The Debt Management Expert

OVERVIEW
For a variety of reasons, there are times when you can’t make the payments on your bills. What happens when I don’t pay my bills?

During the current economic crisis, it has become more and more common to hear of people who can’t pay their monthly bills. This may happen when one person in the family loses a job or gets a pay cut. It may happen when the interest rate on a variable mortgage payment rises and the payment is now higher, leaving less money for other bills. For a variety of reasons, there are times when you can’t make the payments on your bills. What happens when I don’t pay my bills?

When I Don’t Pay My Bills: Collection Notices. You will receive a notice or two from your creditors reminding you that your payment is late.
When I Don’t Pay My Bills: Collection Calls. Your creditors will begin to call you, hoping to remind you that a payment is past due. You can speak with them about your inability to pay at this point and hopefully negotiate a payment plan that you can meet.
When I Don’t Pay My Bills: Increased Interest Rates.If you haven’t paid your bills, or you have but they’ve been late, chances are that you will find yourself with an increased interest rate. This is especially true with revolving charge accounts, such as credit cards.
When I Don’t Pay My Bills: Negative Credit Rating. Your payment history is reported to credit agencies, such as Equifax, Experian and TransUnion. If your credit history reveals a failure to pay, or a history of late payment, this will negatively affect the credit rating that these three companies create for you. With these negatives influencing your credit rating, your credit score will fall and you will become a bad credit risk. It will be more difficult for you to borrow money in the future.
When I Don’t Pay My Bills: Legal Action. The credit card companies could initiate legal action against you if you continue to be deliquent with your payments or fail to make arrangements with them.
When I Don’t Pay My Bills: Bankruptcy. You could be forced to declare bankruptcy to satisfy your creditors. While this word has a negative connotation, bankruptcy doesn’t have to be a negative experience. Bankruptcy can help you wipe your financial slate clean and begin again. It will take time to reestablish credit, but you will begin your financial life anew, on solid ground.

When I Don’t Pay My Bills: How to Prioritize
When you find yourself in position of having to make choices about which bills to pay, how do you choose?
When I Don’t Pay My Bills: Health and Security. Your family’s health and security should be paramount, so it’s important to take care of meeting your mortgage and paying your health insurance. You’ll also need to take care of transportation, utilities and food.
When I Don’t Pay My Bills: What Will You Lose? If you will lose something by not paying a bill, you probably do not want to skip that payment. Look to unsecured bills, such as credit cards, as bills you might be able to skip.
When I Don’t Pay My Bills: Interest Rate. Which credit cards have a higher interest rate? You can sometimes buy yourself some time and save yourself some money by transferring balances from a high interest card to a lower interest card. You can often contact the credit card company and talk to them about lowering the interest rates or creating a payment plan with smaller payments.
When I Don’t Pay My Bills: Consolidation Loan. Consider a consolidation loan carefully. Be sure to understand the interest rates and fees associated with a consolidated loan.

OVERVIEW
Debt management or debt settlement companies can often save you time and trouble when it comes to debt consolidation. A benefit of using a debt management company is the ease of the transition from having many, smaller debts to having one larger one. That being said you need to closely review any company you plan to work with to ensure that they are doing what you agree to.

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The process of debt consolidation can be tricky and intimidating and often not something for you to try, if you are not financially savvy. Debt management or debt settlement companies can often save you time and trouble when it comes to debt consolidation. A benefit of using a debt management company is the ease of the transition from having many, smaller debts to having one larger one. A debt settlement company will take over paying all your creditors. You have to make one simple payment every month.

The idea of debt consolidation is simple. The many smaller debts you carry are covered by one large loan. These are typically unsecured loans such as credit cards, personal loans, store credit cards, and bank overdrafts. The benefits of debt consolidation are that that you can negotiate one interest rate for this loan and you can negotiate the amount of the payment. Often, during the negotiation process, you can often reduce the amount of the debt.

Pros of Debt Settlement
• Avoid bankruptcy – By using a debt management company to consolidate your debt, you will can reduce your debt burden and pay off your bills more comfortably. You can protect assets, such as your car and your home, using debt settlement.
• Make One Easy Payment – You will make one payment to consolidate your debt each month to the debt management company. They will disperse the funds to the creditors. This one payment on your consolidated debt simplifies your bill paying enormously.
• Avoid Harassment – Debt collectors are notorious for their ruthless tactics. A debt management company eliminates a debt collector’s ability to hound you for payment on your consolidated debt.
• Avoid Lawsuit – Debt settlement companies can help you get a hold of your consolidated debts and get them settled in reasonable manner. This can help eliminate the possibility of a lawsuit against you.

Cons
• Debt consolidation negatively affects your credit score.
• During debt settlement, some of your accounts will get charged off. Debt consolidation can negatively impact your credit score. Debt consolidation can be repaired through time and careful use of credit in the future.
• Fees
• Some unscrupulous debt management companies will charge exorbitant fees for their services. Often, you will be asked to pay a percentage of your monthly payment to the debt settlement company in fees.

Points to remember:
• Choose a reputable non-profit debt management agency for debt consolidation. Make sure you toughly investigate the company you decide to use. You need to make sure you choose your debt management company wisely.
• Learn the fee structure for debt consolidation up front.
• Before you agree to a debt management plan, understand the impact this will have on your credit rating.
• Stop using your credit while you’re trying to repair your debt. Create a budget and stick to it.

Related Articles:

• How to Choose a Debt Management Company (Super Pages)
• Debt Help that isn’t (Bankrate)
• Debt Management Company Watch Outs (About.com)
• Your 3 worst debt consolidation moves (MSN)
• The Perils of Debt Management Companies (Find Law)

Examples of Debt Management Companies:

• Debt Consolidation Care
• Credit Counselors
• CareOne

Overview
Are you unsure of how to consolidate your debt and whether debt consolidation is the right approach for you? When you consolidate your debt, you take out a loan to pay off several other debts. This allows you to consolidate the money you owe into one payment and manage your debt more effectively.

Although credit is much harder to come by during these challenging economic times, there are still a number of ways that you can potentially consolidate your debt, such as:

• Credit cards debt consolidation: If you can pay off the balance during the introductory rate period, consolidating your credit cards makes a lot of sense. Make sure to read the fine print carefully before you take any action. Sometimes there are fees associated with the transfer. Also make sure you know when those promotional interest rates end.

• Home equity loans: If you are a homeowner with some equity established in the property, a home equity loan may be the perfect solution for you to consolidate your debt. While they are not as easy to obtain as before, the terms of a home equity loan are very favorable from lenders, with payments that are usually tax deductible. The terms of the line are variable or fixed and can often extend for 30 years. The only clear downside to consolidating your debt in this manner is that your collateral against the loan is the property you own.

• Retirement funds: Considered to be an option of last resort, the interest is rarely tax-deductible, though you are paying interest to yourself instead of the bank. If you are unable to pay it back to the fund within a specified period, you may incur taxes and penalties from the IRS.

• Whole life insurance: If you have a whole life policy that pays an annuity premium to you, you can borrow against its value. You have the option of paying or not paying it back, however if you do not repay the loan, it will be deducted from the total value, thereby of the premium, thereby lessening what those who inherit the value of your policy will receive.

• Credit union: Credit unions generally have lower fees and lower interest rates on loans. It is worthwhile to find out if you can join one.

• Nonprofit consumer credit counseling agency: “What they often will do is, rather than consolidating debt, you pay them a fixed amount and they pay it out to your creditors. It’s a kind of discipline that can be helpful. It’s enforcing a change in spending habits. For the person who is serious about getting out of debt, that’s a solution.”

• Primary lender: In the same way that you might approach your primary lender about a loan modification, you might also consider using the same tactics in this case to renegotiate the terms of your loan so that it is more favorable to you.

Should You Consolidate Debt?
Whether or not you choose to consolidate your debt is a personal decision that specifically depends on your financial situation. Debt consolidation offers many pros and cons:

Pros of Debt Consolidation
Debt consolidation should potentially save you money through lower interest payments and the likelihood of fewer late fees due to the reduction in the number of payments to distinct lenders. Debt consolidation should also help you to rebuild your credit score if you can keep up with the monthly payments due under the revised terms. Debt consolidation should also make it easier for you to organize your finances.

A debt consolidation loan could be helpful if you ran up your credit cards while you were in business school, or if you have a number of high interest student or car installment loans. This will allow you to roll this high interest debt into one manageable payment.

Cons of Debt Consolidation
Debt consolidation is not the right answer in every case. Debt consolidation does not provide a remedy for credit problems. You may have a difficult time finding a fair and reasonable interest rate. If the rate on your new loan is not any better than the rate you pay on your current loans, consolidating your debt would not make much sense.

It can also take longer to pay debts off. When you consolidate debt, you still end up owing the same amount of money. The main difference is usually the length of the term. This could leave you paying more in interest if the term is really long. The best way to combat additional interest payments is to pay down the principal on top of your monthly payments, but doing this may be beyond your means.

You should contact a financial advisor or accountant to evaluate the pros and cons of debt consolidation and whether the option is right for you.

Almost every working American has a FICO score. Anyone with a Social Security number, a job, and any kind of debt is likely to have a record with one or all of the three major credit reporting agencies. This credit report history results in an algorithmic score that rates each individual’s creditworthiness. A higher FICO score means that a person is responsible in acquiring and paying debt, while a low score tells potential creditors that a person is a higher risk.

How is a FICO Score Determined?

Your FICO score is an algorithmic mathematical weighted formula. Your credit history shows how many creditors you have, what your credit limit is for each creditor, how much of your limit you have used, and also whether you pay on time and as agreed or have made late payments in the past.

Serious credit issues, such as repossession, foreclosure, and collections, will also show on your credit report, as well as financial judgments from a court of law. All these critical aspects are scored by their importance to provide a single number of your creditworthiness.

What Affects My FICO Score And How Can I Protect It?

Your FICO score must be treated with care, much like a pet. It needs constant nurturing, maintenance, and sometimes, it must be treated by a professional and bandaged for repair. A credit history can be damaged by anyone who reports your credit activity to the reporting agency without your consent. Subsequently, it is paramount to treat your creditors with respect and pay them as agreed.

Your credit report and FICO score can be damaged by the report of any of the following:

• Late Payments – If you miss a scheduled payment on a credit card, auto, or home mortgage payment, it will show on your report. Late payments are noted as simply late, and in increments of 30, 60, and 90+ late. The more days late your payment is, the lower your credit score. In fact, your credit score can drop almost overnight.

CREDIT TIP: Even if you cannot pay your creditors, you should make arrangements right away when you experience financial difficulty. Try to work with your creditors regarding a payment plan, which may prevent them from reporting a late payment on your credit score.

• Over Limit – Your credit card companies will report your maximum credit limit. If you charge more than that limit, your report will reflect it.

CREDIT TIP: Always stay well below your credit limit. Conventional wisdom says to keep your charged credit at 2/3 or below your limit for each creditor.

• Collection – If you fail to make payments for a period of time on a credit card or other debt, your account will close and be sent to a collection agency. Your credit report will show both the account closure and the new reporting by the collection agency, adding even more damage to your credit.

CREDIT TIP: Avoid collections by working with creditors directly. If you do end up in a collection account, pay it in full as soon as possible. The worst thing you could do is avoid the creditors and collection agencies.

How Can I Improve My FICO Score?

If you have had past credit issues that affect your FICO score, there are strategies you can implement to start improving your score today.

• Payoff All Problem Credit – If your FICO score is affected by negatively closed or collection accounts, immediately pay them in full as soon as possible.

• Get A Secured Credit Card – If you’re unable to get an unsecured credit card, obtain a secured card with a deposit amount. Start making charges and paying your balance in full each month. This will help build your history of reliable monthly payments.

• Get A Personal Loan – Many banks and credit unions will allow you to obtain a personal loan with a savings or CD deposit as security. Obtain a small personal loan, such as $1000, and keep the money in the bank – don’t spend it! Immediately make the first payment and continue making regular payments each month thereafter. Your bank will report your good payment status, and your FICO score can start improving.

Credit is one of the most important personal issues for every consumer. Your credit report and score can determine whether you can get a home loan, a new credit card, and even affect whether you get a job. Treat it with care and you will succeed in keeping your FICO score in a positive range.

Millions of Americans are feeling the stings and arrows of the declining economy. In 2008, over 250,000 homes were foreclosed each month – which translates into three million homes foreclosed in the entire year. More credit card debt is racked up each month, and millions of Americans are looking to consumer credit counseling services for debt management help. Now that newly elected President Obama has signed his stimulus bill into law, what does that mean for the average American with debt management issues?

Who the Plan Will Not Help

First and foremost, Americans must realize that the stimulus plan is not “free money.” People who have uncontrollable debt management issues will not suddenly see their debt wiped away. With that said, the plan does provide debt help to those in serious trouble with their mortgages and credit card debt.

Remember that the bill is a financial plan to help stimulate the American economy, not pay off personal debt. However, by helping Americans manage and control debt, more expendable income can be spent on goods and services – which is exactly how the plan hopes to revive the economy.

How the Plan Can Relieve Mortgage Debt

Millions of American homeowners are feeling the financial crunch of extreme adjustable rate mortgage (ARM) interest hikes or job loss, and they find themselves unable to make their regular mortgage payment. With an average of 250,000 homes foreclosed per month, what are homeowners to do?

The mortgage bailout portion of the stimulus package tags $75 billion for the setup and aid of getting mortgage borrowers back on their feet to avoid foreclosure. Though the federal funds will not give you free money to pay off your back payments or reduce your principal balance, the money will be used to set up a government intermediary program that puts qualified borrowers and lenders together to discuss real solutions to mortgage problems.

A homeowner who is suffering a financial crisis and is having trouble meeting mortgage obligations can use the program to help set up and negotiate a loan modification. However, if you are not delinquent on your mortgage and have the financial ability to pay your mortgage, this plan will not help you. In addition, should you have an inability to provide evidence of future employment, mortgage companies are unlikely to help you through this plan either.

A loan modification is a change in the original mortgage terms, such as a lower interest rate or extension of payments that reduces the monthly payment amount. Working with the lender in this fashion could result in the forgiveness of much of the principal balance, limited forbearance, and ultimately, help homeowners keep their homes and avoid the expense and trouble of foreclosure.

The Benefit of Tax Rebates

President Obama has also passed tax rebates for most Americans. Taxpayers will receive a portion of their 2008 paid taxes back to them in cash. Some of that money may be needed to pay back taxes owed or can be spent directly on reducing piling credit card debt.

Americans who are careless about their debt management and spend more than their means will not see much help. It is people who are responsible and are making real efforts to pay off debt who will benefit from the stimulus bill.

Overview
Loan modification is a process whereby a homeowner’s mortgage is adjusted and both lender and borrower are bound by the new terms. The mortgage terms are adjusted because the borrower is unable to make payments under the original agreement or because the value of the property is worth less than the borrower owes on the mortgage.

When homeowners fall behind on their payments, they are faced with a few very tough choices: foreclose, deed in lieu of title, short sale or loan modification. Loan modification is the only one of these options that does not force the borrower to vacate their home. Loan modifications are designed with three basic objectives in mind:

• Offer proactive workout solutions designed to address borrowers who have the willingness but limited capacity to pay.

• Provide borrowers the opportunity to stay in their home while making an affordable payment for the life of the loan.

• Ensure investor interests are protected; loan modification must always result in a positive net present value outcome for the investor; the cost of the loan modification must be less than the estimated cost of foreclosure.

Banks will allow certain changes to be modified for borrowers who can document the ability to repay the loan in a reasonable and sustained manner. The most common loan modifications are:

• temporarily or permanently lowering the interest rate,
• reducing the principal balance
• ‘fixing’ adjustable interest rates
• adding an interest only option
• increasing the loan term (i.e., from 30 to 40 years)
• a forbearance agreement
• forgiveness of payment defaults and fees

… or any combination of these changes.

Loan modifications are designed with payment levels so that the borrower can consistently make his mortgage payment as well as pay his other bills. Mortgage payments within an arranged loan modification are not intended to consume an entire monthly budget. Lenders will generally take the homeowner’s entire budget into consideration i.e. car payment, cell phone, utilities, credit card payments, and other necessary expenses needed to live a normal life while still maintaining a reasonable mortgage payment. With loan modifications, the benchmark ratio for calculating a borrower’s affordable payment is 38 percent of monthly gross household income.

A loan modification is a negotiation between your modification company and the primary lender (a bank or other financial institution). Your modification company will present the lender with a proposal backed up by your documented income and monthly expenses, which includes both hard and soft expenses. Soft expenses are difficult to document. Your modified monthly mortgage payment is determined by the difference between your total income and your expenses.
Great! I know what a Loan Modification is now. Do I Qualify?

Until you go through the process it is difficult to say if you qualify. Ideal candidates have a number of the following characteristics:

• An interest rate above 6.9%
• Unaffordable Payements
• An Ajustable Rate Loan
• Are Deliquent on Payments
• Are Currently in Forclosure
• Have Negative Equity in their Home