placing the money owed into a separate account. After doing this the agency will contact the creditors for you and negotiate your debts. It is important to keep in mind that debt reduction agencies will assist you with your debts for a fee.

Federal Trade Commission

The FTC (Federal Trade Commission) advises you to stay away from debt reduction plans that result in untrue claims. FTC also advises documenting all claims and debt reduction plans with third party companies as well as creditors. Creditors frequently record calls to protect themselves from untrue claims. The FTC can be contacted by calling 1-877-FTC-HELP.

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Does Using a Debt Consolidation Company Hurt My Credit?

If you are considering debt consolidation, chances are you are already deeply in debt and your credit score may be suffering. If this is the case, using a debt consolidation generally company won't make it any worse, though there are exceptions. If credit score is a concern to you, then it is best to carefully review each program to see how payments are managed and reported to credit bureaus.

The Debt Consolidation Process

Debt consolidation begins with an overview of expenses

Debt consolidation begins with an interview between a credit counselor and the client. The counselor reviews the client's expenses versus income to develop a debt reducing strategy. Trustworthy companies let clients know if consolidation is a valid option or if simple spending adjustments or bankruptcy are better choices. Counselors offer plans that consolidate high interest credit card payments into one affordable lump sum. The counselors then work with the client's creditors to negotiate lower interest rates. A percentage of the monthly payment goes to the debt consolidation company as payment for these services.

Benefits

Debt counselors will offer suggestions on budgeting

Working with debt consolidation companies means that creditors recover most of the outstanding debt. Clients undergoing debt consolidation no longer receive harassing collection calls or late fees. Debt consolidation improves credit rating because the payments are made on time and kept current. This is important since late payments have a negative effect on credit scores. Working with a debt counselor also helps clients understand budgeting and money management.

Disadvantages of Using Debt Consolidators

Many debt consolidation companies are reputable, however, those that are not may cause damage to your credit score. Such companies have been reported to take payments from consumers without sending them to creditors. Some have made late payments to creditors on their clients' behalf. A few offer debt consolidation loans that have high interest rates, meaning the consumer will have a lower payment but end up paying more over time.

Effects

Keep older credit card accounts open to show a solid credit history

A statement on the credit report indicating a modified or reduced balance after a debt consolidation is viewed negatively by creditors. Sometimes an agency closes the credit card accounts when a client starts the program. This is detrimental because the overall available credit decreases but the balance stays the same. It is better to pay off the accounts first and then close them. Closing older accounts is not recommended because they have a longer credit history, and payment history accounts for 35% of a credit score.

Consolidating Credit Card Balances

It is tempting to transfer balances from high interest credit cards to those with low introductory rates. This helps reduce debt in the short term if you are diligent about paying down the debt. Looking for deals that have a long introductory period will give you more time to pay down balances. Remember to close the accounts yourself because accounts closed by the creditor will reduce the overall credit score. Another danger to using balance transfers is that opening accounts repeatedly reflects badly on your credit report.

Other Options

Non-profit credit counselors work with consumers to provide debt management advice without financial obligations. They help analyze spending habits and can assist in setting up budgets. Counselors can help consumers negotiate better terms with creditors. This usually has no impact to the credit report and can be done without debt consolidation. If debt is not extreme, paying higher minimum payments could help pay down debt faster than using a debt consolidation agency.

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