About Getting Out of Debt

Getting into debt is easy. Getting out of debt is, unfortunately, far more complex. There are a number of avenues to get out of debt.

Significance

The modern world runs on credit. Long gone are the days when most people could live their lives without ever borrowing money. Unfortunately, the need and the easy availability of credit has made it easier than ever to get into debt over your head. Even if you are managing to pay your bills on time, being in debt can take its toll on your life in many ways.
The interest that you pay on debt is money that you don't have available to save or invest. That impacts your future by restricting the amount of money you can put toward buying a house, starting a business, fulfilling a dream or being financially stable when you retire.
The amount of debt that you carry directly affects your ability to get credit when you need it. Your income to debt ratio is one of the things that bankers look at when you apply for a mortgage or a car loan. If you owe too much money, you may not be approved for the loan, or you may end up paying higher interest rates for the loans you do get.
Being in debt may even affect you when you apply for a job or to rent an apartment. It's become more and more common for prospective employers and landlords to check your credit history when making a decision about hiring people or renting apartments to them.
Getting out of debt, or at least bringing your debt down to a manageable level is evidence that you're capable of managing your money.

Types

You've probably seen a lot of advertisements for debt management solutions of various kinds. If you're trying to get out of debt, there are several routes you can take.
Self-help is the most popular approach to getting out of debt. There are some tried and true techniques that you can use to help you prioritize your debts and pay them down until you are debt-free. This method requires a lot of self-direction and self-discipline.
Nonprofit debt counseling is another option for those who need help reducing their monthly payments or the total amount of debt that they owe. You can work with a nonprofit debt counselor who can help you look over your spending, contact your creditors and make arrangements for a payment plan that you can manage.
Debt consolidation is a popular option for people who can qualify for a debt consolidation loan. The principle is simple enough--you take out a loan large enough to pay off all of your debts at once, and then pay off the loan, hopefully at a lower interest rate and with a lower monthly payment than the combination of all the other loans.
Bankruptcy is a last resort for those who can't find any other way to pay off and manage their debts. There are several different types of bankruptcy available to individuals struggling with debt. The two most common are Chapter 7, under which all of your assets are liquidated to pay off your creditors, and Chapter 13, which allows you to work out a payment plan to pay off your creditors over two to five years.

Considerations

Before you choose a method of getting out of debt, you should consider a few important factors. These can help you make your decision.
How much do you owe? Many debt consolidation and debt solution firms will only work with you if your debt is within certain limits. Likewise, some bankruptcy options may not be available to you if your debt is too much or too little.
Are you employed or do you have a steady source of income? It can be important to be able to prove a steady, regular source of income if you intend to get a debt consolidation loan or qualify for some debt repair programs.
How much can you pay toward your debt each month? The amount that you can is a major consideration for some debt repair programs.
Do you need to reorganize your debt to make it easier to pay? A debt counseling or non-profit debt repair program can help reorganize your debts by negotiating with creditors and setting up a single payment plan.
Can you negotiate with creditors yourself or do you need help? If you have trouble talking to creditors, or if you've tried to negotiate smaller payments without success, a debt counseling program may be the right option for you.
Can you qualify for a debt consolidation loan? While a debt consolidation loan isn't always the best way to get out of debt, if you can qualify for a low-interest loan with smaller monthly payments, it may be a good choice for you.

Warning

If you decide to seek help getting out of debt, it's important that you understand the different kinds of debt relief programs available. Unfortunately, there are many unscrupulous people who seek to profit from the misfortunes of others. Debt relief scams target people who are desperate to clean up their credit and get out from under their bills. Be wary of programs that promise to erase your credit history or eliminate your debt without effort. Avoid any debt relief program that that tells you that credit collection agencies are not legally entitled to collect debt from you. Always check with the Better Business Bureau and do a web search for complaints about any debt resolution company you are considering before signing a contract. Your best bet is to work with a nonprofit debt relief company that charges reasonable fees for work on your behalf.

Time Frame

The amount of time it takes you to get out of debt depends on the amount of money that you owe and the amount of money that you can put toward your debt. Most credit repair agencies aim to have you completely out of debt in 2 to 5 years. A bankruptcy court will also attempt to work out a repayment plan that will pay off your debt in 2 to 5 years in the case of a Chapter 13 bankruptcy.

Read More

Does It Hurt Your Credit to Pay a Settlement Balance on a Debt?

A settlement on a debt is a negotiated agreement to resolve a balance on a loan account. On credit cards and other unsecured debts, debtors often use settlements to pay off balances for less than the full balance. It's possible, for example, to settle a $10,000 credit card debt for $7,000 -- if the creditor or debt collector agrees. Settlements can hurt credit initially but can be beneficial for the debtor's credit in the long run.

Considerations

The three major credit bureaus -- Experian, Equifax and TransUnion -- update accounts on credit reports as "settled for less than the full balance" or a similar phrase following a settlement agreement. Settlements are a negative credit event because they show the debtor failed to pay an account as agreed. Settlements hurt credit scores and may make it difficult to obtain new credit at reasonable interest rates. The effect is greatest when the information first appears on credit reports. However, the negative impact lessens over time if the debtor pays all other bills on time and keeps revolving balances on credit cards low.

Scores

It's impossible to predict the exact effect a settlement will have on your credit. Credit scores range from 350 to 850, and people at the bottom end of the scale may not be affected at all by a settlement. That's because their credit can't get much worse. People with higher credit scores have more to lose because of a settlement.

Challenges

Usually, people engaging in debt settlement already have poor credit. Banks and credit card companies will not settle accounts that are up to date. There is no reason for them to allow a customer who is paying on time to resolve a balance for less than the full amount. However, lenders may settle with debtors who are at least three to six months behind. At that point, the lender begins to fear the debtor may stop paying on the account altogether, resulting in a bad debt. Missing payments on credit obligations hurts credit scores each month, meaning someone with credit card bills six months behind may already have credit scores near the bottom of the scale.

Credit Repair

Settling does help credit in the long run because it satisfies the debt. Credit bureaus report credit accounts closed for nonpayment as "charge offs," another negative credit event that hurts credit. After a charge-off, creditors often assign the accounts to debt collectors and list them on credit reports as "collection accounts." Settling debts does not remove charge-offs or collections information but shows creditors that the debtor eventually resolved the account through settlement. That is important because some lenders, such as mortgage companies, will not extend credit to a debtor if the credit report shows active collection accounts. That makes paying off balances though settlement a good move even if there is initial harm to credit reports.

Read More

Can Creditors Garnish Self-Employment Income?

When you owe money to a creditor, one of the potential strategies that it could use to collect is a wage garnishment. However, if you are self-employed, you do not earn a regular wage from an employer. When this happens, it can be difficult for a creditor to garnish your wages.

Wage Garnishment

The basic idea behind a way to garnishment is that a creditor gets a judgment against you and then uses that judgment to take money out of your paycheck. The money from the garnishment is provided directly from the employer. This takes the responsibility out of the hands of the debtor and puts it on the employer. Once the debt is paid off, the wage garnishment is then ceased and the employee gets to keep his entire paycheck again.

Self-Employed Garnishment

When an individual is self-employed, she does not receive a regular paycheck from an employer. The money that is received by a self-employed individual does not have taxes taken out of it. Even if a company regular pays this person a wage as an independent contractor, no money is taken out for taxes. This means that the money cannot be withheld for a creditor. The money goes to the self-employed individual first before it could be withheld for the benefit of a creditor.

Ordered Payments

Although a self-employed individual cannot necessarily have his wages garnished, you can be ordered to pay a debt by the court. If a creditor files a lawsuit against the debtor and gets a judgment, the court can order the self-employed individual to pay the debt. This means that it is up to the debtor to handle the payment instead of an employer. If the payment is not made by the deadline, the debtor can face some serious consequences from the court.

Garnishment Alternatives

Even if a creditor cannot take money directly out of your paycheck, some other options exist for getting the money you owe. Creditors can take money directly out of your bank account through a levy in some cases. They could also place liens on your property that makes it impossible for you to sell the property until the debt is paid. This means that although wage garnishment may not be a direct threat, debt collectors can still get money from you in other ways.

Read More

Resources for Help With Medical Debt

After dealing with a major medical event, patients often face high medical debts from which they need to recover. Even those who have health insurance can end up with large amounts of medical debt, as insurance plans only cover a certain percentage of the cost of treatment. Resources that provide assistance for medical debt can help ease the burden of mounting medical bills.

Clinics and Hospitals

Private clinics and hospitals often have a patient assistance program to help make medical bills more manageable. A medical office would rather receive an adjusted payment from a patient than no payment at all. By calling a medical provider's billing office, you can either arrange to have a medical bill reduced or set up an interest-free payment plan. To have a medical bill reduced, a patient must submit proof of his household income. The medical billing office will then adjust the amount due based on the income information provided. If the patient is ineligible for a reduced medical bill or the reduced amount is still high, he can set up a payment plan wherein he pays an agreed-upon amount every month.

Disease-Specific Organizations

Individuals with rare or serious conditions may be able to receive co-pay and medical debt assistance through disease-specific organizations. For example, an individual diagnosed with leukemia can apply to receive co-payment assistance or help with medical debts through the Leukemia and Lymphoma Society. A patient can learn more about disease-specific organizations that help with medical debts by speaking with a patient case manager at her hospital or her doctor's staff.

Government Insurance Programs

If a patient has little to no income, she can apply to receive health insurance through the state Medicaid program. If the patient is eligible for Medicaid, her coverage may begin retroactive up to three months prior to acceptance. This means the Medicaid program could help pay for medical expenses that accumulated three months prior to the patient's acceptance into the health insurance program. If an individual has a severe and marked disabling condition that has lasted, or is expected to last, for at least 12 months, he may be eligible to receive Social Security Disability Insurance (SSDI) payments. A patient can use the monthly SSDI benefits to help pay for his medical debt.

Benevolence Charities

Churches, particularly larger ones, have benevolence programs that assist members of the congregation and community. An individual with medical debt should not hesitate to ask the pastor of the church she attends about such a program. If her church does not have a benevolence program, the pastor can refer her to a church that does. If an individual does not attend church, she can still try to access benevolence funds by talking to the churches in her community.

Read More

Paying Interest & Fees on Collection Agency Debt

If a person defaults on a personal debt he will likely face pressure to pay off his debt. The creditor may choose to pressure the debtor itself or it may outsource the task to a collection agency. The collection agency has all the powers accorded to the creditor in seeking repayment. However, the agency must respect the loan contract and is forbidden from adding additional interest or fees.

Contracts

Most debts derive from a contract in which the debtor agreed to pay back the creditor by a certain period of time. If the debtor fails to do so, the contract may stipulate that the debtor is required to pay additional fees or a higher rate of interest on the loan. When this is the case, the debtor is legally required to pay these fees. However, the creditor may not add new fees or interest arbitrarily.

Interest and Fees

A collection agency assigned collection of a debt is not allowed to alter the terms of the debt contract. This means that while the collection agency is allowed to assess the interest and fees called for in the contract, it cannot assign the person additional fees or charge additional interest. Creditors who do this may face civil penalties.

Considerations

Even if a significant time period has passed since the debt was issued or the creditor has to spend money to collect on the debt, it cannot pass charges or interest on inflation to the debtor. According to the Fair Debt Collection Practices Act, any money that the creditor spends trying to collect a debt, even a debt severely past due, cannot be passed onto a debtor.

Civil Judgments

The only exception to this rule is if a collection agency sues the debtor in civil court and is awarded damages. If the judge chooses to, he may award the collection agency compensation for legal fees. In such a case, the debtor is responsible for paying the extra fees assigned by the judge.

Read More

Can I Claim My Daughter as a Dependent if I Have Joint Custody of Her?

A divorce can have dramatic emotional effects, but it can also have financial effects. You and your former spouse must consider separate living expenses, alimony and child support payments. Divorce can also affect your taxes, particularly if you have children. If you and your former spouse have joint custody of your daughter, whether you can claim your daughter as a dependent depends primarily on the details of your divorce agreement.

Distribution of Custody

Even if you and your spouse have joint custody of your daughter, one of you may keep your daughter a larger percentage of the year. If your daughter lives with you a larger portion of the year, you can typically claim your daughter as a dependent to reduce your tax liabilities. Conversely, if your daughter lives with your former spouse a larger part of the year, you usually cannot claim your daughter as a dependent.

Alternate Year Deductions

The divorce judge may impose an alternate year exemption arrangement to address joint custody, particularly if your daughter spends equal time with you and your former spouse. In this case you will claim your daughter as a dependent one year, and your spouse will claim her the following year. This prevents one spouse from enjoying greater tax benefits from a joint custody arrangement than the other spouse.

Release to Claim of Exemption

Internal Revenue Service (IRS) Form 8832, Release of Claim to Exemption for Child of Divorced or Separated Parents, is typically used to allow a noncustodial parent to claim an exemption of a child to reduce her tax liability. However, your spouse may sign this form to allow you to claim an exemption for your daughter in a joint custody agreement. If you claim an exemption using Form 8832, you will need to attach a copy of the form with your tax return.

Considerations

The divorce judge may consider several factors when determining whether to allow you to claim your daughter as a dependent for tax purposes. These factors may include the tax consequences incurred by both you and your former spouse, which of you pays child support and the income earned by you and your former spouse.

Read More

Do Lower Interest Rates Affect Homeowners Who Are Already in Difficult Financial Situations?

Interest rates are the rates charged by lenders to people who take out loans, such as mortgages. While the rates offered to individual borrowers will be largely determined by the person's personal credit rating -- the riskier the borrower, the higher the interest rate -- they are also affected by large-scale movements in the price of loans offered by many lenders. Lower interest rates can aid homeowners in financial trouble in a number of ways.

Lower Interest Rates

When interest rates drop, anyone who wishes to borrow money likely will be required to pay less to secure the loan than he would have paid otherwise. For a person who is required to pay off a debt, this can offer some debt relief, as the person may be able to take out stabilizing loans. However, a homeowner whose interest rate on his current mortgage is fixed will not have lower monthly payments.

Adjustable-Rate Mortgages

By contrast, a person with an adjustable-rate mortgage likely will have the size of his payments reduced if interest rates are lowered. This is because the interest rate on this type of mortgage depends on the going rate of interest in the wider lending market, as measured by various indexes. The index to which the mortgage is linked should reflect the decline in interest rates, thus causing the amount of the person's payments to drop.

Other Types of Loans

In addition, a person may wish to take out another type of loan or line of credit to help extricate himself from a difficult financial decision. For example, a person who has paid off part of his home may choose to take out a home equity line of credit, which he can use like a credit card to take out loans. As the interest rate declines, the rate attached to this line will decline, too.

Refinancing

Another way in which a homeowner who is in financial trouble can be helped by a decline in interest rates is through refinancing. If a person is having difficulty paying off his current mortgage, he may be able to refinance to a cheaper mortgage. This is usually easier to do if the interest rate has declined since the time he took out his existing mortgage.

Read More