Should I Ask Credit Card Companies to Lower My Credit Limit?

Just as you can request an increase in your credit line from a creditor, you can ask it to lower your credit limit. Whether or not you should ask for a reduction in available credit will depend on your financial circumstances and the goals that you have set for yourself. Lowering credit limits can work in your favor or against you.

Reasons for Asking for a Lower Limit

The reasons behind asking creditors for a lower limit can vary. Perhaps you have evaluated your current credit situation and you feel your spending is spiraling out of control because you have too much available credit. Or maybe you are planning a trip and you don't want your credit card to have so much open credit on it during your travels in case it gets lost or stolen, assuming the creditor is willing to reinstate your credit limit upon your return. You may have paid your credit balances down or paid them off completely, or you don't want to be tempted by a high credit limit. A loan you have applied for may also be the reason behind asking your creditor for a lower credit limit.

Possible Effects of a Lower Limit

Asking a creditor to lower your credit limit can have a negative effect on your credit score, especially if you're already carrying a balance. For instance, if you have a credit card with an $8,000 limit and you've used $2,400, you have used 30 percent of your available credit. If you ask your creditor to lower your limit to $5,000, once the limit is lowered you will have used almost 50 percent of your available balance. The amount of credit you have versus the amount of credit you've utilized can shave points off of your overall credit score, especially if you're using over 30 percent of your available credit balance.

If a loan officer handling your mortgage loan request reviews your credit report and sees that you have $20,000 worth of unused credit on various credit cards, he may take into consideration the available funds that you could possibly utilize, causing you to have a larger debt-to-income ratio. To get the loan you want, you may have to request a reduction in your credit limit.

Alternatives to Asking for a Lower Limit

In certain situations, such as being approved for a home loan, asking for a lower credit limit can work to your advantage if you have a large amount of unused credit and lowering the limit wouldn't increase the amount of utilized credit to more than 30 percent of your available amount. Otherwise, you may want to consider alternatives such as paying down your credit card debt below 30 percent or more and then using your credit card only for amounts you can pay in full each month. This will take discipline on your part to resist the temptation to use your available credit balance.

Extra Advice

Any change in your credit score due to being granted a lower limit on your credit card won't last forever. If you aren't concerned about lowering your credit score temporarily, go ahead and request a lower limit if it will help you manage your debt.

If you are planning on applying for a large loan and you have used 30 percent or more of your available credit, you may not want to request a lower limit, because it could cause you to be denied for the loan due to a decrease in the amount between your credit limit and the amount you currently owe to the creditors.

If the creditor is interested in granting you the large loan, he can request that you pay off some or all of your credit balances before he will grant you the loan. Or he can suggest that you ask your creditors for a lower limit if you have a large amount of unused, available credit. Some lenders will view you as less of a financial risk for a large loan if you don't have a large amount of unused credit that you could use at any time. But requesting a lower limit won't work in your favor if you are already carrying balances close to 30 percent or more of your total credit limit.

Sometimes when you demonstrate financial responsibility in relation to a credit card account, the creditor will automatically raise your credit limit. You can monitor your statements for this change, and contact the creditor immediately to restore the original, lower limit.

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How to Insure Debt

Credit or debt insurance is insurance that is purchased in addition to taking a loan or line of credit in order to secure the buyer in the event that an illness, injury, job loss or death prevents him from repaying his loan. Debt insurance can either be voluntary or an involuntary part of the contract when applying for a loan or mortgage. The lender is the beneficiary of this insurance, although the premium is paid by the buyer. A few steps can help you determine whether insuring debt is right for you.

Instructions

1

Determine whether the loan or mortgage you are applying for includes debt insurance as part of the contract. Some lenders include the debt insurance as mandatory, but in many cases it is optional.

2

Assess your current financial situation to determine whether your personal insurance would already provide adequate or better coverage than debt insurance. Review your health insurance coverage and savings to determine whether they would amply cover your debt during an event that reduces your income. Keep in mind that debt insurance is usually not automatically approved at the time of application, and your claim may be rejected when you need it.

3

Call or meet with your lender about various rates and premiums of debt insurance and what kind of coverage they offer. Look into other kinds of personal insurance if you do not already have it to see if they could offer more overall coverage for cheaper premiums.

4

Purchase debt insurance from your lender only when you have ruled out the possibility of adequate personal insurance to cover the loan payments and you are certain you can easily afford the extra cost of premiums.

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Debt Relief for Unsecured & Secured Debt

Being overloaded with debt is not a pleasant experience for anyone. There comes a time when you know you won't be able to pay even the minimum debt payments and still cover day-to-day living expenses. When that happens, it's time to consider debt relief for unsecured and secured debt.

Unsecured and Secured Debt

Any debt not secured by an asset is an unsecured debt. Credit cards are unsecured. Personal loans and most medical bills are unsecured. Payday loans and pawnshop loans are secured by your postdated check or permission to debit your bank account in the case of payday loans. Pawnshop loans are secured by the asset you've given the pawnshop. A mortgage is secured by the home. Some furniture stores secure the purchase of furniture on credit with the furniture you've purchased.

Renegotiation

Renegotiation is working with your creditors to bring down the interest rates and waive any late fees so your payments are within reach. This is possible on secured debt such as the mortgage on your home and unsecured debt such as credit cards. If the interest rate is 18 percent and you're able to get the creditor to bring it down to 9 percent, or even less, your monthly payment will substantially decrease and the debt will be paid off more quickly.

Credit Counseling

The credit counseling company goes over your income, expenses and assets and works with you to develop a budget that pays off as much of your unsecured debt as feasible within a two-to-five-year time span. You may have to sell assets and put the cash toward debt payment. The credit counselor works with your creditors to renegotiate interest rates and minimum payments. Previous penalties for late payment may be waived. You pay the counseling company one payment each month. The company then pays each creditor per the new agreement. Credit counseling works primarily for unsecured debts.

Debt Settlement

Simply put, you work with each unsecured creditor to come up with a payoff amount that's from 20 to 50 percent less than what you owe them. This payoff is a lump sum payment. Once they receive that payment, the remainder of the debt is forgiven. Debt settlement may have income tax implications because the forgiven debt may be considered income. Be careful when using a debt settlement service. The fees may be high. You pay the service every month until enough money has accumulated to pay off the loan at the negotiated amount. If the service goes out of business, or is unethical and doesn't pay the creditor, you still owe the money. Until the lump sum payment is received by the creditor, they may proceed with litigation.

Bankruptcy

Bankruptcy requires a court procedure and a federal judge to declare you are no longer responsible for paying your debts. Nearly every type of debt may be included in a bankruptcy, with the exception of past taxes, federal student loans, child support arrearage and alimony arrearage. You will have to sell assets and put the cash toward the debt payment. Secured debts such as a car loan can be included, but the lender will take back the asset, such as a car. Foreclosure on a home mortgage is stopped by a bankruptcy, but arrangements for arrearages have to be made with the mortgage holder.

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The Truth About Zero Percent Financing

It sounds good when you hear it. Zero percent financing on car or credit card offers is a common promotion, but is it really a good deal for you? While a loan may have 0 percent interest rates, you may pay in other ways. In many instances, 0 percent interest is a marketing tactic and has little to do with the actual cost of the credit.

Do the Math

Some consumers get so excited about the 0 percent financing offer, they don't bother to look for the best price. This happens the most with vehicles, but can happen with any consumer item. The 0 percent offer could encourage you to go with a particular item when another may cost less. Most 0 percent offers on vehicles are given instead of rebates or other incentives that you may receive. You need to do the math. It may be cheaper to take the incentives and get a low-interest rate loan from a local credit union.

Introductory Period

Credit card companies send offers with 0 percent interest for a certain time period, after which the rates return to their normal levels. Many of these cards have higher interest rates after the introductory period than a card without the teaser rate. They also may charge higher balance transfer fees.

Credit Always Costs Money

Just because you are paying 0 percent interest on a loan or credit card does not mean that you are not paying for the credit. If you are buying a car or another item, such as furniture, the seller or the manufacturer has probably paid a fee to buy the rate down to 0 percent. Essentially, this is money that you have paid because the amount paid to buy down the loan could have been used to reduce the cost of the item.

Deadlines

Often, 0 percent financing on vehicles is only available for loan terms of 24 to 36 months. The higher payments may make these loans unaffordable. On consumer goods, the loan may need to be paid off within a certain time period or you will pay finance charges. The charges will probably be assessed from the beginning of the loan, so you will have no savings in finance charges over a normal loan if you don't pay it off within a certain time period.

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Laws for Financial Hardships & Garnishments in Florida

Garnishment and financial hardship laws vary from state to state. Each state can create exemptions for certain debtors and set garnishment limits. However, no state can pass garnishment laws that allow creditors to garnish a larger percentage of disposable income than Title III of the federal Consumer Credit Protection Act. Florida has its own wage garnishment laws and it is the only state with a head-of-household exemption.

Wage Garnishment Overview

Title III of the Consumer Credit Protection Act is a federal statute governing wage garnishment limits. Title III sets the wage garnishment limit at 25 percent of a debtor's disposable income per paycheck or "the amount by which disposable earnings are greater than 30 times the federal minimum hourly wage." Florida's wage garnishment statute sets the same limit as the federal statute. However, Florida allows qualified creditors to claim an exemption for head of household.

Florida Wage Garnishment

In Florida, if a debtor qualifies as head of household, creditors are not allowed to garnish her wages. If a debtor who qualifies as head of household nets in excess of $500 per week, creditors still cannot garnish her wages without written consent. To qualify as head of household in Florida, a debtor must provide over half of all support for a dependent such as a parent, a spouse or a child. It is not required that a dependent live with the head of household. Even where a debtor does not qualify as head of household, creditors still cannot garnish more than 25 percent of disposable earnings in a given pay period.

Disposable Earnings

In Florida, creditors are allowed to take either 25 percent of a debtor's disposable income or the amount by which disposable income exceeds 30 times the federal minimum wage, whichever is less. As of July 2009, the federal minimum wage was $7.25 an hour. Disposable income includes all wages --- in a given pay period --- that remain after mandatory deductions such as Social Security, unemployment and taxes.

Additional Asset Protection

You cannot lose your home to a creditor in Florida, unless that creditor holds a mortgage on your home. Additionally, Florida protects debtors who live in an area that is incorporated from forced sales. Under Florida's constitution, debtors can claim up to $1,000 in personal-property exemptions. This means that up to $1,000 worth of personal property cannot be reached by creditors; personal property includes jewelry, furniture and clothing.

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What Happens If a Debt Collector Charges Your Bank Account Without Permission?

There are numerous methods that a debt collector may use to get the monies owed. They might include threatening letters or phone calls, harassment of family and friends and even a lawsuit to obtain a judgment. When this happens, a debt collector may garnish your bank account to get what is owed. This is, however, the debt collector's only legal method of accessing your banking information.

Look Over Paperwork

In some instances, the original credit contract you signed with a debtor states that if you default, the company has permission to charge your debit card or bank account for the amount owed. This stipulation is generally found in the small print of your credit contract and may be overlooked in your eagerness to get credit. Look over original paperwork to ensure that you didn't agree to allow the company to collect monies in this manner.

Make Sure You Don't Have A Judgment

If you are the type to ignore calls or letters from debt collectors, then you might not know if the company legally has the right to take the money. If a creditor has sued you in court and won, you may have a judgment against you. Judgments generally allow for wages and bank accounts to be garnished for a certain amount on a regular basis until all monies owed are collected. Check with your creditor or local court system to find out if you have a judgment and get copies of the paperwork to find out the terms.

Contact Your Bank

If you have no judgments and did not sign paperwork allowing the company to take the money from your account, then contact your bank immediately and alert it to the security breach on your account. Ask it to change your banking information and assign you a new account number. You can also request an alert for the company that took the funds, so that the company can make no further transactions from your account. If you have fraud protection, your bank may be able to help you recover the funds.

Contact Your Local Authorities

If a company has illegally removed funds from your bank account without your permission, contact your local authorities, as this constitutes theft. Even if the company operates in a different state, the financial crimes division of your local police department can give you direction on how to pursue charges and can tell you the appropriate next steps to deal with the company.

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Can the Credit Bureau Remove Judgments From Reports?

Court judgments creditors hold after winning a lawsuit against you don't only leave you subject to garnishment and asset seizure, they also hurt your credit. A civil judgment is a public record maintained through the court system indicating that you previously ignored your financial obligations to a creditor. Depending on your situation, you may have the right to demand that the credit bureaus remove the civil judgment from your records.

Credit Bureau Rights

Each credit bureau has the ability to modify data within your credit files at any time. Creditors typically report your debts to the credit bureaus via reporting software and your credit report updates automatically. A credit bureau representative can, however, access your credit report and manually update it to delete a judgment record.

Just because the credit bureaus can delete the civil judgment tarnishing your credit history, that does not mean that they will. The credit bureaus must focus on accuracy when maintaining consumer reports. Thus, although your judgment may be unpleasant and the only black mark on an otherwise unblemished credit record, if you legitimately owe the judgment the credit bureaus can leave it alone until the reporting period expires.

Reporting Period

Unless you successfully have the judgment record removed early from your credit report, it can remain there for up to 20 years, depending on where you live. While the credit bureaus delete most derogatory entries from your credit files after 10 years, judgments are governed by how long your state gives the creditor to collect by force. One the judgment itself expires, so does the credit trade line reflecting it.

Disputing the Judgment

Credit reporting laws in the FCRA that each credit bureau must adhere to require that the credit bureaus provide consumers with disputing options. You can dispute any item on your report -- including a judgment.

The credit bureau that receives your dispute contacts the courthouse that awarded the judgment and inquires about its validity. Should the court note that the judgment is valid, the credit bureaus will not remove it. If the court does not respond to the inquiry or verifies that the information on your credit report is inaccurate, the credit bureaus will remove the judgment from your report.

Vacating a Judgment

If you chose not to fight the collection agency in court when you received your initial summons, you can redeem yourself -- and force the credit bureaus to remove the judgment, by filing a Motion to Vacate with the court that originally heard the case. You must have legal grounds for filing a Motion to Vacate, such as never receiving a summons or complaint. The judge will then give you the opportunity to present your case. If you are successful overturning the court's previous ruling, the credit bureaus will remove the judgment from your credit report.

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How Much Does a Charge-Off Lower a Credit Score?

If you fail to make your credit card payments, typically within 180 days or six months after the first delinquent payment the credit card company will "charge off" your debt. A charge-off is basically a write-off (forfeited as bad debt) that gets reported to the credit bureaus as a charge-off and negatively effects your credit rating. A number of factors determine how much a charge-off will lower a credit score.

FICO Score

Credit or FICO (Fair Isaac Corporation) scores range from 350 to 850, with higher scores indicating a better credit history and better debt management on your part. The most important aspect of figuring your FICO score is your payment history, accounting for 35 percent of your total score. How much a charge-off will lower your credit score will depend largely on the payment history reflected in your credit report.

Credit Reporting

The Fair Credit Reporting Act stipulates that a credit card charge-off must be removed from your credit report after a period of seven years. The reporting period officially begins on day 180 after the last payment on the account was made. Once the charge-off is removed from your credit report, all evidence of the debt and your payment history for the particular credit account disappear as well.

Collection Agencies

Many credit card companies sell charged-off debts to collection agencies. Once a charge-off has been carried out and the debt has been sold, this does not relieve you from the responsibility of paying off the debt, and the collector will be contacting you. After the debt is taken over by the lender's collections department or sold to a collection agency, you will have two entries for the account on your credit report: a charge-off from the original lender and a status of "In Collections" from the collection agency. Collection agencies add additional fees to the debt and may file a lawsuit if the debt remains unpaid.

Effects

By the time the creditor charges off your debt, you have already done substantial damage to your FICO score with the documentation of continuous late payments in your credit history. As 35 percent of your FICO score consists of payment history, the accumulation of late payments steadily drops your credit rating. Around the end of the 180-day reporting period, the bulk of the damage will have been done by the delinquent payments, rather than by the charge-off itself. Depending on your previous payment history and credit score, the charge-off and the process leading up to it could cost you 50 to 150 FICO points.

Considerations

A person with a previously high credit score may see a more significant drop in her FICO score as the result of a charge-off; whereas, someone with a history of consistent credit issues and a low score may only lose a few points.

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Is There Help for Credit Card Holders From the Government?

As of 2011, there are no grants, tax cuts, personal bailouts or loans available from the federal government for resolving credit card debt issues. The government does make help available in other ways, but generally the credit card holder must accept responsibility for solving his own problems.

Counseling

The government makes free credit card counseling available through a nationwide network of government-certified credit counselors. The counselors are approved by the U.S. Department of Housing and Urban Development and can recommend all legal and ethical options for resolving credit card debt problems. The counselors also offer debt management plans for a fee. The plans last for four or five years with a goal of eliminating or greatly reducing credit card debt. Guidance from credit counselors is significant because of their good working relationships with credit card companies. The counselors can often negotiate lower monthly payments and interest fees.

Chapter 7 Bankruptcy

The government also provides protection from credit card and other debt through bankruptcy. The Federal Trade Commission (FTC) recommends that most people choose bankruptcy only as a last resort for addressing financial problems, but for some people it is unavoidable. Chapter 7 bankruptcy eliminates credit card debt in just a few months. Individual states set their own income limits for qualifying for Chapter 7, and usually only people with low incomes are approved. Chapter 7 liquidates assets to pay credit cards and other debt, but many people qualify to keep cars and a primary residence.

Chapter 13 Bankruptcy

Chapter 13 is a less commonly used form of personal bankruptcy, and it takes much more time to complete than Chapter 7. Chapter 13 requires a payment plan of three to five years, with unsecured creditors such as credit cards receiving money remaining from income after the court allows for reasonable living expenses. Some people with low income pay nothing to unsecured creditors during the three to five years, with all unsecured debt wiped out at the end of the bankruptcy. Chapter 7 and Chapter 13 feature a legal injunction called "the automatic stay." The stay is signed by a judge and prohibits collection efforts by credit card companies and others during the bankruptcy.

Debt Settlement

The federal government also makes it easier for some people to engage in debt settlement. The FTC recommends debt settlement as an alternative to bankruptcy. The strategy allows for paying off debts for less than the full amount owed. The Internal Revenue Service usually treats the savings as income, but people who are considered financially insolvent at the time are granted exceptions. Insolvency means a person has more debts than assets.

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How to Pay Off Multiple Bills

Having multiple bills to pay can create a lot of financial stress in your life. The total may seem overwhelming, especially if you can only afford to pay the minimum payments each month. People can experience hard financial times when they start to put necessities on credit cards because they cannot afford to take care of their daily needs. Others take advantage of "sales" by using credit cards to buy a bargain when they really cannot afford it and never consider the high interest rates as part of the price. Paying off these bills requires patience and perseverance, but it is obtainable.

Instructions

1

Create a savings for emergencies so that you never need to use credit cards to supply necessities for your family. Try to keep a balance of at least $1,000 in this account and make sure you distinguish between real necessities and something you desire before removing any of the money.

2

Start minimizing your debt by clipping coupons for items you always buy and cutting out unnecessary expenditures, such as the latte on the drive to work and eating out.

3

Save every extra penny that comes into your household and pay it on your smallest debt, recommends Dave Ramsey. Alternately, you may want to decrease the debt by paying on the bill with the highest interest rate, according to Suze Orman.

4

Create additional income by temporarily taking on a second job or having a large garage sale.

5

Choose to focus on the smallest debt or the one with the highest interest, but pay every spare penny on that bill. Once it is gone, take the extra money you now have and pay it toward the second smallest bill or the one with the second highest interest rate.

6

Repeat the method until all your bills are paid.

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Can I Borrow From My 401k to Pay Down Debt?

Employees usually can borrow money from their 401k retirement plans to pay down their debts. The question is whether you should use your 401k funds for that purpose, because it's not a wise choice in some cases. The amount of debt you have and your career plans should influence your decision on borrowing from your 401k.

Process

Consider whether you could borrow enough from your 401k to make a significant impact on reducing your debts. Employees usually can borrow up to $50,000 of their 401k account balance, and they typically have up to five years to repay the loan. It may not be worthwhile to borrow from your 401k if you're deeply in debt and the loan would only help you repay a small portion of what you owe. In such cases, you would still have a lot of debt, and you would create another debt by borrowing from your 401k. Retirement plan providers usually take monthly deductions from employees' paychecks to repay 401k loans.

Bankruptcy

Some employees borrow from their 401k plans to avoid filing for bankruptcy, but "Consumer Reports" notes that may unnecessarily increase their financial problems. Money in 401k plans is off limits to creditors, debt collectors and others when people declare bankruptcy. Employees who still have to declare bankruptcy after using their 401k to pay debts ultimately lose money they could have retained for the future.

Money Management

You may have enough money in your 401k to pay down a significant amount of your overall debt. However, "Consumer Reports" notes that people can easily end up back in financial trouble if they don't change how they handle their finances. For instance, it's important to avoid racking up high-interest debts from credit card charges and payday loans. Otherwise, you could accumulate more bills than you had before you paid off debts with your 401k loan.

Considerations

Avoid borrowing from your 401k plan if you're concerned about losing your job or are considering a job change. People who lose or quit their jobs after borrowing from their 401k plans usually have to repay the loan in full within 60 days of leaving their employer, according to Bankrate.com. More debt accumulates if you can't repay the loan by the deadline because you will have to pay taxes and penalty charges on the remaining balance of the loan.

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How to Earn Back Good Credit

After a bankruptcy or paying back bad debts, getting good credit again can seem nearly impossible. But just because you have made some mistakes with your credit does not mean you cannot earn back good credit. It is going to take some time and effort, but you can increase your credit score and have a high credit rating again. Whether you have had credit card debts, loan debts, college loan debts or medical debts in the past, you can earn back good credit.

Instructions

1

Pay off any debts you have now. Call up each one you have a debt with, whether they are collection agencies or the business you owe the money to. Get all of your bills together and figure out how much you can pay each one per month. Call each one and tell them how much you can pay each month. They will set you up with a payment plan and send you a bill each month for your new monthly payment. Pay the bills as soon as they come in every month.

2

Obtain a credit card for people with bad credit (see Resources below). You will have to pay an annual fee and a fee to get the credit card started. This may seem frivolous at first, but this may be the only way you can get a credit card. Once you have paid the annual fee and any other fees associated with this new credit card, you can start charging, but do so carefully--charge a small amount (an amount you know you can pay off each month). When the bill comes in, pay your entire balance off, not just the minimum payments.

3

Pay more money on your debts when you can. The only way to keep the bills out of collections is to call the billing department and set up a payment plan, and follow through by paying the agreed-upon payment every month when the bill comes in. If, for any reason, you are not able to make the payment, call as soon as possible to sort something out.

4

Sign up with an agency that will track your credit for you. Privacy Matters can track your credit report for you for a low monthly fee. It will alert you every time something changes with your credit report. This will ensure that you are aware of everything going on with your credit (see Resources below)

5

Limit how much you allow people to access your credit report. Anytime you apply for any type of credit (loans, credit cards, gas cards, department store cards) you are allowing them to access your credit report. This will show up on your credit report, and the more people you have accessing your credit report, the worse it looks.

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Should I Settle an Account or Pay in Full?

Unpaid bills often give debtors the unenviable choice of paying the account in full or trying to settle for a lower amount and dealing with the consequences of that down the road. Neither choice is correct in every situation. Your current income and long-term goals should drive the decision, such as if you want to borrow money in the future.

Benefits of Settling

If you need the maximum amount of money in your bank account, settling is the best option, because you sometimes get to pay 20 or 30 cents on the dollar. In addition, by agreeing to a settlement the creditor cannot pursue collection further, such as filing a lawsuit. Lawsuits often result in a lien on your property or garnishment of your bank account or wages.

Disadvantages of Settling

Settling debt lowers your credit score; how much depends on the starting point of your score and the rest of your credit history. A score of 780 drops to between 675 and 655 after settling a single account, according to Ellen Cannon of Bankrate.com. Assuming you want to obtain new credit as soon as possible, settling an account prolongs your return to an excellent credit rating. Also, the IRS taxes forgiven debt, so you must account for forgiven debt income when determining whether you can afford to pay a settlement.

Benefits of Paying in Full

Paying in full does the least amount of damage to your credit rating. Also, you have less legwork to do. Settling an account requires negotiations with the creditor, which you may not be prepared to do. Also, there is the chance that the creditor may want to keep you on as a customer if it sees that you will repay the debt in full, even if its takes you longer than the original agreement stipulated.

Tips

Take a look at your entire financial picture. If you want to pay off a creditor in full or settle a debt, you must have the finances to do either option while still meeting your other financial obligations. Defaulting on other debts keeps you in a cycle of debt and bad credit. Thus, you should talk to a financial counselor for at least one session. In some cases, bankruptcy is your best option, because you can wipe out unsecured debt and start anew.

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Tips for Consolidation of All My Debts

If you have thousands of dollars in outstanding debt, getting sound sleep at night is difficult. Those who are overwhelmed by the thought of owing different amounts to a wide variety of creditors may find peace of mind by getting assistance from a debt consolidation agency. Before you determine that debt consolidation is the right strategy for you, remember to choose wisely and read the fine print in your contract.

Check Your Credit

Study your credit and get a good idea of where you stand financially. Not every situation calls for consolidation and you cannot possibly make an informed decision if you don't know the effect the debt has had on your credit. Don't think of debt consolidation as a way to avoid dealing with your finances. Figure out exactly how much you owe and to whom the money is owed first and then consider whether consolidation is a viable option.

Find A Trustworthy Company

Not all debt consolidation agencies run an honest business and not all will prove helpful to your efforts at simplifying your debt. Don't just pick the first company you come across in the phone book or online; do your research first. Check the Better Business Bureau to see if the company in question has a good reputation among its customers. It's also important to establish when the agency started operation to ensure you are dealing with experienced professionals.

Pay On Time

Once you have made the decision to consolidate your debts, make sure all your payments are received on time. A missed or late payment undermines whatever positive effects you received from consolidation in the first place. If you are not prepared to make timely payments on your debt, there is no sense in seeking a consolidation agency to assist you. Lumping all your debts into one does not make your life any easier if you don't plan on paying.

Pay More Than The Minimum

Debt collection agencies are in business to help you, but they also need to make money off of you to stay active. Be aware of interest rates in the debt consolidation process and increase your monthly payments as much over the minimum due as possible. This lowers your principle amount due, resulting in a lower interest rate on your remaining debt. Read the fine print in your contract, however, as some agencies charge a prepenalty clause that works against you if you pay over than the minimum.

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Laws Regarding Student Loan Deferment

Borrowers who cannot afford to repay their student loans right away can apply for deferment to waive or lower the payments for a specific amount of time. The rules for student loan deferment apply to all types of federal student loans, but they do not necessarily apply to private student loans. Borrowers should check with their private lenders to find out about specific policies they have in place regarding deferment.

In School

All students who are enrolled at least half-time pursuing a degree or certificate can defer student loan payments. Some internship and residency programs also qualify the borrower for in-school deferment. The deferment suspends all payments until the student drops below half-time enrollment. Some types of loans give the student a six-month grace period between ending school and beginning repayment. In-school deferment makes it possible for students to pursue further education without worrying about paying for the previous stage of education yet.

Public Service

Many public service jobs qualify individuals to defer student loan payments. Active duty military personnel can have their loan payments deferred while they are active and for 180 days following deactivation. Military personnel who are called to active duty from a student status qualify for up to 13 months of deferment following deactivation. Some volunteer positions, such as those with the Peace Corps or Americorps, come with automatic student loan deferment and a stipend following completion of service. Some teaching and public health positions also qualify the borrower for deferment.

Economic Hardship

Borrowers who are unemployed or are otherwise suffering extreme economic hardship will usually qualify for student loan deferment. To qualify for economic hardship deferment, you must either be receiving welfare assistance or make less than 150 percent of the monthly poverty guidelines for your family size and state of residence. To qualify for unemployment deferment, you must be actively looking for work and be registered with an employment agency in your area. Periods of unemployment or economic hardship deferment cannot exceed three years.

Considerations

Students whose loans were not subsidized by the federal government will continue to accrue interest on their balances while the loan payments are deferred. If the borrower does not pay the interest before beginning repayment again, it is capitalized, meaning it is added to the balance on which future interest is calculated. This can increase the cost of repaying the loan. Therefore, borrowers who qualify for deferment but can still afford to make payments should either not defer the loans at all or should make payments during deferment to cut the future cost of repaying the debt.

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What to Do When a Collection Agency Enters a Default Judgment

Collection agencies are relentless in their attempts to collect on an unpaid debt. You can ignore their calls and letters, but eventually, the collection agency may file a lawsuit and seek a judgment from the court. A judgment orders you to pay a debt, and sometimes, a collection agency can acquire a default judgment against you.

What is a Default Judgment?

The court notifies you of an upcoming court date if a collection agency files a lawsuit against you. You have the option of attending this court hearing to dispute the debt before a judge. However, if you do show or send your attorney to court on the day of the hearing, the judge has no choice but to rule in favor of the collection agency. The agency wins by default, and the judge issues a default judgment against you.

Consequences of a Default Judgment

Credit bureaus are notified of a default judgment, and with a judgment on your credit report, your FICO credit score can take a nosedive. Judgments also can complicate future loan and credit card applications. Lenders and creditors can pull your credit report, take note of the default judgment and deny your application. Judgments stay on your credit report for seven years.

Appealing the Judgment

You can take steps to remove a default judgment from your personal record. If you do not owe the money, and you can prove this to a judge, go to your local courthouse and file a petition to vacate or appeal the judgment against you. This appeal erases the original judgment and gives you another opportunity to state your case before a judge. Prepare for your hearing date by gathering evidence as to why you don't owe the money. You can bring copies of written contracts or canceled checks to show the judge. If you win, the bureaus remove the default judgment from your record.

Satisfying the Judgment

Many creditors will not remove a judgment from your credit report. But if you pay the balance owed, creditors will submit a judgment satisfaction letter to the courts and then notify the bureaus. Once the bureaus receive confirmation that you have paid a judgment, they'll update your personal file and change the status of the judgment to "paid." The original judgment will stay on your report for seven years, but future creditors and lenders will see that you paid or satisfied the judgment, which can help your approval chances.

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What Percentage of Debt Is OK?

A debt is a burden. In the case of a financial debt, you must dedicate a portion of your income or assets to paying off that obligation, which could prevent you from achieving other financial goals. If you want to better manage your finances it's important to know what percentage of debt is "normal" or acceptable for someone in your financial situation.

Types of Debt Accounts

Know the various types of debt accounts before answering the question of what percentage of debt is an acceptable level. The four main categories of debts are secured, unsecured, revolving and installment loans. Secured debts are tied to an asset, such as a car or home loan, unlike unsecured debt such as credit cards and personal loans. Revolving debt continues to persist and the payment amounts vary, as in the case of home equity credit lines and credit cards, while installment loans commonly maintain a level payment and have a definite end date.

Why Is This Important?

It's important to know exactly how much debt you carry at any given time. For one, part of your credit score is based on the total debt you owe to creditors. In fact, the total debt you carry makes up 30 percent of your credit score calculation. Your credit score also takes into account the mix of various debts (10 percent of the calculation). Knowing the percentage of debt you owe is also important if you plan to apply for a new loan in the near future --- lenders use this information when evaluating loan applications.

For Mortgages

When applying for a mortgage loan, lenders prefer that your total monthly debt payments not exceed 36 percent of your gross income. That includes all debts from car loans to your proposed mortgage loan payment. So if you plan to get a mortgage make sure your debt is below that maximum.

Debt Free

In truth, the ideal debt percentage to hold is zero in most cases. Though going debt-free might not help your credit score, it does give you the satisfaction of knowing that you're not obligated to anyone but yourself. Without debt payments you can save more toward your future, including retirement, education and raising a family.

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IRS Mortgage Debt Relief Information

Losing your home to foreclosure doesn't necessarily wipe away your responsibility to pay your mortgage. According to Bankrate.com, any balance left over after the sale of your home is still yours to pay. If you can't repay your mortgage balance, the bank has the option to write off the mortgage deficiency as a tax loss.

Significance

When any creditor claims a bad debt deduction on its business taxes for a debt you failed to pay, the IRS requires you to include the written off amount in your income. This results in you paying taxes on the entire forgiven debt. The Mortgage Forgiveness Debt Relief Act of 2007, however, may protect you from paying taxes on forgiven mortgage debt.

Features

If your foreclosed home was your primary residence and the bank wrote off less than one million dollars in mortgage debt, you qualify for debt relief. Even if you do not qualify under traditional standards, if your total debts exceeded your assets when you incurred the debt, you may qualify for partial or complete tax debt relief due to insolvency.

Considerations

To claim debt relief under the act, you must fill out lines 1e and 2 on Form 982 and submit it with your tax return. You do not need to fill out the entire form. Mortgage debt relief from the IRS is only available through December of 2012.

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How to Stop Foreclosure by Filing a Lawsuit

Most people who purchase a house take out a mortgage, a loan to finance the price of the house. The borrower agrees to pay back the sum of money owed over a period of time. When a borrower cannot repay this sum, he may face a process called foreclosure. Foreclosure means the bank that owns the mortgage can take the right to live in the house away from him. The borrower loses any equity in the house and may have to move. You can stop this process temporarily with a lawsuit.

Instructions

1

Hire a lawyer specializing in real estate. Make sure the lawyer understands your situation completely. Once you are behind on payment of the mortgage, the bank may file a foreclosure lawsuit. The aim of the lawsuit is to remove you from the property and take legal claim to it. Once this lawsuit is filed, you will receive a summons that notifies you that it has been filed. You have 28 days until you have to respond to the foreclosure lawsuit.

2

Respond to the summons. If you do not answer the summons within this time frame, the mortgage company can get a default judgment against you. The default can allow the local sheriff's office to sell the property without your consent and legally remove you and your belongings from the premises.

3

Have your lawyer file a motion for extension of time. This motion must be filed in local courts. This is an answer to the suit filed by the bank. The motion for extension of time will grant you an additional 30 days or more to respond. This can give you time to find necessary documents and deal with the threat of foreclosure more effectively. Filing a motion for extension of time may help you avoid foreclosure by giving you the leverage to convince bank officials to lower your interest rates or extend the term of the mortgage. This can help you keep your house.

4

Find out if the bank is in violation of the law. Investigating this can buy you time or help you avoid foreclosure altogether. Sometimes banks are in violation of the Truth in Lending Act. This could subject bank officials to financial penalties. Banks may be in violation of this act because of actions such as failing to notify borrowers of late-payment fees. This may make it undesirable for the bank to foreclose on the property in question and help you avoid foreclosure. Your lawyer will work with you to investigate these claims.

5

Negotiate with the bank if you find any violations of the Truth in Lending Act. Bank officials may be reluctant to foreclose on a house if they can possibly avoid doing so. Foreclosure leaves the bank with a bad loan and property that may require fees to maintain. By taking the previous steps, you've demonstrated to the lender that you will take any legal steps available to stop foreclosure.

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Help for Personal Debt

It's not uncommon for adults to have some measure of personal debt. However, when debts become a problem and you're unable to make minimum payments, or you notice a decrease in your score due to high credit card balances, perhaps now is the time to take charge. Debt elimination can increase extra income, wherein you're able to save more and improve finances.

Make Lifestyle Changes

Lifestyle can play a role in excessive debts. If you're accustomed to eating out daily with friends, going on regular shopping sprees or enjoying lavish vacations, you may discover that your present income and cash flow can't accommodate such enjoyments. This forces you to rely on credit cards and loans to maintain a certain type of life. Rather than live beyond your means and acquire excessive personal debt, think smarter and make changes to improve your finances. There's nothing wrong with having fun and going on vacation. The problem lies when you can't afford certain choices. Eliminating personal debt requires a measure of sacrifice. This may involve moving into a cheaper apartment or house, trading in your car for something less expensive and reducing the amount you spend on entertainment.

Learn Discipline

Make cash your friend to eliminate personal debt. Credit cards allow you to buy whatever you want now. Since you're allowed to carry balances from month to month, there's no rush to pay down the charge. Keeping debts to a minimum involves paying off credit card balances each month. Not only does this habit help you avoid personal debt, it also improves your FICO credit score. Before pulling out a credit card, ask yourself the following: can I pay off this item within a month? If your answer is no, leave the item in the store and wait until you can afford it.

Inventory Debts

Estimating how much you owe doesn't work with debt elimination. You have to know your exact balances and how much you have in disposable income each month. Start by looking at your personal budget. How much do you make a month after taxes? What are your recurring, necessary expenses? Write down your expenses and subtract this figure from your income after taxes. Place your debt statements on a table and calculate how much you owe. With $300 in extra money each month, you can pay off your $3,000 balance in 10 months.

Create Extra Money

Some people remain in debt because they legitimately don't have the extra money to pay off balances. In fact, some people don't have enough to meet their monthly obligations and they compensate with credit cards. Getting out of debt in this situation typically involves creating extra household income. Finding a better paying job, starting a home-based business or working part-time can help you become debt-free.

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Credit Card & Debit Solutions

After you've made the decision to pay off your debt, you must choose between several different options. No one solution works for everyone. Your choice will depend on your financial situation and the severity of your debt. However, with each plan it's vital to make a firm commitment to pay off all the debt and keep it paid off to avoid falling back into debt later.

Snowball Plan

One solution for paying off debt is to pay off your smallest balance first in what is called the snowball plan. Some financial experts recommend the snowball plan based on the idea that once you see your debts shrinking, you'll be more encouraged to continue paying down the rest of your debt. You will see the effects of your efforts fastest on the smallest debt. Once you pay off the smallest debt, continue to the next smallest debt and so on, until all your debt is paid off.

Highest Interest First

Other financial experts recommend paying off the credit card with the highest interest rate first. Interest is expensive, and the longer it sits and accumulates, the more you're paying toward your debt. Therefore, it makes sense financially to get rid of those debts with with the highest interest first so you're paying the least amount of interest overall by the time you get to the card with the lowest interest.

Consolidation Loan

Consolidation loans wipe out your debts so you make one monthly payment rather than multiple payments to different accounts. Those who have trouble keeping track of payment due dates may benefit from a consolidation loan; however, they may be risky. Although consolidation loans are often advertised with very low interest rates, those rates are generally reserved for those with extremely good credit. According to Bankrate, 70 percent of those who take on consolidation loans end up with the same amount or more debt within two years. Therefore, you must be fully committed to keeping your debt paid off if you take on a consolidation loan.

Debt Management Plan

For those who have had problems paying their debt, a credit counselor may recommend a debt management plan (DMP). Under a DMP, your credit counselor will negotiate with your creditors for lower interest rates or pay off balances. The counselor will then set up a payment plan through which you will pay off your debt over a set period of time. Be aware that you may have difficulty obtaining new credit down the road because creditors will view your DMP as an indicator that you have had problems paying the full amount of previous loans.

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What Does "Charge Off Account" Mean?

A charge off account is a tax and accounting maneuver done by a creditor. It means that they are reporting the debt as a loss on their income taxes so that they may claim it as a deduction from their income. A charged off debt does not mean that the creditor can't try to collect the debt in the future.

Time Frame

A creditor will usually charge off a debt if it has been delinquent for 180 days, or six months from the date of the last payment. At that time the account will probably report as "charged off" on your credit report.

Significance

A charge-off will have a serious impact on your credit score. This is a major delinquency in the eyes of most banks and credit card companies. A charge-off may also be listed on your credit report twice; once for the original creditor who charged it off and again for the collection agent pursuing the account.

Misconceptions

Often people believe that when a creditor charges off their account, they do not have to pay the bill or that their obligation to the creditor is voided. This is not true. A charged off account can be sold to a collection agency, which may use more aggressive collections techniques. A creditor may also transfer the balance to its own specialized collections department.

Benefits

In the past, paying off a charged off account could harm your credit score because it brought the collection account to a more recent status. This part of the credit scoring model has been changed. If the charged off account is still showing a balance on your credit report, you will generally improve your credit score by paying the bill in full. If the balance is already reporting as a zero balance because the creditor sold the account, then the payoff probably won't help your credit score as much.

Prevention/Solution

It is important to keep track of your bills and the payment due dates. It is possible to be surprised by a charged off account when you don't remember the original bill. Check your credit report each year. You can get a free copy of your credit report from each of the three reporting agencies each year for free by going to the annual credit report website.

Warning

Settling a charged off account for less than you owe can cause damage to your credit score. Settled accounts report as such and the settlement is now more recent than the previously charged off account. More recent accounts have a larger influence on your credit score.

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Can I Deduct a Medical Garnishment?

If you incur medical expenses and do not pay the hospital or medical provider, your creditor may initiate collections strategies such as contacting you by phone, sending you late notices or hiring a collections agency to contact you. If these strategies do not result in payment of your medical bills, the creditor may obtain a judgment against you by suing you in civil court. In most states, a creditor with a valid judgment can obtain a garnishment to take a portion of your wages to pay your defaulted debt. However, you might be able to claim garnished amounts as deductions to reduce your tax liability.

Allowable Deductions

Whether you can deduct garnished amounts used to pay medical expenses depends on whether the expenses would have been deductible if you had paid them directly to the medical provider. These amounts include garnishments for expenses not paid by your insurance company or other medical coverage. Eligible expenses include hospital and emergency room charges, surgery and anesthesia costs, addiction treatment, diagnostic fees, acupuncture and psychiatric care. Internal Revenue Service Publication 502 provides a complete list of deductible medical expenses.

Disallowed Deductions

If the medical expense would not have been deductible if you had paid the provider directly, you may not deduct a wage garnishment related to the service. Teeth whitening, cosmetic surgery, nonprescription medicines, hair removal and nutritional supplements are not considered deductible medical expenses. Also, you may not deduct judgment costs such as interest, attorney's fees and court costs.

Adjusted Gross Income Threshold

Before you may deduct wage garnishment amounts related to medical expenses, the garnished amounts must meet the adjusted gross income threshold -- you may not deduct medical expenses if they total less than 7.5 percent of your AGI for a single tax year. However, because most states allow judgment creditors to garnish up to 25 percent of your wages after taxes have been deducted, garnished amounts might exceed the 7.5 percent AGI threshold requirement.

Considerations

Although you may deduct medical garnishment amounts in some cases to reduce your tax liability, avoiding a judgment and resulting garnishment will help you avoid severe financial consequences. If you stay in contact with your medical creditors, you might be able to negotiate a monthly payment substantially less than the 25 percent maximum garnishment creditors may order in most states. Also, a money judgment can severely affect your creditworthiness for up to seven years.

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What Happens After Your Property Gets Repossessed?

If a lender holds a lien against property you own, it has the right to repossesses the property if you fail to make payments. For example, when you apply for an auto loan, your lender holds a lien against the automobile until you pay off the loan. If you miss a payment, the lender can seize the vehicle. The same is true with a mortgage or some other financed purchases. The consequences of nonpayment stretch beyond the repossession itself.

Property Sale

After repossessing your property, the lender sells it. Although the lender may sell the property through a private sale, it typically does so via a public auction. You have the opportunity to redeem your property by paying off the outstanding amount you owe plus any fees the lender incurred during the repossession. Your redemption rights vary depending on your state of residence and the type of property repossessed.

Credit Damage

If your lender reports your loan to the credit bureaus, your credit rating suffers from a property repossession. A mortgage repossession, known commonly as a foreclosure, will appear on your credit report for seven years, as will an auto repossession. The payments you missed prior to the lender seizing its collateral will also appear on your credit report for seven years and lower your credit score. A lower credit rating makes it more difficult to obtain a new loan to replace the repossessed asset.

Deficiencies

If the lender sells the repossessed property for an amount equal to or greater than the amount you owe, credit damage and the loss of the asset are the extent of the damage you will suffer when the lender seizes the item. If, however, the property sale does not generate enough revenue to cover your delinquent balance, you are still legally responsible for paying the difference, which is called the deficiency.

Collection Activity

The lender may demand that you pay the deficiency voluntarily or file a lawsuit. You have the right to defend yourself in court, but, should you lose, the court awards a judgment to the lender -- giving it the right to garnish your bank accounts and wages. Judgments also appear on your credit report and adversely affect your credit scores.

Tax Consequences

A lender does not have to pursue you for a deficiency you owe. It can opt to forgive your deficiency. Should the lender forgive your debt, it reserves the right to claim the deficiency as a tax deduction and send you a Form 1099 noting the forgiven balance. You are responsible for including any such forgiven debt as income for tax purposes. Thus, if the lender forgives your deficiency rather than pursuing you for payment following a repossession, you must pay taxes on your debt.

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Laws on out-of-State Wage Garnishments in Texas

The majority of states allow creditors to garnish debtors' wages; however, Texas does not. If a creditor has a judgment in one state and the debtor is in a different state, wage garnishment might be possible. This concept also applies to debtors who live in Texas but are paid in a state that allows wage garnishments.

General Criteria

A wage garnishment is a mandatory document that orders the debtor's employer to withhold monies from his income to satisfy the balance he owes the creditor. A wage garnishment is sent to the debtor's employer; therefore, it is executable in the state that the debtor is paid. If a debtor lives and works in Texas, wage garnishment does not occur since Texas does not permit creditors to garnish wages.

Possibility

If the debtor lives in Texas and is paid in a state that allows wage garnishment, an out-of-state creditor can garnish her wages. The creditor would need to go through domestication to obtain a wage garnishment. Domestication requires the creditor to obtain a judgment against the debtor in her (the creditor's) state, complete the required paperwork in the debtor's local court, pay the necessary fee and serve the debtor notice that she's domesticating the judgment. Domesticating a judgment can be a time-consuming and expensive process. For procedures on domestication, the creditor can consult the courthouse in the county that the debtor's assets are located.

Applicable Laws

Where domestication of a judgment is successful and wage garnishment is possible, the laws of the state that issues the garnishment apply. Therefore, interest is accrued on the judgment at the rate of the issuing state, plus employee discharge protection laws and garnishment withholding limits of the issuing state apply.

Considerations

Though Texas does not allow wage garnishment, an out-of-state creditor can still obtain a judgment in his state, domesticate it in Texas and execute it via other collection methods, such as bank account, rents or royalties garnishments.

Legal Agencies

Statutory entities, such as the United States Department of Education, the Internal Revenue Service and the state taxation agency do not need a court order to garnish wages. These agencies must, however, send the debtor a bill demanding payment and a notice of their intent to garnish prior to garnishing. If the debtor lives and works in Texas, her wages can be garnished for child support, back taxes and student loans.

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Debt Reduction Training

If your debts are spiraling out of control--and according to the site CreditCards.com, the credit-card debt of the average U.S. household is now over $8,000--you might require debt reduction training. This training, which can be provided by a nonprofit credit counselor, community association or financial planner, can help you learn how to not only pay down your debt but prevent it from building up again.

Paying For Professional Help

If you've run up a sizable amount of debt, it might be time to hire a licensed financial planner. This professional will study your financial situation and help you set up a budget that will maximize your savings while allowing you to gradually reduce your debt.

A financial planner can also help you meet your financial goals, whether they are saving money for your children's college education or saving for retirement, all the while providing you with a budget that will help you steadily reduce your debt.

A financial planner is a good choice for people who have run up debt because of poor spending decisions but are unlikely to repeat this pattern.

The best way to find a licensed financial planner is to log on to the home page of the Financial Planning Association.

Credit Counseling

If you've run up large amounts of debt several times, you might need help from a nonprofit credit counselor. A credit counselor will not only help you set a budget and pay down your debt, such a professional also will help you understand the reasons why you are consistently overspending.

Be careful, though, when choosing a credit counselor. Even some who refer to themselves as "nonprofit" charge high fees. Work with a counselor who either charges no upfront payment or one who charges a nominal fee.

To find a credit counselor, log on to the "Find a Counselor" section of the National Foundation for Credit Counseling. A link to the site is included in the References section of this story.

Local Debt Reduction Training

Your local churches, YMCAs or government offices might offer free debt management and reduction courses on a regular or periodic basis. These courses are often free, and will usually provide information on setting a budget, erasing bad spending habits or saving more money.

You can best find these local meetings by calling your city hall or by scouring your local newspapers or community Web sites for information.

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How to Write a Dispute Letter to a Collection Agency

Sometimes, you seem to get a debt letter out of nowhere. Usually, this is called "zombie debt" and it's something that you may or may not have paid in the past, but which your original creditor has sold to a collection agency. Under the Fair Debt Collection Practices Act, you have the right to dispute the debt, by sending a message in writing to the agency. You may want to do this to verify the debt or to prove that you have already paid off this debt.

Instructions

1

Use a business letter format. In the top right corner, put your address and the date. On the next line, write the agency's address; line it up flush left. Use a colon instead of a comma after addressing the recipient, then write your letter as usual.

2

Reference the Fair Debt Collection Practices Act section 809(b) on validating debts. This section allows you to request that the agency validate that it owns the debt that it is trying to collect by telling you to whom you originally owed the debt and showing proof that the agency now owns the debt. Collections on the debt will stop until the company answers those two questions.

3

State that you understand your rights. In some cases, a collection agency may add several fees to your original debt. This is not legal. Tell the company that you understand your rights--you do not have to pay interest or fees and the company cannot attempt to collect on the debt without verifying it.

4

Provide proof that you did pay the debt if this is true. Enclose proof, such as a copy of your bank statement or a copy of the canceled check.

5

Include an account number, if listed on your collection letter. If the letter that you received had an account number printed on it, you should include that in your letter, to make it easier for the company to respond to your inquiry.

6

Sign the letter. Print your name underneath your signature.

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Debt Counseling Vs. Bankruptcy

Mounting personal debt may have you reaching out for professional assistance. There are several options when it comes to debt management, but two of the most common solutions are debt counseling and bankruptcy. Before making a final decision on which route to take, you need to understand the significant differences between the two tough choices.

Definition

Personal bankruptcy is a court-administered program that allows you to discharge some of your debt and pay off the rest at a discounted rate. Debt counseling is a way to get advice on how to manage your debt, while also giving you access to programs that can allow you to negotiate your debt payoff amounts and consolidate your debt.

Differences

The most significant difference between debt counseling and bankruptcy is that bankruptcy is administered through the bankruptcy court system and can remain on your credit report for up to 10 years. Debt counseling is done through financial professionals and should only significantly impact your credit while you are enrolled in a debt management plan or similar program, according to money management experts on the Pier 55 website.

Considerations

A debt counselor can help you create a monthly budget, understand the areas of your spending that are causing problems and help put together a monthly plan to pay your bills and pay off debt. Debt counselors offer a service known as debt negotiation where they negotiate a discounted pay-off amount with your creditors and then get your creditors to agree to a monthly installment payment to satisfy the debt. With Chapter 7 bankruptcy, the courts decide how much of your debt is discharged and how much you have to pay back. In Chapter 7 bankruptcy, you may have to surrender your home and car as part of the court-ordered arrangement, according to debt expert Aleksandra Todorova on Smart Money's website. Both processes carry fees. A lawyer and court fees go along with a bankruptcy filing, and there are set-up and monthly administration fees for a debt counseling service.

Exploring Your Options

Debt counseling should be explored before deciding on bankruptcy. Because of the long-term nature and significant impacts of bankruptcy, it should be viewed as a last resort.

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How to Handle a Judgment

If you owe money to any creditor, that individual or company has the option to take you to court and obtain a judgment against you. You will receive notices, including a summons that you may choose to respond to. If you do not respond, the court will automatically rule in the creditor's favor, and order you to pay the debt, plus interest and fees. If you have received an income execution or notice of judgment from your state's court system you must set up a payment plan or prepare to have your wages garnished.

Instructions

1

Contact the original creditor or your local courthouse (listed on the judgment paperwork) to arrange a payment plan for the judgment filed against you. Typically, you will be required to make contact within 21 to 30 days of the date of the judgment letter. Failure to set up a payment arrangement will prompt the executor to contact your employer and set up a wage garnishment.

2

Give the associate the account number listed on the judgment, your name and social security number. If setting up a payment plan, tell the associate the gross amount of your last paycheck and the frequency in which you are paid. The amount due each pay period is based on a percentage of your wages.

3

Supply the court with any forms or documents necessary to pay your judgment without wage garnishments.

4

Obtain a certified check or money order in the amount of your first payment. Make a copy of the judgment and send it and the money order to the creditor or to the courthouse address listed on the judgment notice. Include a copy of your most recent pay stub if paying on a payment plan.

5

Continue to make payments as required. If you do not make timely payments, a notice of the judgment and garnishment will be sent to the payroll department of your employer and the money will be automatically deducted from your paycheck. Once paid in full, you will receive a notice of satisfactory payment.

6

Keep a copy of any paperwork associated with your judgment.

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The Effects of Debt Settlement on Credit Scores

Debt settlement can be a solution to reducing the amount of money you owe. The process of settling your debts involves contacting your creditor -- or hiring a settlement company to do this on your behalf -- and asking the creditor to accept a percentage of what you owe as payment in full. Because debt settlement involves the forgiveness of some of your debt, you cannot use debt settlement without some harm to your credit score. However, debt settlement sometimes is the best way to get back on your feet financially.

FICO Scoring

Your Fair Isaac Corporation (FICO) credit score is calculated based on many factors, including, among other things, your length of credit history, amount owed (your debt-to-credit ratio) and payment history (whether you have paid bills on time). Generally, using debt settlement impacts your credit score negatively in terms of the length of your credit history. However, with debt settlement, you eliminate some of the delinquent debts tracked in the payment history category of your FICO score. With these debts cleared, credit scores sometimes rise with the use of debt settlement. Payment history makes up 35 percent of the credit score calculation, while credit history length makes up only 15 percent.

Why Your Credit Suffers

When you opt for debt settlement, your creditors typically end up closing your account once you pay the arranged amount. Closing an account can shorten your credit history, because history is calculated using only open accounts. This, in turn, lowers your credit score. As a result, debt consolidation companies and other financial advisers, such as Debt Settlement Outlet and Dr. Don Taylor of Bankrate, recommend keeping older accounts open even if the balance on those accounts is zero.

Length of Impact

Generally, a settled debt may remain on your credit history for up to seven years. During that period, you should do everything you can to make the rest of your credit score as clean as possible. Obtain a free copy of your credit report each year through AnnualCreditReport.com to check your financial activity and dispute any inaccuracies that are negatively affecting your credit score.

Considerations

Debt settlement does lower your credit score somewhat, but the impact of settlement is not as severe as some other methods of dealing with debt. For example, bankruptcy means a creditor may get no payment at all, whereas a settlement provides the creditor a portion of what you owe. Because debt settlement reduces the amount you owe, the negative impact on your credit is partly offset by your ability to make other payments on time. Over time, the lack of delinquencies will rebuild your credit score. Additionally, settlement doesn't necessarily destroy your credit. In some cases, your credit score after a debt settlement may still qualify you for some loans. Also, you may ask your creditor to upgrade your account rating that is reported to the credit bureau. Creditors can list your credit rating anywhere from R1 to R9 on an account. R1 is the best rating possible and represents paying in full on time. R9 is the worst, representing bad debt, bankruptcy and other collections. Creditors also can use specific wording, such as "settled" or "settled in full," and they may upgrade your account to "paid in full" in rare instances. Such designations may help a potential lender view your credit report more favorably. The decision to change the account rating ultimately is up to your creditor, and not all creditors will upgrade account ratings based on your request.

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What Happens If You Bounce Your Bank Account?

You overdraw your bank account when you execute a transaction that exceeds the available balance in your account. Payment or purchase made by check, online bill payment, debit or ATM card, or electronic funds transfers are all subject to overdraft fees. Overdrafts that are honored by your bank can result in fees that, if not paid, can affect your credit rating and your future ability to obtain a bank account.

Overdraft Policies

When you have a checking account, the bank has the option of "covering" transactions you make if the transaction amount exceeds your account balance. The other option a bank has is to deny the transaction or deny the check for insufficient funds. If the bank "covers" the transaction it charges you a fee for doing so. Fees vary by bank. If the transaction is denied you are not charged a fee, unless you wrote a check. If a check is denied for insufficient funds the bank charges a set fee.

Overdraft Fees

Overdraft fees can be excessive particularly if your overdraft amount is a small sum, such as $1. Such an overdraft can generate a $30 fee depending on the published fee structure of your bank. In this case, you are $31 overdrawn, instead of $1 overdrawn. Some banks charge a fee each day you are overdrawn. "Covering" your transactions is known as overdraft protection. Some banks provided this as "courtesy" overdraft protection automatically. If you do not have overdraft protection, your electronic transactions are denied. If you do not have overdraft protection and your check bounces, you pay a fee to your bank, and your payee may also charge a fee, to cover the fee charged by his bank. If you have overdraft protection your transaction is paid, you overdraw your account and you are charged a fee for having the bank "cover" your transaction.

Implications

If you owe a bank money for any reason and default on the payments, the bank may send information to ChexSystems, which is a network of member banks who share information about the mishandling of checking and savings accounts. This information is used to determine whether or not to allow you to open a new account. Included in their report are your name, addresses and instances of mishandling your accounts, such as for non-sufficient funds. It also validates your Social Security number, lists inquiries initiated by you, for a loan for example, or those initiated by others, such as credit card companies. In addition, it lists any returned check to a retailer, with the retailer's information and that of the transaction; and the number of checks you have ordered.

Legislation

In 2010, new Federal Reserve rules went into effect to better regulate the overdraft practices of banks. Under the new regulations, banks can charge a $20 to $30 fee each time you overdraw your account, but can charge no other fees associated with the overdraft. Prior to the new regulations, banks could automatically enroll you in the overdraft protection program as a "courtesy", without your knowledge or permission. The new regulations require that you must notify the bank in writing that you wish to opt-in and agree to an overdraft charge, in order for the bank protect you from an overdraft and charge a fee for this protection. If you don't notify them, your debit and ATM transactions are denied if you have insufficient funds, without a fee. You can change your status at any time, in writing. This does not apply to checks or automatic bill payments. If you wish to opt-out of protection for these financial instruments, check with your bank. It may or may not be an option.

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Collection Letter Requirements

The Fair Debt Collection Practices Act (FDCPA) is a federal law that protects debtors and alleged debtors from unethical collection tactics by third-party debt collectors. Letters from collection agencies must conform to this law, which restricts the kind of language that can be used in the letter, and requires that full information about the debt be disclosed. While the FDCPA does only applies to third party collection agencies, some state laws apply similar restrictions on letters sent by the original creditor.

Initial Contact Letter

Under the FDCPA, after a debt collector first makes contact with an alleged debtor, the collector must mail a written letter, called a "validation notice", that provides the following information: The name of the original creditor, the amount the debtor allegedly owes, and how the debtor can challenge the debt if the debtor does not believe that she actually owes the debt.

False Statements & Threats

It is illegal for a debt collector to mail a letter that contains empty threats. For example, if the debtor lives in a state that does not permit the garnishment of wages to pay off a debt, a collection agency cannot threaten to garnish that debtor's wages. Similarly, the bill collector cannot threaten to sue the debtor if the collector actually has no intention of filing a lawsuit.

A collection letter cannot contain threats of violence or obscene language. Nor can it threaten a debtor with jail or suggest that the debtor has engaged in criminal activity.

Privacy

According to the FDCPA, a collection agency cannot send an alleged debtor a letter that is written or printed to appear as though it is from a government agency. Collection agencies are also forbidden from contacting debtors with a postcard. Furthermore, it is illegal for a debt collector to use an envelope that suggests that it has been sent from a collection agency. The debt collector can use its own name on the envelope, but only if the collector's name does not refer to debt collection.

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Statute of Limitations for Phone Bill Debt in Alabama

If you stop paying your telephone bill, you'll accrue a balance you remain responsible for after the phone company shuts down your service. The telephone company may turn an unpaid phone bill over to a collection agency, but the collection agency has a set period of time in which to force you to pay.

Significance

A collection agency may file a lawsuit for an unpaid telephone bill. In Alabama, the judgment from the lawsuit allows a creditor to seize a portion of your wages and bank accounts to cover the overdue debt. It may also place liens against personal property such as your car.

Time Frame

The statute of limitations for lawsuits on a bad phone bill debt in Alabama is two years. Thus, after two years pass, a collection agency can continue using alternate debt collection methods, such as telephone calls, but cannot legally file a lawsuit to recover the overdue telephone bill.

Considerations

Sometimes collection agencies ignore the statute of limitations and file lawsuits anyway. If the debtor does not inform the court of the expired statute, the collection agency can obtain a judgment by default. In cases like these, the consumers may sue the collection agency for violating federal collection laws upholding each state's statute of limitations.

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Incorrect Information on Credit Report

Incorrect information on your credit report can damage your credit rating and reduce your ability to obtain loans and other credit. Unfortunately, many people aren't aware of the information on their credit report until after they have been rejected for credit.

Types

Incorrect information on a credit report can range from harmless errors such as outdated occupation titles, addresses and phone numbers to more serious errors such as incorrect reporting by a creditor, duplicate information and unknown credit accounts and inquiries, which may be signs of identity theft.

Fair Credit Reporting Act

The Fair Credit Reporting Act, a federal law created to protect consumers from unfair credit practices, gives you the right to dispute any incorrect or incomplete information in your credit file. Each of the three major credit bureaus provides a form or online application for filing these disputes.

Dispute Procedure

After your dispute is filed, the credit bureaus have 30 days to investigate, and a dispute notation will appear on your credit report. If the creditor is unable to prove the accuracy of its information, the bureau must stop reporting it. When the investigation is complete, the bureau will send you a report detailing its investigation and an updated copy of your credit report if changes were made.

Misconceptions

Negative information on your credit report may appear incorrect at first glance, but may be accurate. Over time, older unpaid accounts may be transferred through several collection agencies. As a result, the credit grantor listed on the credit report may look unfamiliar. Contact the creditor listed to verify the name of the original creditor before filing a dispute.

Monitor Your Credit

Review your credit report at least twice annually to monitor instances of inaccuracies. Consumers are entitled to one free copy of their credit report each year, or reports can be purchased from the reporting agencies as often as necessary. There are also a variety of companies that monitor credit changes for you in exchange for a monthly fee.

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Should I Stop Paying My Debt to Settle?

Debt settlement is a method for eliminating excessive debt, and it may be preferable to bankruptcy for many. Debt settlement resolves unsecured debt such as credit cards through negotiated agreements in which the borrower pays less than the full amount owed and the creditor accepts it as full payment. However, only past-due accounts are eligible, meaning people trying to negotiate a debt settlement must stop making payments to allow their accounts to fall behind.

Credit Impact

Debt settlement hurts credit scores, although less than bankruptcy. Settlement information is considered very negative, and it remains on credit reports for seven years. Bankruptcy remains on credit reports for 10 years, and it is the worst possible information for your credit report. Settlement offers may be available on credit cards and other accounts after payments are behind by about three months, and better settlement offers may be available at around six months as creditors prepare to list the account as charged off and send it to a collections agency.

Missed Payments

Missing payments on one account to facilitate a settlement agreement could affect other accounts as well. Creditors regularly review credit reports for updates about their customer's finances. A credit card company noticing that you are missing payments on another card could reduce your credit line or close the account because it fears you are having financial problems. In addition, not making payments on any account hurts your credit score even before the settlement is added to your credit report. People who are considering not paying their debts to settle accounts should prepare to live without credit for a while.

Bill Collectors

Bill collectors and collection agencies are another issue for debt settlement. Collection activity will increase each month accounts are past due, eventually resulting in numerous phone calls and letters, some on a daily basis. The Fair Credit Reporting Act, a federal law, offers some protection against the harassment, including provisions for not allowing collection agencies to contact you by telephone.

Risks

There is no guarantee debt settlement will work. Creditors are not required to offer settlements, and they can file a lawsuit for the full amount instead. However, most creditors and debt collectors would rather settle than go to court. SmartMoney reports that settlement payments typically range from 20 to 70 percent of the amount owed, with most cases settled for around half the balance.

Tax Issues

Savings achieved through debt settlement are often treated as income by the Internal Revenue Service. For example, assume you settle a $10,000 credit card debt for $5,000. That's a significant savings, but the IRS may require you to boost your reported income for the year by $5,000, because the savings are considered income for tax purposes. Some people may qualify for an exception to the requirement if they can show they are financially insolvent because their debts are greater than their assets.

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If I Make Payments on Time Can I Get My Bills Sent to a Collection Agency?

Collection agencies specialize in collecting debts that consumers leave unpaid. Creditors must pay collection agencies a percentage of whatever the company collects or sell accounts to the company for far less than the debt is actually worth. Thus, collection activity is reserved for severely delinquent accounts. In certain situations, however, making payments on time does not protect you from having your accounts transferred to collection agencies.

Clerical Errors

All companies, no matter how well-organized, are subject to the occasional clerical error. Should this occur, your on-time account could be relegated to a collection agency. If you receive communication from a collection agency regarding an account you know you paid on time, contact your creditor immediately and address the problem. All creditors' policies differ, but you may need to provide your creditor with evidence of your timely payments, such as canceled checks, in order to have your account pulled out of collections.

Less Than Minimum Payments

Just because you send in timely payments does not mean that your creditor has to accept them. Creditors typically have a minimum monthly payment that they demand from you. Sending in less than the minimum payment leaves a delinquent balance remaining on your account. Because your account is officially "delinquent" your creditor can send it to a collection agency -- even though you are making payments toward the total balance.

Medical Debt

Your insurance company is responsible for paying off your medical debt in a timely manner. Even if you pay your insurance premiums regularly, that is no guarantee that your insurance company will remit payment to your health care provider within the required time frame. According to the Neighborhood Economic Development Advocacy Project, health care providers often send debts to collection agencies much more quickly than other creditors.

Keep in touch with your health care provider regarding payments made on your account. If your insurance company is late submitting a payment, contact the insurance company and inquire about why it has yet to pay off your debt. It's up to you to keep your medical debts out of collections.

Settlement Balances

When you negotiate a settlement with a creditor, that creditor allows you to pay less that the total balance you owe to "settle" the account. Unfortunately, the remaining balance doesn't always disappear. Unless your creditor provides you with a written statement agreeing to forgive your remaining debt after you pay off the settlement, it still owns the debt and, if it chooses, can sell the debt to a collection agency. Thus, making timely payments on a settlement agreement doesn't always prevent the account from ending up with a collection agency in the future.

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