Help for Bad Credit and Debt Consolidation

If you have bad credit, you first need to figure out where you're starting from by taking a good, hard look at your current credit standing. When you understand your starting point, you'll be able to figure out the best route out of debt. Debt consolidation through a consolidation loan or, in more drastic circumstances, a debt management plan may or may not be the appropriate route to your financial freedom.

Credit Score

Each year, everyone in the U.S. is entitled to a free copy of their credit report from each of the three credit bureaus (Experian, Equifax and TransUnion). The Annual Credit Report website is the only website under the Fair Credit Reporting Act and the only one recommended by the Federal Trade Commission (see Resources). Once you have your credit report, comb through it to see if there are any errors. If you find any, report them immediately to both your creditor and the credit bureau by writing a letter and providing any documentation (see Resources).

Take Inventory

Before making a commitment to any type of consolidation, you must first figure out how much you can realistically pay toward your debt each month. To be successful in using a consolidation plan and to avoid spiraling further into debt, you must be completely committed to making your monthly payments on time each month and keeping the debt paid off forever. According to Bankrate, 70 percent of people who take on some type of debt consolidation end up in the same amount of debt or more within two years.

Lower Interest Rates

See what your credit card company has to offer you by way of lower interest rates. Consolidation loans and debt management plans are seen as dark marks on your credit report because they indicate to lenders that you have been financially irresponsible in the past. Also, the rock bottom interest rates advertised on consolidation loans are generally for those with stellar credit, so if you can lower the interest rates on your cards you may end up with a better deal than a consolidation loan. Use any credit card offers you've recently received to come up with a target interest rate, then call your creditor to for a reduction in your current rate.

Consolidation Loan

If you can get a low enough interest rate on a consolidation loan, it may make your overall debt less costly. Consolidation loans also have the added benefit of allowing you to make one monthly payment rather than individual payments to your multiple accounts. However, the loan effectively wipes out your current balances, which frees up the credit on your cards -- you must avoid falling into the trap of spending on this credit to pay off your debt. Applying for a consolidation loan requires a lender to make an inquiry into your credit report, which causes a negative impact on your score. If you manage to pay off your debt with the consolidation loan (and keep it off), the positive impact far outweighs the negative one. You may, however, have difficulty attaining new credit while using a consolidation loan.

Debt Management Plan

Those who are already delinquent on their payments and who are having a hard time meeting minimum payments should consult with a credit counselor. Only a credit counselor may recommend a debt management plan or DMP. These plans are seen as the last stop before bankruptcy. Once you decide to enroll in a DMP, your credit counselor will work with your creditors to try to negotiate lower interest rates and pay off balances. Once your counselor has created a plan for you, he will lay out a specific timeline, at the end of which your debt will be paid off. Bankrate warns that you should check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling to confirm that your credit counseling company is reputable.

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Advice on Bankruptcy & Foreclosure

Realizing that you cannot afford your mortgage payments is frightening. If you're weighing your options, both foreclosure and bankruptcy are probably looming large in your thoughts. However, bankruptcy and foreclosure are not synonymous, and sometimes, despite the negative connotations, one or the other can be a financial lifesaver.

Not Synonymous

While bankruptcy and foreclosure sometimes come one after the other, the two are not synonymous, nor does one necessarily result in the other.

Foreclosure results from the inability to pay your mortgage. When you stop making payments, the lender repossesses the home. Often, the lender will take legal action against you to collect what is owed on the mortgage.

Bankruptcy, on the other hand, results from an inability to pay a number of debts, not just a mortgage. In Chapter 7 bankruptcy, all debts are discharged, and any assets you may have are sold to repay your creditors. In Chapter 13 bankruptcy, your debts are restructured, giving you three to five years to come to a financial settlement with your lenders. Secured debts, such as mortgages and car loans, may be adjusted to give you further time to pay.

Not the Only Options

If you're struggling to make your mortgage payment, figuring out why is the first step to weighing your options.

If you are unable to pay any of your bills due to loss of employment or other financial catastrophe, your options are very different from the person who got behind on his mortgage but now has the ability to pay, or has found himself underwater, owing more on his home than the home is worth.

If you have some income to pay toward your home, it's a good idea to talk to your lender about mortgage modification options. Mortgage modification may allow you to pay the interest only, pay a reduced payment or otherwise make a payment arrangement that will allow you to keep your home until you are more financially stable.

Bankruptcy to Avoid Foreclosure

If overwhelming debts are making it impossible to make your mortgage payment, bankruptcy may allow you to discharge or reorganize other debts in order to make your mortgage affordable, but it's a risky proposition.

While bankruptcy can stave off foreclosure for a period of time, it's only a good idea if you can actually make the mortgage payment after the bankruptcy is discharged.

Chapter 7 bankruptcy can erase non-secured debt like credit card debt or medical bills that are hindering your ability to pay your mortgage. However, if you have property you do not want to lose, such as cars or even family heirlooms, Chapter 7 may not be the best option for you. Furthermore, income restrictions may disqualify you from Chapter 7 filing.

Chapter 13 can help you reorganize debts, including mortgage debt, to allow you to repay some or all of your creditors some or all of what you owe, but filing Chapter 13 is an expensive proposition, costing several thousand dollars in legal fees, and requires that you to pay back some debt.

A Difficult Decision

Choosing between bankruptcy and foreclosure is never an easy decision because both result in a serious financial setback. If you've lost your job and cannot afford your mortgage or other debts, filing bankruptcy may give you a clean financial slate, but it comes at a price -- bankruptcy is devastating to your credit score and can make getting credit, getting a job and finding a home difficult for the term that a bankruptcy stays on your credit report, up to 10 years. Foreclosure takes a lesser toll on your credit than bankruptcy, and as long as you can stay current on other bills, you can rebuild your credit in few years.

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What Does "Consolidate Loans" Mean?

Think of loan consolidation in the same way you would think of consolidating files. Instead of having multiple file folders, you could move all of your similar paperwork into one file folder. When you consolidate your loans, you are essentially moving all those debts into one loan. It's vital to make sure a consolidation loan is beneficial to your financial situation before investing the time and effort into applying for one.

Definition

When you consolidate your debt, you take out one large loan that pays off the balances on your existing debt so that you make just one payment per month, rather than payments to each of your individual lenders. The key benefit to a consolidation loan is the convenience of making a single payment each month. Also, if your current loans or other debts have high interest rates, you may be able to save money by consolidating under a loan with a lower interest rate.

Applying

It's important to shop around when researching consolidation loans. Discuss your situation with representatives at both banks and credit unions to find the lender that can offer you the lowest interest rate. Depending on how much debt you have, a fraction of a percentage point in interest could mean the difference between hundreds or even thousands of dollars.

Warnings

Not everyone will be able to qualify for the ultra-low interest rates advertised by lenders. The advertised rates are used to attract people who have high interest rates, but once their application is processed, those individuals may be surprised to find that they qualify only for consolidation loans with higher interest rates. This occurs because the advertised rates are usually reserved for those with excellent credit scores. A lender may be able to give you an estimate on the type of interest rate you would qualify for if you provide a consumer copy of your credit report prior to putting in an inquiry.

Considerations

Consider speaking directly with your lenders to negotiate lower interest rates on your current debt before applying for a consolidation loan. Remember, a consolidation loan is new credit, and each time you apply for new credit you create a small negative impact on your score.

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How to Estimate How Much to Pay Each Month to Clear Debt in Excel

Figuring out how much pay out on debt each month can be a complicated task. On the one hand, paying more each month reduces the amount of interest you'll pay and how much time you'll be in debt. On the other hand, it's important to maintain monthly cash for the necessities of life and other financial goals. Using an Excel spreadsheet will help set a monthly payment target that meets both needs, or at least finds the best compromise amount.

Instructions

1

Download the free Credit Card Payoff spreadsheet (see Resources). Because the spreadsheet uses no macros and has a simple one-page interface, it will save you the time of building a calculator yourself without introducing your computer to any virus risks.

2

Open the spreadsheet and fill your debt info in the Credit Card Info box. While the spreadsheet says "credit card" it can be used for any debt that allows for flexible payments. Enter the total amount of debt and the interest rate. The spreadsheet will automatically calculate your interest-only payment. Note this may be different from the minimum payment set by your debtor.

3

Enter a comfortable monthly payment in box A ("Calculate Months to Payoff"). The spreadsheet automatically counts how many months it will take the debt to be retired at that monthly payment (the years are in smaller text to the right of the box). It also shows how much of the total payoff will be going to interest.

4

Read the charts to the right of the green boxes. The top (blue) chart shows a range of payments by total months to payoff. Make note if a small increase in monthly payment will decrease your total payoff time by six months or more. Identify a payoff goal based on the blue chart. If possible, push yourself to the shortest amount of payoff time possible.

5

Enter your new payoff time in box B ("Calculate Monthly Payment"). This will give you a new target monthly payment, as well as once again giving you information about the total interest that will accumulate. The monthly payments from Box A and Box B now give you a range of payments to make each month. This gives you flexibility from month to month without giving up on your overall debt management goals.

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Can Spouses Be Held Liable for Debt Collection in Texas?

Each state has different laws regarding debt collection and the methods creditors may use to recover monies owed. In some cases, you may be subject to debt collection actions even if your spouse is the person who owes the debt. If you live in a community property state, such as Texas, debt collectors can take steps to seize your bank accounts or other assets if it's determined that you are liable for your spouse's debt.

Time Frame

Under Texas law, your liability for your spouse's debt depends on when the debt was incurred. If your spouse incurred a debt in his name prior to the marriage, the debt remains his sole responsibility unless you acted as a co-signer or guarantor. If you add your name as a joint account holder to the debt at any time before or after the marriage, you automatically become liable. Your liability for debts incurred solely by your spouse after the marriage is determined by the type of debt involved.

Contracts vs. Torts

Texas law makes a distinction between torts and contracts in determining spousal liability for debts. A debt is considered a tort if it is related to a legal action brought against your spouse in a personal injury lawsuit. In the case of a tort action, you are generally not considered liable for the debt unless your actions directly or indirectly caused the injury. If the debt is created by a contract, you can be held liable if the debt was incurred for necessities, such as food, clothing, shelter or medical care. For example, if you're covered under your spouse's insurance plan but you receive medical care not covered by the plan, you can be held liable if your spouse fails to pay the out-of-pocket expense to the health care provider.

Liability and Assets

If you're liable for your spouse's debts, Texas law has specific guidelines as to which of your assets may be seized. Generally, debt collectors cannot seek to attach any assets held in your name only that belonged to you prior to the marriage. If you own an account that is under your sole control but contains community property, creditors can attach it to debts related to tort actions only. If you and your spouse own a joint bank account, all funds in the account are considered community property, meaning creditors can seize them regardless of which spouse they belong to or who incurred the debt.

Considerations

If you're concerned about protecting your assets from your spouse's creditors, you can draw up a legal agreement prior to or after the marriage specifying which assets should be treated as community property and which should be kept separate. If your spouse dies, any community property under your sole control becomes subject to seizure by contract creditors. However, any new income or assets you receive are considered your separate property only and are not available to your spouse's creditors.

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How to Make Multiple Credit Card Payments to Reduce Interest

When you pay only the minimum on your credit card balances each month, you are not effectively paying down the debt. In reality, by paying the minimum you are merely paying a portion of the total accrued interest. The problem with making only minimum payments is that the interest continues to accrue. This could result in your paying on the debt for an unreasonable length of time. Depending on the amount owed, it may take a number of years to completely satisfy the debt. High balances and accruing finance charges can drain your budget and prevent you from ultimately reaching your financial goals.

Instructions

1

Obtain a copy of your credit report. Consumers are entitled to receive one free credit report every year from each of the credit reporting agencies. Having a copy of your report will give you a glimpse of what is being reported about your payment history. The credit report may also include the contact information for each creditor.

2

Get organized. Once you obtain a current copy of your credit report you can create an Excel spreadsheet that includes the total amount owed and minimum monthly payments. Establish a monthly budget. This will also show what you can commit to pay on your credit card balances each month.

3

Create a detailed payment schedule. Stick with your payment plan even when you see your balances decreasing. Resist the urge to splurge and incur additional debt. Keep in mind the goal is to get all your balances to zero. Slacking on your payment plan will slow your progress and result in you paying more interest. Pay down accounts with the highest interest rate first.

4

Make the payments according to your schedule. It is a good idea to contact the creditor when making your payment. Tell the representative where you would like the payment applied. If the creditor is not told that payments should be applied to the principal, they may apply the payment toward interest or toward the next month's bill.

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Debt Settlement Program Effects on FICO and Credit Ratings

Debt settlement involves using an outside agency to negotiate with lenders to reduce the total amount owed. Credit bureaus use the Fair Isaac Corporation (FICO) model to score consumer credit information for potential lenders. Debt settlement will affect your credit score, but just how much depends on your starting score and overall lending history. Most negative information remains on your score for up to seven years.

Debt Settlement Process

With debt settlement, you make payments to a settlement agency over time, amassing enough money in an account to make a reasonable offer on your debts. Debt settlement companies generally wait until your accounts become delinquent to negotiate with creditors. The reasons for waiting are twofold; the longer your accounts are delinquent the more likely a creditor is to accept an offer and waiting allows funds from your payments to increase enough to make an offer. The debt settlement agency then negotiates with creditors to settle for a reduced payment on the total amount due.

Credit Scoring

Debt settlement will negatively influence your credit score in two ways. First, when you stop paying lenders to as you try to negotiate with them, late payments end up on your credit report, lowering your score. Second, your report will show that the account was settled for less than the amount owed. A settled account is scored much the same way as a "charge-off" or a loan discharged in bankruptcy Barry Paperno, consumer operations manager at FICO tells Bankrate.com. The extent of the damage depends on your starting score and overall credit history. Generally, individuals with high beginning scores are hit the hardest.

Other Concerns

Debt settlement companies expect a fee and creditors continue to tack on penalty or late fees, increasing your total debt. There is no guarantee that a creditor will settle or even negotiate. Depending on state laws and the type of debt, lenders may initiate lawsuits leading to wage garnishment, bank levies or property liens. Depending on your total debt, settlement could take years to resolve. Additionally, the IRS may consider money you saved by settling the debt taxable income.

Considerations

The Federal Trade Commission cautions consumers against debt settlement companies asking for upfront fees, claiming "government bailouts," instructing you to stop communicating with creditors or guaranteeing results. Check with your state attorney general's office or the Better Business Bureau regarding a particular company's consumer history before committing to a debt plan.

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