If you've lost your job, had a medical emergency that your insurance didn't cover (if you were insured at all) or for some other reason now face a growing mountain of debt, the promises of a debt settlement company might look very attractive. But are they for real?
When considering debt settlement, it's important to keep your expectations realistic. Be wary of debt settlement companies that promise you a specific percentage reduction in your debts. Ask for statistics on the average settlement the company negotiates in both percentages and dollar amounts. Also understand that each negotiation will be different. Some creditors will be eager to settle a debt; others will hold out for a higher payoff.
Your credit report will likely reflect some negative information regarding the settlement. In all likelihood, the debt will be reported as settled, rather than paid as agreed. This isn't the worst thing in the world. This information will become much less relevant over time, if you resume (or develop) good credit habits. These include paying bills on time; keeping your debts proportional to your income; and resisting the urge to ask for more credit over time. Your credit report will heal faster than you think.
This is an important distinction between settlement and bankruptcy. Bankruptcy can stain your credit report for ten years. Financial trouble, followed by a period of stable payments and responsible use of credit, will rarely cause trouble for more than a few years. Creditors are far more interested in what you have been doing recently than they are in punishing you for past troubles, especially those that have been resolved. In addition, these negative marks must be removed from your credit report after seven years, meaning that all evidence of trouble is erased.
Debt settlement can and does produce a permanent reduction in the amount of money you owe a creditor. Once the bill is settled, the remainder of the debt is wiped out, and you can begin to create your new financial future.
Your creditors will not come back to you at a later date to seek repayment of the forgiven debts. You will be expected to pay taxes on the forgiven amount, however. For tax purposes, forgiven debt is considered taxable income. Keep this in mind when you negotiate your debt settlements. If possible, work to spread your settlements out over multiple tax years. This is especially important if you are seeking a substantial forgiveness. If you are not able to spread your settlements across more than one tax year, work with the IRS to create a tax payment plan you can afford.
Monday, March 23, 2009
Tuesday, March 17, 2009
Debt Relief v. Bankruptcy
An overabundance of debts may be leading you to think about declaring personal bankruptcy. While that is one option, there are other ways to reduce your overall debt load and secure permanent debt relief.
Debts can be secured or unsecured. Secured debts are those that are "backed" by the value of the asset being purchased. Homes and cars are typically considered secured debts. Other similar purchases, like vacation homes, boats and recreational vehicles, would also fall into this category. If for some reason, you can no longer make the payments on these assets, you can sell the asset to repay the loan. You could also find another purchaser willing to take over the payments on the asset. Finally, you could return the asset to the creditor and allow the creditor to liquidate it to settle the debt.
Other debts, like credit card bills, utility bills (in most cases), medical bills, and personal loans are considered unsecured. The borrower has offered no collateral to back up his promise of repayment. Instead, the creditor has accepted the borrower's promise to repay in exchange for the loan. Unsecured debts typically have higher interest rates and shorter repayment terms than secured loans. They are also "unprotected" in bankruptcy proceedings, and are often discharged as a complete or near-complete loss by the creditor.
Student loans represent a special kind of debt. While the debt itself is unsecured, there are stiff penalties for failing to repay student loans. Bankruptcy proceedings do not discharge these loans. The law does provide a mechanism to discharge student loans, but the process is long and difficult, and the success rate is extremely low.
If you have less than $10,000 in unsecured debts, your best bet is to work out a payment plan that will discharge your debts in the space of about 3 years. Enroll in credit counseling and take advantage of debt reduction workshops and budgeting courses to help put your debt back into proportion with your income.
If you have more than $10,000 in unsecured debts, you may benefit from a combination of credit counseling and financial education programs, and some type of negotiated debt settlement. Much of your final strategy will depend upon your overall debt load, the stability of your income, and your plans for the next 3-5 years.
If your unsecured debts exceed $25,000, debt settlement should be a cornerstone of your approach to reducing your obligations. You may not be able to discharge all of your debts, but in working with your creditors, you may significantly reduce the balance you owe.
Filing for bankruptcy should be a last option. This strategy should be reserved for individuals who have no viable income, no prospects for meaningful income in the future, and who have significant unsecured debts that cannot be negotiated, settled or discharged in any other way.
Debts can be secured or unsecured. Secured debts are those that are "backed" by the value of the asset being purchased. Homes and cars are typically considered secured debts. Other similar purchases, like vacation homes, boats and recreational vehicles, would also fall into this category. If for some reason, you can no longer make the payments on these assets, you can sell the asset to repay the loan. You could also find another purchaser willing to take over the payments on the asset. Finally, you could return the asset to the creditor and allow the creditor to liquidate it to settle the debt.
Other debts, like credit card bills, utility bills (in most cases), medical bills, and personal loans are considered unsecured. The borrower has offered no collateral to back up his promise of repayment. Instead, the creditor has accepted the borrower's promise to repay in exchange for the loan. Unsecured debts typically have higher interest rates and shorter repayment terms than secured loans. They are also "unprotected" in bankruptcy proceedings, and are often discharged as a complete or near-complete loss by the creditor.
Student loans represent a special kind of debt. While the debt itself is unsecured, there are stiff penalties for failing to repay student loans. Bankruptcy proceedings do not discharge these loans. The law does provide a mechanism to discharge student loans, but the process is long and difficult, and the success rate is extremely low.
If you have less than $10,000 in unsecured debts, your best bet is to work out a payment plan that will discharge your debts in the space of about 3 years. Enroll in credit counseling and take advantage of debt reduction workshops and budgeting courses to help put your debt back into proportion with your income.
If you have more than $10,000 in unsecured debts, you may benefit from a combination of credit counseling and financial education programs, and some type of negotiated debt settlement. Much of your final strategy will depend upon your overall debt load, the stability of your income, and your plans for the next 3-5 years.
If your unsecured debts exceed $25,000, debt settlement should be a cornerstone of your approach to reducing your obligations. You may not be able to discharge all of your debts, but in working with your creditors, you may significantly reduce the balance you owe.
Filing for bankruptcy should be a last option. This strategy should be reserved for individuals who have no viable income, no prospects for meaningful income in the future, and who have significant unsecured debts that cannot be negotiated, settled or discharged in any other way.
Monday, March 2, 2009
Will Homeowner Plan Be Enough?
As President Obama has taken the wraps off of his plan to stave off foreclosures, some analysts are wondering if the latest proposal will be enough. The new federal funding is expected to help 7 million to 9 million homeowners in the next few years, but experts are predicting that there may be as many as 10 million foreclosures in the same time period. That number doesn't include the number of homeowners who are not in foreclosure, but who would benefit from mortgage assistance.
Another concern is the number of adjustable rate mortgages that are set to adjust in the next two years. More than $1 trillion of adjustable rate mortgage debt is on the line and analysts believe that many of these mortgages will end up in foreclosure as property values continue to decline.
While mortgage lenders have been somewhat receptive to provisions that make mortgage loan modifications easier, they're almost universally against the "cramdown" proposal, which would allow bankruptcy judges to modify mortgage agreements. The current cramdown proposals include giving bankruptcy judges the power to write off portions of the principal on a property included in bankruptcy petitions, or convert mortgage debt to unsecured debt when the value of the property drops below the value of the property's mortgage(s).
Right now, bankruptcy judges have the ability to write down or write off unsecured debts, but lenders fear that mortgage cramdowns will lead to an increase in the amount of consumer debt that is written off in bankruptcy proceedings. Details of how the cramdown proposal would work have not yet been worked out, but modifying the power of the bankruptcy court would require Congressional approval.
Another concern is the number of adjustable rate mortgages that are set to adjust in the next two years. More than $1 trillion of adjustable rate mortgage debt is on the line and analysts believe that many of these mortgages will end up in foreclosure as property values continue to decline.
While mortgage lenders have been somewhat receptive to provisions that make mortgage loan modifications easier, they're almost universally against the "cramdown" proposal, which would allow bankruptcy judges to modify mortgage agreements. The current cramdown proposals include giving bankruptcy judges the power to write off portions of the principal on a property included in bankruptcy petitions, or convert mortgage debt to unsecured debt when the value of the property drops below the value of the property's mortgage(s).
Right now, bankruptcy judges have the ability to write down or write off unsecured debts, but lenders fear that mortgage cramdowns will lead to an increase in the amount of consumer debt that is written off in bankruptcy proceedings. Details of how the cramdown proposal would work have not yet been worked out, but modifying the power of the bankruptcy court would require Congressional approval.
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