Debt Free

Yes, you can still consolidate mortgage debt, or get a mortgage to consolidate debt, even though the number of available lenders seems to be....well that seems to be consolidating too, as this lender and that either goes out of business, or rethinks their strategy altogether. Are we going to have any lenders left??

I was in a Bank of America branch the other day and overheard one of the bank managers explaining to a prospective mortgage refinance customer why Bank of America was in no danger of having the same sort of troubles as IndyMac or any of the other recently (or soon to be) departed. What was his reason for this revelation? He went on to explain that Bank of America was more selective when choosing their mortgage customers, and avoided those with credit problems that would go on to plague so many other lenders.

Upon hearing this bit of salesmanship, my first thought was “If that's the case, and it's worked out so well for you, why the hell did you buy Countrywide?” Seems like good old BofA would stick with what had worked so well in keeping them off the mortgage default express, rather than dumping $2 billion in cash and another $4 billion (at the time) in stock into the sick, California based, mortgage lender, Countrywide. Oh well, maybe the deal could still pay off for Bof A down the road. After all, greater minds than mine concocted it.

If you're looking for mortgage debt consolidation, you're after one of two things, depending upon your interpretation of the term. Either you have a first and a second mortgage and you want to combine them into a single loan, or you have high interest consumer debt, typically of the unsecured variety, and you'd like to roll it into a single, secured loan with a lower aggregate payment that all the little loans that preceded it. Either way, you'll be consolidating multiple loans into one (hence the term consolidation loan).

Here are some pitfalls you'll want to watch out for when getting one of these loans.

Mortgage Debt Consolidation Flag -

Using a small, unheard of mortgage company.
Don't do it. As we've recently seen, merely being a behemoth is no guarantee of safety, either. However, when you're consolidating loans, and anytime you're playing around with your mortgage in general, using a reputable company is of paramount importance. Make sure that their sterling reputation precedes them.

Mortgage Debt Consolidation Flag -

The “Pay Up Front” loan scam.
This loan scam is used for all sorts of personal loans, not just mortgages. It targets those with bad credit or folks with no equity in desperate need of a refinance; basically those debtors with no place else to turn. The legality of absolutely guaranteeing someone a loan never enters into the equation. The scam works like this. The lender claims they'll guarantee you'll be approved for the loan, but they require 2 or three months of payments in advance. Don't write the check!! You'll get no loan, and they'll be on a beach, earning 20% (on your money).

Mortgage Debt Consolidation Flag -

High, hidden, and inflated fees -
You could well be required to pay some fees when getting one of these loans, but in many cases the fees go far beyond reasonable. On many occasions you'll be asked to pay points, but also many other fees, most of which go directly to enriching the lender. If you're getting a loan from a broker, and your credit is decent, don't pay an origination fee.

You may not know this, but the broker is already getting a fee from the lender for your loan. Don't facilitate the broker's double dipping by paying origination fees on your consolidation loan.  If your credit's good, they didn't have to do all that much to get you the loan. On the other side of the coin, if your credit is shot, you could reasonably expect to pay a fee, because the broker probably had to work their tail off to get you financed with a decent interest rate.

Don't pay a separate application fee, credit report fee, and appraisal (don't forget to get a copy of the appraisal, they have to provide you one by law) fee. In most cases the application fee will contain the costs for the appraisal and the credit report. If you pay all three, you're just lining the lender's pockets (or sending their kids to Harvard). Another trick used by some lenders is marking up the fees that they're asking you to pay. You should pay fees such as wire transfer fees or title fees, but you should not allow the lender or broker to mark them up.

Mortgage Debt Consolidation Flag -

The Over Eager Lender –
If your lender seems too over the top, especially of you have bad credit, take a step back and look at all the details one more time. You may just have the employee of the year at your disposal, but you could also be headed for trouble. This type of lender or broker can often be leading you into a trap known as…

Mortgage Debt Consolidation Flag -

The Old Bait and Switch –
Mortgage lenders aren’t the only businesses to be guilty of this little scheme. One thing that could tip you off that your lender may be a bit sleazy is if they treat your loan papers as a “living, breathing document”. That’s to say that the loan you negotiated may not be the one they set in front of you on the closing table. Even though you agreed to certain terms verbally, or got an offer sheet, it is still incumbent upon you to be sure the loan documents you’re signing reflect the same loan you agreed to.

If you have really crunched the numbers (all of them), feel that a mortgage debt consolidation is the right financial move, and are comfortable putting your house on the line, than go for it. If you’re just consolidating more than one mortgage into a single mortgage, you house was already collateral any way. If you’re consolidating high interest, unsecured debt, think it through a few times before committing your house full of family memories (and possibly substantial equity) as collateral for a dent consolidation loan.

In any case, you should only get one of these loans if the financial situation that caused you to go into debt has been erased. If you had an extraordinary event, such as a auto accident or medical problem, that’s one thing. If you just can’t seem to stop hoppin’ in the Jag for trips to Westfarms or the Fair Oaks, spend a bit too much time at the casino, or think nothing of rolling in at 4:30 after dropping a wad at Marquee on a regular basis, that spending pattern’s got to stop. Unless you can reign in a pattern of excessive spending, you have absolutely no business getting a debt consolidation loan. You’ll just run up your debt level again and then where will you live?

Posted by debtblog at 06:23 AM | Permalink | Comments (0) | TrackBacks (0)

Effective debt management will minimize extraneous fees and other charges that chip away at your financial well being, and competently managing your debt will allow you to keep a high credit score. The importance of a high credit score cannot be understated, especially in the really ugly credit situation that has developed over the past couple of years. Don't get me started on that, please.

What is the right debt management solution for you? Determining that requires looking at your financial situation and taking stock of not only where you are, but how you got there. Debt management is one of the things that, to put it bluntly, many people screw up royally. Get it right and you could be living in fat (phat?)city. Get it wrong and bankruptcy could be a few short stops down the line.

One of the biggest problems is that too many people simply don't manage their debt at all. They don't look at what's causing them to be in debt, and they put little or no planning into getting in debt or getting out of it. They're not proactive, they just react to their next Visa bill with a mixture of fear and derision. You can avoid being part of that vicious cycle by actively planning what level of debt you'll take on, and why. Include a percentage for emergencies. How much emergency debt you'll provide for varies depending on your financial situation.

Here are some debt management rules that will help you develop a personal debt management solution -

Debt Management Rule 6
Avoid going into debt for depreciating assets. Unfortunately few people can manage this step as they use one of their largest depreciating assets to get them to work everyday. As the average price of a new car has gone above $25,000, few people can afford to purchase one without an attending rise in their debt level.

There are some ways to mitigate this. You can purchase a used car. Depending on the car, a large percentage of depreciation is gone after the first 2 years. Buying a car that is 2 to 3 years old will still get you a solid, reliable car, with years of trouble free service ahead, and much of the depreciation behind it. The wrench in this works is very low or zero percent financing. You can get low interest, incentive financing plans with some manufacturer's certified used car programs, and promotional financing offers change daily, so check into these before you take on more car debt.

Other depreciating assets are nearly anything besides your house or certain investments. That is where many people make a huge mistake. Not only do they go into debt purchasing depreciating assets, they also violate debt management rule number 5.

Debt Management Rule 5
Don't go into debt for non-essential items. Sadly, much of America (and the rest of the world) completely ignores this debt management rule, treating the next sale at Macy's or Bloomingdale's as a date not to be missed. In the majority of cases, this pilgrimage to the pillars of modern consumerism is financed entirely by debt. Not just any debt mind you, but the 17%, plus a hefty annual fee variety. Although many would argue vigorously the other way, that new sweater just doesn't qualify as an essential item.

Debt Management Rule 4
Time your debt correctly. Timing of debt is very important. Too many people put something on a credit card or other type of credit account when they could have waited one or two days and paid for the item with cash. This is poor debt management. You're increasing your debt levels unnecessarily, and in most cases it is magnified by simultaneously violating debt management rule 1 or 2 (possibly both).

Debt Management Rule 3
Make your debt payments automatic. This automates a good part of your debt management tasks. It will help prevent you from making your payments late or forgetting to make a payment; two of the sins of debt and credit that can follow you around for years. Not only that, but it's a heck of a lot easier than writing all those checks every month.

Debt Management Rule 2
Make money on your debt. Only go into debt when you will earn a higher return on your debt than it costs you. If you go into debt at 7%, you should earn at least 8% on the debt. If you can do this, you've won the debt management game and debt is your friend. You can go deep into debt and come out ahead; way ahead. Unfortunately the majority of people are never able to put this rule into effect, and suffer instead form years of oppressive credit card and other high interest consumer debt that costs, rather than pays, them money.

Debt Management Rule 1
The number one rule of debt management is spend less than you make. That will allow you to follow all the other rules, and use debt rather than having it use (and abuse) you.

You may not be able to effectively develop or implement a personal debt management solution. You may have to retain the services of a debt management professional. There are all sorts of pros, and like any other profession, some are very good, and others border on criminal. Due to the circumstances surrounding individuals seeking debt management services, the industry can attract more than its share of the latter, so be careful. There are definitely benefits to using a good firm. They can get you out of debt comparatively quickly and help increase your credit score.

Keep in mind that there are two definitions to debt management. Some debt management firms negotiate down your debt with the credit card companies or other creditors. After they've done this, they then put you on a strict payment plan through the debt management agency itself. While this can result in your getting out of debt much more quickly than you would otherwise, be prepared to take a fairly large credit score hit, and heaven forbid you should miss a payment or two. You could lose much or all of their fees or other money you've paid in.

Other debt management firms are more akin to credit counseling agencies. Here's what to look for if you're contemplating using a debt management solution company. Although this is not a hard and fast list, and there may be some excellent firms that do not meet some of the criteria, it's a great place to start.

Make sure the company is a member of the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Although it's not mandatory, look for non profit firms (Don't ever confuse non-profit with free). Make sure they show exactly what will be required of you and give you a list of their fee structure. Get from them exactly what services they provide and when they'll provide them. In most cases paying for all their services in advance is huge red flag and you should run like the wind should they ask you to do so.

One thing a good debt management firm can do for you is to get your account 're-aged' where it no longer appears as past due on your credit report. This takes some sweet talking to the creditor, but if they have a good relationship with said creditor, it is often done.

Debt management and a good debt management solution can often be the difference between coming out on top financially and slogging through years of huge Visa bills. It's up to you.

Posted by debtblog at 04:08 PM | Permalink | Comments (0) | TrackBacks (0)

When shopping for a house many people are payment shoppers, just as they are when shopping for cars. It's all about the monthly payment. That's why so many people are attracted to the adjustable rate mortgage loan; it keeps their monthly mortgage payment lower than a conventional, fixed rate mortgage product. The problem is that that's only true for a while. Eventually the mortgage payment will rise, and with it will go the home owner's blood pressure. This is because, as the name suggests, the ARM's interest rate adjusts. In case you had any illusions, it adjusts up, and so does the mortgage payment.

When looking at an ARM, you'll be confronted by a set of numbers used to describe the terms of the loan. They'll be stated in fractional looking terms, such as 3/1, 5/1 or 7/1. This is simply the number of years that the initial mortgage interest rate stays the same, and how often it will adjust after that. A 3/1 ARM will stay at the initial rate for 3 years. After that it will adjust every 1 year.

Just how does an ARM adjust? Do the lenders sit around the bar at the country club and pull interest rate numbers out of their....well, you get the picture. Actually the loan's interest rate is tied to an index, which is simply one of several reference interest rates used by major financial institutions. Depending upon the specific index, it is set by the federal government or the applicable financial institutions.

The most common indices used to compute the mortgage interest rate on an ARM are the London Interbank Offered Rate (LIBOR), the Prime Rate, the Cost Of Funds Index (COFI), and 1, 3 or 5 year U.S. Treasury note rates. Ah, but you won't just pay these rates, you'll pay the index rate plus what's called a margin. The margin is just a percentage over the index rate. So, if you have a 5/1 ARM that's tied to the 1 year LIBOR, and your margin is 3%, when your ARM adjusts, you'll pay the current 1 year LIBOR rate plus 3%. Currently the LIBOR is 3.29%, so you'd pay 6.29%. That rate would hold until the next adjustment period, when it would adjust again. In the case of the example 5/1 ARM, it would adjust in 1 year.

There are several other important things to look at in an ARM. One of these are the caps. An ARM cap is simply that, a cap on how much the interest rate can go up. Typically the loan will have lifetime caps and periodic caps. While caps can be beneficial, they can also work against the borrower if there is what's called a carryover provision in the terms of the loan. A carryover lets the lender carry over interest rate increases they couldn't apply because they exceeded the cap.

For example, if your ARM adjusted upwards but was capped at a 2% increase, your lender could only increase the interest rate upwards by 2% in any given period. If the index went up by more than that, say 3%, a carryover provision could let them carry over the extra 1% increase to future adjustment periods and apply it then. So if the index increased 3% this year, but only 1% next year, the lender could increase your mortgage interest rate 2% each year, because the 1% over the cap they couldn't apply in the first year would be carried over and applied the next. Got that??

People love ARMS, especially when they're starting out in their careers, because as they earn more money they can afford a larger payment. The other common strategy, in fact the one that many people counted on, is to refinance the ARM into a fixed rate mortgage loan before the dreaded adjustment occurs. If you have a 5/1 ARM you have a 5 year window to enjoy the low, introductory rate before the loan adjusts (also called resetting) to a higher rate. Most people thought it would be no problem to simply refinance their mortgage before they got caught with the higher rate, because as home values rose, they'd have enough equity in the home to qualify for a fixed rate mortgage with a low interest rate.

That's how so many people got into so much trouble with ARMs. They did two things that came back to bite them. They got too much house, and they thought real estate appreciation would continue unabated, or at least until they could refinance. The problem arose because in many areas the real estate markets were showing double digit annual appreciation for the better part of a decade. People forgot that that's not really how things work over the long term. Eventually the chickens will come home to roost; and they'll crap all over the coop when they do so.

Here's a common example that occurred in many areas. First of all, you'll note that this was a classic example of “the bigger they are, the harder they fall”. Most of the big problems happened in areas that saw the largest and fastest home value appreciation, such as Las Vegas, south Florida and Southern California. If a borrower got a 5/1 ARM tied to the LIBOR for $400,000 in 2003, in 2008 their ARM is due for a reset. If their initial interest rate was 4.75% their monthly P&I payment would be about $2,087 per month. Now, when their mortgage resets (if it was calculated today), they'll be paying $2,473 per month.

Now $390 a month isn't chicken feed (the price of chicken feed's going up, just like everything else), but it could have been even worse. Many people used special mortgage products, like interest only loans to buy their properties. That keeps the monthly payment low, because you're only paying the interest for the first part of the loan. As with the standard ARM however, the interest only loan will eventually reset, leaving you holding the bag for both the principal and the interest. The increase is compounded because the interest rate can also adjusts upwards at the same time, depending upon the terms of the loan. So, you could be hit with the added costs of repaying the principal, but also an increasing interest payment at the same time.

How the majority of people got into trouble with their ARMs, was they either neglected to refinance in time (very stupid financial decision) or their home's value dropped to the point where they couldn't refinance because they owe more on the house than it's worth (that also had it's roots in a stupid financial decision, although not nearly as poor a decision as neglecting to refinance before it was too late). When this happens, you can't get a new mortgage for enough to pay off the ARM because the value of the collateral used to secure the new loan (your house) isn't enough to cover the loan.

To compound matters, many lenders are skittish that home values will continue dropping in many regions, so they are requiring higher down payments than in the past. If they want a 20% down payment, you'll need 20% equity in your house in order to refinance it. This is something many people just don't have.

So, there you go. That's what an adjustable rate mortgage loan is, and that's how so many home owners got into so much trouble with them. Here's to helping you get debt free, and have a great weekend.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

Well, although you won’t get anywhere near the best interest rates on a mortgage, chances are you’ll still be able to get one, even with a foreclosure on your credit. You will pay between 1.5 to 4 percentage points in interest above what you’d pay if you had good credit. Often it pays to get your credit score up even a few points because it will put you in the next higher credit score range. For more on that, see a post I did a few months back on credit score ranges, and how only a single point in your credit score could save you thousands of dollars.

There are some things you can do to help yourself though. First of all, make sure your credit is only as bad as it needs to be. Clean up your credit report and get rid of any inaccuracies. The foreclosure is going to be the sore thumb on your report though, there’s no denying that. Concentrate on paying every single bill on time from this point forward. You want to rebuild your credit to minimize the interest rate on your next loan.

If you wait 2 years after your foreclosure, you should be able to get an FHA loan. You’ll only need 3% down for most FHA (technically FHA insured) mortgages, but starting in July you will pay more with lower credit scores even with FHA loans. There is an upfront risk mitigation fee and an annual fee for those with poor credit. This will go up as the credit score down. Even if you are backed by the FHA, your credit should be 580 – 600 before you go for an FHA mortgage. Many lenders are still skittish, even with the government’s blessing, ad some won’t even loan on credit scores under 580.

This shows the need to spend your 2 years wisely, rebuilding your credit and saving a down payment. Although you can get an FHA loan with 3% down, including buyer paid closing costs, you’ll want to know that the actual down payment must be only 2.25%, but 3% of the funds in the transaction must be contributed by the buyer. Unlike a conforming mortgage, FHA lenders don’t really care where you got the 3% because they’re not required to. There has been some discussion in congress about raising the down payment for FHA mortgages, possible to 3.5%.

So, if you’ve looked foreclosure in the face, smelled it’s wretched breath, and some out of the whole thing ready to start anew, there is hope for you. You can get a mortgage after you’ve had a foreclosure, and your best bet may be with an FHA backed mortgage.

Posted by debtblog at 07:56 AM | Permalink | Comments (0) | TrackBacks (0)

To decide weather or not you will keep your home or put it on the market, you have to look at the circumstances that caused your financial difficulties. If you have a very good chance to make your house payments in the future, you can aim toward keeping your house. To determine the likelihood of making your house payments, you'll need to make an honest and realistic budget. With a little luck and some skill, you may be able to make one of a few things happen that could make keeping your home easier.

To keep your home, you'll need to either get a refinance (if you have sufficient equity and good enough credit), or workout your foreclosure through one of the following methods; mortgage modification, forbearance, or a deferment. These will help you improve your financial situation and make it easier to make your monthly mortgage payment. A hardship letter is but one step in the process toward making this happen.

To write a hardship letter you need to remain honest, but give your lender a true picture of why you are in your current financial situation. You'll need to show them what caused your current financial problems and how they caused you to become delinquent on your mortgage payments. You'll need to do your best persuasion job in the letter, because the whole reason you're writing it is to convince the lender that you're worthy of a second chance. If you're in sales, now's your time to shine. Heck, maybe you can craft such a good letter that you can actually start a business writing them for others.

The thing to remember is that you want to be convincing, but honest. Remember that lenders see many such letters and they can smell the stench of BS for miles. Before you write your letter, you'll need to workup a complete household budget. Don't leave anything out. This will be used by your lender as the basis for a mortgage modification or payment plan. Be careful, because since you will be required to submit this to your lender, they will probably hold you to it and may not allow you to change it.

In the budget, you have to show them how your ability to pay their mortgage fits into the budget that you've submitted. It's very important that you actually can fit realistic payments into the budget, because if you can't, selling your home may be your best option. Hopefully you'll be able to get your mortgage modified so that you can get payments that you can afford from this point forward. Be realistic though. If you owe $200,000 on your home, you aren't going to get a 3%, 30 year fixed mortgage, so if those are the only payments you can afford, you may have to look at other options.

After you've completed your budget, you can write your hardship letter. Here are some of the key components you need to include. All the vital statistics, such as your name, property address and best contact phone numbers. Be very cordial and simply explain to the lender exactly what hardship circumstances you've experienced. Don't lie or tell any tall tales, because they will backfire on you. Explain the circumstances (example:death in the family, medical problems, injury, military service, divorce, etc.), tell them it was a temporary situation, and that you are now able to make the payments on your mortgage. A few paragraphs will be fine. Don't get too lengthy. You will want to include the dates of your hardship in the description. Also include a statement that you believe that the facts contained in the letter are true to the best of your knowledge.

Although you can do this on your own, it's not a bad idea to seek professional assistance in fighting foreclosure from experts (which I am not). The difference between losing your home and keeping it could be a slight one, and it would be a shame to lose your home when you could have saved it. Remember that ignoring it will not make it go away. That's the worst thing you can do when facing a foreclosure situation. You need to be proactive and contact your lender as soon as you think there may be a problem. If it gets that far, writing a hardship letter to stop foreclosure will be but one step in the process. Good luck.

Posted by debtblog at 01:10 PM | Permalink | Comments (0) | TrackBacks (0)

They are offering a way to roll all your outstanding high interest rate debts into a single loan, typically with a lower payment than the combined payments of all your debts before (obviously if you have debts that have a lower interest rate than the offered rate for the consolidation loan, you would just retain that existing loan(s) for it's(their) original purpose). A debt consolidation loan is usually just a cash out refinance, or home equity line of credit that you use to pay off all your other outstanding debts. Despite what some of the radio ads say, they don't eliminate your debt, they just move it, and possible allow you to eliminate it faster than you otherwise would have.

There's one thing to be aware of before you begin to solicit offers for a loan. There is a scam that's becoming much more prevalent with the rising tide of credit problems and foreclosures called the advance fee loan scam. You'll be asked to pay huge fees in order to secured a guaranteed loan. Here is the FTC warning on these scams -

“Advance fee loan scams prey on consumers who may be under financial duress and may be seeking quick and easy loan approval and funding. The scam typically involves the lender making false promises to arrange for a loan in return for fees paid upfront by the loan applicant. Scam artists may even design Web sites and online loan applications giving the appearance that the company is legitimate. “

Make sure that the company that you are dealing with is a bona fide financial services firm with a proven track record. There are hundreds of real lenders in the marketplace, so finding a good one should not be difficult, just be sure and do your due diligence's.

So, how do you go about separating the wheat from the chaff when you're looking for a consolidation loan? Can one of these loans really help you get debt free? Will you pay less in interest and fees with one of these loans than you will if you just paid for your credit cards (and other debts, but the majority of these loans go to pay off credit cards) and didn't get a loan? You'll certainly want to answer these questions before you get a loan.

First of all yes, typically you will pay a lower interest rate if you transfer your debt from credit cards, which are unsecured, to a debt consolidation loan, which is secured. The mere fact that the consolidation loan is secured, typically by the borrowers home or other real estate, means that the lender faces lower exposure to risk, which is reflected in a lower interest rate to the borrower. Many people get confused by the fact that they are paying a lower interest rate, however.

Just because you are paying a lower interest rate doesn't mean that you'll pay less in total interest. That is because the term of a debt consolidation loan is much longer than the term to pay off most credit cards. If you make the minimum payment and stretch out the payment schedule to the maximum allowable time, you could actually pay more in total interest. This is because, while each interest component of each payment is lower, you will make many more payments. So, one key to getting the best debt consolidation loan is to not only search for the best interest rate, but to make the payments in such a way that you really do pay less in total interest payments.

Carefully compare the fee structure of the loan offers you receive to help determine which are the top loans. There are many fees that you may be charged, such as origination fees, processing fees, appraisal fees, credit report fees, and other fees. Not all loans will charge the same fees and not all fees for the same thing will be at the same rate between the different loans. The only way to determine which loan has the best fee structure is go through the fee schedule with a fine toothed comb.

If you have outstanding credit you can get a personal loan you can use for anything you'd like, including debt consolidation. With a personal loan you will not have to put any security up for collateral, so you won't be in danger of losing your home should you run into unforeseen financial problems. You will usually pay more than you would for a secured loan, but less than you're paying on your credit cards this way. This solution is only available for borrowers with premium credit. Keep in mind that you will also not be able to receive any tax benefits with a personal loan, as you may be able to receive if you got a cash out refinance or home equity line of credit to use for debt consolidation.

One note here, and it is a very important one:

• Make sure that the circumstances which caused you to go into debt have been eliminated, because you'll rapidly get into serious financial trouble otherwise.

In short, here is how you can be sure you are getting a top loan when you're shopping for a debt consolidation loan:

• Compare interest rates, including the simple interest and the (APR), which takes into account interest , fees and other charges.

• Compare fees – Look at the total amount of loan and service fees you'll be charged, and when you'll be required to pay them. Remember that any fees that you roll into the loan will accrue interest over the live of the loan, multiplying them substantially.

• Look at the total interest in dollars you be charged over the life of the loan

• Verify if the loan offers any tax benefits – Refinances or some home equity loan products will offer these benefits. To be sure, check with the IRS.

• Check the lender's track record. How long have they been in business, and do they have a good reputation?
  
  

One of these loans may or may not be the best solution to more quickly get you out of debt. This guide should help you get one of the top debt consolidation loans. But remember, getting debt free is up to you.

Posted by debtblog at 01:48 PM | Permalink | Comments (0) | TrackBacks (0)

On the way in this morning I sat behind a brand new, back convertible Bentley Continental. You know, the one with the 550hp twin turbo 12 cylinder. While the guy driving that car was probably not all that concerned with the recent increases in the price of fuel unless it affects his business or investments, he's probably one of the few to share that sentiment. Most of us are pulling up to the pump and trying not to retch into our cup holders as we're confronted by the most recent fuel price increase.

If this describes you, and you're leasing a vehicle, investigating one of the firms that allows you to either swap your lease to drive a different vehicle, or just get our of your current car (so you can take the train to work) may be worth doing. One benefit for those who'd like to get into a newer vehicle, is that in many cases you can do it with no money down, and a comparatively low payment. It's kind of the automotive equivalent of buying a distressed property. Here's how the whole lease take over process works.

Getting out of an existing auto lease.
You go to one of the companies that specialize in lease take overs and sign up for their service. You'll typically pay a listing fee, just as you would if you ran a classified ad to sell your vehicle. When an interested lease assumer decides they love your old car and want to take over your lease, they're credit checked to ensure they're able to take over the lease. Depending upon the service, the buyer and seller will then usually negotiate the applicable terms and come to an agreement. In many cases it works out very well for the one taking over the lease because the original lease holder has offered some sort of incentives. Even if they don't, they have already paid all the fees and deposits at the inception of the lease, so the party taking over the lease can just step in and begin making payments.

It is also great for the original lease holder because they can get out from under a lease that they can no longer afford, or a vehicle that no longer suits their needs, without paying an early termination fee to do so. Those fees can be oppressive, and a huge barrier to getting out of lease early. Letting someone else take over your existing lease will avoid the whole issue, as the lease isn't terminated, just “borrowed” until the term is completed.

Taking over an existing lease.
Just as getting the drain of a vehicle that you can no longer afford the lease payment on, or is killing you at the pump can be a weight releasing experience, so can stepping into a vehicle by just assuming the payments. A further benefit is that, since you'll only be assuming the existing lease, the term is in most cases fairly short. If you want to “try before you buy” this may be just the ticket. You can make relatively small monthly payments for terms of as short as 4 – 6 months before deciding if the vehicle is right for you. There's nothing like living with a vehicle for an extended time to make sure it's really the car that you'd like to be driving. You just can't make that evaluation in the 15 minute test drive you get at the dealership.

In some cases the lease listing agency will charge a transaction fee, and in other cases, they'll only charge a listing fee. In addition you may have to pay a fee charged by your leasing company, but in many cases these fees may be avoided. Remember that many lease terms, such as the monthly payment and allowable mileage are set in the lease terms and cannot be changed, although other terms can be negotiated between the assumer and the assumee, such as additional funds or assets that can be included in the transaction. Take note that many of the vehicles listed are fairly expensive vehicles that people are no longer in a position to afford. In addition, some of the vehicles have higher mileage so one of the reasons that people were getting out of them is that in order to stay within the maximum mileage, they can only average 800 – 900 miles per month for the remainder of the lease. Some people cannot do this.

Looking at some of the sites that specialize in the lease transfer market, I've seen some interesting vehicles such as a:

2003 Acura RSX - $145/ mo for 17 months – nice, 4-cylinder (pretty good gas mileage) performance coupe.
2007 Ford Focus – $229/ mo for 18 months
2008 Mercedes Benz R350 (Mercedes Mini-Van / SUV) $380/ mo for 26 months
2006 Mercedes Benz SLK-350 $541/mo for 14 months – Want to drive a small, but pretty quick Mercedes convertible for the summer? Here you go.

The whole lease take over marketplace is one that many people just aren't aware of. Since awarenes of the secondary market is so low, most people don't think about doing this when they're either saddled with a vehicle that they'd rather be rid of, or when looking for a new one. Taking over a lease or giving one up may not be the best choice for you, but it bears looking into if you're in either position. One of the leaders in the lease trading or take over industry is swapalease.com. You can find out more about the process, and see if it is an alternative that could work for you here. They've been featured in many national publications and are Better Business Bureau accredited.

Posted by debtblog at 01:42 PM | Permalink | Comments (0) | TrackBacks (0)

For example Essex, Suffolk, and Norfolk counties in Massachusetts showed an average year over year increase in their foreclosure rates of almost 44% in Q2 of 2005. Consulting firm Global Insight prepared a report in mid 2007 estimating the foreclosure problem, coupled with declining home values, could cost the U.S. as much as 1% of the GDP, due to decreased economic activity.

A group of banking industry regulators and 10 state AGs calling themselves the State Foreclosure Prevention Working Group has been working on the problem for over a year now. The have discovered some interesting aspects to the problem that can go a long way to help understanding foreclosures. It's interesting to note, for example that:

• Payment resets on hybrid ARMS have not been the primary cause of foreclosure problems in many areas. Despite the news coverage that could lead one to believe otherwise, mortgage holders with resetting ARMs was not the cause of many foreclosures. In fact, many (the report didn't mention the exact number, only that it was a significant percentage) sub-prime borrowers were behind on their mortgage payments before their ARMs reset.

  That says to me that many of these mortgage borrowers took on loans which were beyond their abilities. Weather that was due to fraud on the part of the applicant, lenders pushing prospective borrowers toward mortgages that were beyond their capabilities from the outset, or more recent economic factors, such as job loss, is unknown. It could possibly be a combination of those factors and more.

  For all the hand wringing and hollering by the media and consumer groups, it seems as though many homeowners simply wanted a more expensive home than they could really afford, and were willing to bet that continued real estate appreciation would render their decision a good one. For too many that was simply not the case. For these homeowners taking advantage of record low mortgage interest rates and conventional 30 year fixed mortgages, coupled with homes that were more within reach would have been a much better choice. Now the piper has come a calling.

• Refinance options have, as the report so eloquently states, “nearly evaporated”. One thing that the media has gotten right is that refinancing out of a rising house payment is not an option that remains open to very many borrowers. In the past it was a relatively simple matter to grab a lower house payment by refinancing. That's no longer the case.

• 45% of homeowners that have taken the step of contacting their lenders are working toward some type of mortgage modification. That speaks volumes. It isn't in the best interest of the lender to enter into foreclosure. They lose money on every one. As with any business, they're not in business to lose money. Instead of foreclosing on a home, they'd rather get a long term stream of interest income.

  The fact the almost half of all mortgage holders that have spoken to their lender were able to work toward some type of mortgage modification shows why contacting the lender early is so important. Unfortunately some lenders will only agree to such steps once your loan is already in default, but early contact, not avoidance is still the most important step that you can take if you feel foreclosure is imminent.

  There may be some pending legislation that can help with mortgage modification. Currently H.R. 5579, titled the “Emergency Mortgage Loan Modification Act of 2008” is being debated in Congress. It has been placed on the calender, but is still in committee and has yet to be voted on. According to it's description it is “To remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans, and for other purposes “ what exactly that impediment is, I am unsure.

  It's possibly the treatment of the forgiven portion of debt as income by the IRS. Currently if a portion of your soon to be foreclosed upon home's mortgage is forgiven by the lender the IRS treats that as ordinary, taxable income. It's their equivalent of hitting you when you're down.

  Since the report was released a few months ago, more lenders have taken the step of allowing borrowers to modify their mortgages so the 45% figure is probably higher now. Mortgage modification could be the “new refinancing”.

Nationwide the firm RealtyTrac reports that foreclosures are up 112% year over year for Q1, 2008. The top 5 states in terms of foreclosure filings were:
1 – Nevada
2 – California
3 – Arizona
4 – Florida
5 – Colorado

The bottom 5 were:
46 – Mississippi
47 – South Dakota
48 – West Virginia
49 – North Dakota
50 – Vermont

You'll notice that the top 5 were those states that experienced a rash of investors trying to capitalize on skyrocketing property values, now not so skyrocketing. The bottom 5 on the other hand experienced lower property value gains over the last 5 years. Because they were not as attractive to investors, who ostensibly would be much quicker to become over extended and then jump ship, they have higher foreclosure rates. The other reason is that in certain areas property values went up so fast that the average homeowner had to resort to all manner of unconventional mortgage products to simply buy a home at all. Maybe renting would have been a better idea, but hind sight is 20/20. Hopefully this will provide a bit more information to help in understanding foreclosures. For more help, see my previous post on how to avoid foreclosures.

Posted by debtblog at 01:58 PM | Permalink | Comments (0) | TrackBacks (0)

That is part of the reason for the economic troubles we’re facing these days. People want to get mortgages to buy houses, they have shown that they are trustworthy and historically are fairly unlikely to miss payments. However, many lenders (or their investors) are so skittish that these folks are being denied the opportunity for a mortgage in many cases.

If you are one of those that gets through the net and is in the position to be offered a mortgage, you shouldn’t just take whatever then lender is offering. There are some questions you should be asking first, even though you may just feel damn lucky to get a mortgage at all.

Here are mortgage questions to ask when analyzing your mortgage offer.

Mortgage Question to Ask – 1
What is the interest rate?

That is numero uno. The interest rate will have the greatest impact on how much you’ll pay every month and how much you’ll end up paying over the term of the loan. (For mortgages of the same amount, obviously.)

Mortgage Question to Ask – 2
Is this an ARM or a fixed rate mortgage?

In a survey of mortgage holders last year, over 30% of respondents were unsure of what type of mortgage they had. That amazed me so much I did a post on it. (Type of mortgage post) How so many could fall into this situation still amazes me, but don’t end up being one of these borrowers.

If you don’t know the difference between the different types of mortgages, here it is in a nutshell. A fixed rate mortgage is basically what the name implies. The interest rate will stay the same over the term of the loan. On the other hand, an adjustable rate mortgage (ARM) will change, or adjust, the interest rate at various times throughout the term of the loan. Rest assured the interest rate adjustment will be up, and so will your monthly payment. For more on this, see a post I did last year on how to select a mortgage.

Mortgage Question to Ask – 3
Are there prepayment penalties?

This is of huge importance. The majority of borrowers keep their mortgages for 5 years or less. That means you’ll pay off the mortgage and either get another one for your existing home, or you’ll buy a different house. In any case you’ll hold the mortgage for less than the full term. If you are charged a prepayment penalty it will cost you a hefty premium to do this.

Prepayment penalties are charged by lenders to help mitigate the risk that they’ll not get the entire revenue stream provided by the loan going full term (sounds like a pregnancy). Typically prepayment penalties expire after the first 2 – 5 years, but in some cases can persist longer than that. The penalty is monetary, you’ll not be asked to pledge your first born or classic ’57 T-bird. The normal prepayment penalty is about 2 – 3% of the outstanding balance at the time of the loan payoff.

You may be offered some consideration for agreeing to a prepayment penalty, such as a lower interest rate. On the other hand, you may be required to agree to one if you have bad credit, although at the present time few borrowers with really bad credit are able to get a mortgage at all, unless they have absolutely huge down payments.

A prepayment penalty may apply to a refinance only, in which case it is termed a “soft” penalty. If it applies to both a refi and a payoff of the mortgage, it is called a “hard” prepayment penalty.

Mortgage Question to Ask – 4
How much will this mortgage cost me in addition to the principal and interest?

Paying fees and closing costs for your loan are completely normal. There are a myriad of fees associated with securing your loan, such as appraisal fees, title insurance, documentation fees, recording fees imposed by the county for recording the deed, prepaid insurance, notary fees, application fees (try to negotiate your way out of that one), and so on.

You are required by law to be informed of any and all such fees and closing costs within three days of your loan application being received by the lender. These fees and closing costs can vary widely so it bears checking up on. Be aware that any such fees that are rolled into your mortgage will cost you a substantial amount of money after you’ve paid interest on them for 20 – 30 years.

Mortgage Question to Ask – 5
How long will it take to close the loan?

Closing is when you actually receive the proceeds for the loan. When it closes can affect your house deal, so you have to know how long it will take to happen. About 3 – 4 weeks is normal.

Mortgage Question to Ask – 6
Are you charging me points?

Points are an interest rate buy down. If you are charged points, you will pay a fee to the lender in exchange for a lower interest rate on the mortgage. It’s important to know this when comparing different mortgages, because if for example, one lender quotes you a 5.9% mortgage and another a 6.4% mortgage, you aren’t making an apples to apples comparison if the lower rate was obtained by your paying points to buy it down.

Points on a mortgage are equal to 1% of the mortgage amount. So a point on a $350,000 mortgage would cost you $3,500 up front. See the specific term of the offer to see how much each point is worth in terms of rate reduction. Normally it’s only a good idea to buy points if you are going to stay in your home and not refinance for at least 5 years, probably longer, otherwise you will not have time to recoup your added costs.

These are some of the most important mortgage questions you should ask when comparing different mortgages and before you sign your loan agreement. Before going into the process, make sure you have all your ducks in a row, they’re easier to shoot that way. Get all your required documentation in order, such as bank statements, tax documentation, check stubs, and anything else the lender may ask for. Also, you should have any offer reviewed by a good real estate attorney before you sign it. Here’s to hoping you get that mortgage!

Posted by debtblog at 01:56 PM | Permalink | Comments (0) | TrackBacks (0)

What are some of the dangers of reverse mortgages?

Reverse Mortgage Danger Num. 1 -
Well, in the first place you should be aware that the amount you receive will probably be less than you are shown in the initial calculations. This is because unlike a traditional mortgage, where the taxes, insurance, and fees are paid by monies you paid into an escrow account when you write your mortgage check. With a reverse mortgage on the other hand, it actually works, drum roll please, in reverse. The money for those items is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you'll get each month. Be aware of this when you are making your calculations.

Reverse Mortgage Danger Num 2 -
Another danger of a reverse mortgage goes to the actual structure of the loan. As it is stated in most of the loan documentation, you will retain use of your property as long it is your primary residence. The problem is that, as reverse mortgage holders are senior citizens, the chances are fairly great that they may do one of two things that could cost them their home.

One is to be confined to an assisted care facility. At this point the home is no longer their primary residence and the bank will come for their money. If the balance is less than the home equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the home will simply be forfeit to the lender to satisfy the terms of the loan.

The other condition that could trigger the primary residence provision is that the homeowner could move for much of the year to a second home. This is very common for seniors living in northern states. They will purchase second homes in warmer climes, such as California, Florida or Arizona, where they can relax in the sun. If they take their relaxing a bit too seriously however, they could find themselves in a situation where their home is no longer considered their primary residence.

Reverse Mortgage Danger Num 3 -
Another danger of a reverse mortgage is getting sucked into paying high fees or getting bad ARMs. Many reverse mortgages are adjustable rate mortgages. Many people are well aware of the dangers of these type of mortgages as they've occupied more than their fair share of the evening news for the last year. The same problems can apply for reverse mortgages as for traditional mortgages. You can easily be risking your security with the uncertainty of a reverse ARM. Personally, I may just be too conservative, but I like the old fashioned way, fixed.

Another point to be aware of is that the FHA will charge a 2% fee to insure reverse mortgages. But the real thing to watch out for is that you may be asked to pay even higher fees and closing costs than you would with a traditional mortgage. Don't do that, because many lenders will offer basically the same fee structure with a reverse mortgage.

Reverse Mortgage Danger Num 4 -
Another danger of reverse mortgages is that they let you spend your home's equity on just about anything you want to. This could cause a problems if you need those funds for an emergency down the road. While there's nothing wrong with living it up a bit in one's golden years, be aware of the temptation to splurge with all your reverse mortgage payments on trips to Mexico or a new Prevost to impress the folks in Arizona. Keep your eye on the future and remember that the money from the reverse mortgage could allow you to keep your independence at home should you or your spouse's health take a turn for the worse in the future.

A reverse mortgage can be a great financial vehicle to carry you through your golden years in relative financial security. Just be aware that there are dangers to reverse mortgages, just as with any other financial products

Posted by debtblog at 02:03 PM | Permalink | Comments (0) | TrackBacks (0)

These days times are tough and probably no one is experiencing that more than small business owners. According to the 368 page SBA report on small business released in December of 2007, there are over 6 million non-farm small businesses. That means well over 6 million of you out there are small business owners. Because so many are owned by more than one person, it's probably closer to 10 or 12 million.

Many of these entrepreneurs are constantly operating on the ragged edge of profitability and trying to keep their heads above water, so uncollected accounts can threaten their very existence. Few small business owners have the expertise, time or temperament to be effective debt collectors and yet allowing the debts to remain uncollected can sink their ship. Speaking from past experience, the financial stress of irregular cash flow can keep you awake at night, especially when you're staring payroll in the face. One position you never want to be in as a business owner is having to tell your valued employees that they'll have to wait to deposit their paychecks.

In the majority of cases, the cash flow problems are created by debt you can't collect in a timely fashion. Late and delinquent payments will ruin your cash flow. You may be profitable on paper, but your accounting won't pay your bills, only an influx of cash can do that. As a business owner there are times when you may have to hold your own paycheck in order to pay your employees. That doesn't go over too well on the home front, I can assure you.

You have some alternatives. You can just hope your accounts will pay, which sometimes just isn't very realistic. After all, in many cases your accounts are other small business owners just like you, and they're having their own financial problems. You have to make sure paying you becomes one of their top priorities. When cash gets tight, most business owners will pay their employees first, then the lease, and then vendors and other debts. Key vendors get pushed to the front of the pay line, while less important vendors are moved farther back.

If you don't have the skills to get your account moved to the front of the payment priority line, you'll need to hire someone who does. As I mentioned before, that expertise can come with a hefty price tag. An alternative is to use one of the online debt collection agencies that have come with the dawn of the Internet. For many of the same reasons other industries can become low cost service providers by becoming virtual, so can debt collection agencies.

This alternative can offer some advantages to you as a business owner. Typically the cost will be lower than a traditional debt collection agency, which helps preserve much need cash for you. In addition, you will usually have to pay no up front fees, which you may be in poor position to do. Basically the online agency will send collection letters from an official source for a set fee per letter, typically from $5 - $30. As you may have noticed, that's far lower than the 30% - 50% fee you may face when using a traditional debt collection agency. To be fair, a traditional agency will normally have a larger breadth of services available than does an online collection agency. For example, they may add phone calls to their repertoire.

You can have the entire process handled by an online debt collector, which could provide you with substantial cost savings. If they are unsuccessful you will have lost only a very small amount, and can turn to more traditional agencies. If they collect your outstanding debt, the money will be sent directly to your business. You will have much needed cash and can concentrate on what you really want to do, running your business, not collecting debts.

Posted by debtblog at 01:37 PM | Permalink | Comments (0) | TrackBacks (0)

A foreclosure is a proceeding that occurs when a mortgage loan is in default. Default means that the lender hasn't received a payment on the loan for a specified time period, usually 30 days after the payment due date. Typically the borrower will be assessed a late fee after the first 16 days with no payment, but the loan will not actually be declared in default until the 30 day mark has been reached.

The First 30 Days of the Foreclosure Process
Once the mortgage is in default the lender will make attempts to collect the past due balance, normally by initiating a series of phone calls to the borrower. You will also get one or more late payment notices sent by mail from your lender. Be aware that as soon as the 30 day period is reached and collection proceedings begin the lender will begin to assess additional fees and charges for collection and legal proceedings. This means that not only will you owe the past due balance on your mortgage, you will also have to contend with late fees, collection charges, and possible legal bills.

The Second 30 Days of the Foreclosure Process
The second 30 days with no payments received is where the foreclosure process begins in earnest. The lender will send a formal notice of default. This is usually done by certified mail. The notice of default will demand payment in full for the amount the loan is in arrears and any outstanding fees and other charges. There will be a specified time period by which the mortgage must be made current. Some lenders will accept partial payments, while others will demand payment in full. Many mortgages have an acceleration clause that allows the lender to demand full payment once a certain number of payments have been missed or amount time has passed with no payment being received.

This is when the lender will pass the defaulted mortgage from their collection department to their legal department. This means that you will owe even more fees before your mortgage will be considered current again. The purpose of sending the defaulted mortgage to the legal department is so that formal foreclosure proceedings can begin.

The Third 30 Days of the Foreclosure Process
The lender's legal department will forward the information associated with your mortgage to an attorney that will begin the actual legal foreclosure proceedings. Specific things must happen once this stage is reached. A notice of the impending foreclosure must be advertised in a public place, such as a local newspaper. You will get a Notice of Intent to Foreclose by certified mail.

There will be a court hearing to determine the validity of the lender's claim of non-payment. If their claim is upheld by the court, the lender will be permitted to foreclose on the property. A date for the foreclosure auction is set. At this point in the process another notice will be advertised, this one of the actual foreclosure sale of the property.

It is important to realize that you are not legally compelled to move out of your house at any point in the foreclosure process. Only after the property has been sold at auction will you receive a formal notice of eviction. This notice is normally sent within 72 hours after the sale. If you fail to abide by the notice, you can be forcibly evicted by the sheriff's department. In some cases the new owner will allow you to pay rent in order to remain in the home for a longer period of time. If you fail to move, eventually the sheriff will evict you by force and you can be arrested. This can take 6 – 10 weeks from the time you are sent the formal eviction notice, but in some locations can be as little as 1 week. Normally the new owner must go in front of a judge to actually have you evicted from his new house, but you can appeal the decision, granting you even more time.

The most important thing you can do to avoid such unpleasantnesses is to never let it get this far. Do not ignore the lender's communications. They will have little to gain from beginning the foreclosure process against you. They're a lender, not a real estate company. See my previous post on how to avoid foreclosure for more on how to keep your home.

Posted by debtblog at 01:50 PM | Permalink | Comments (0) | TrackBacks (0)

Actually yes, there are debt relief programs that can help you do that, but it's not really that simple. After all, you don't get something for nothing, although it could be argued that if you get a portion of your debt eliminated, you actually did.

There is some confusion among many debtors about the differences between the various debt relief programs. Are debt settlement, debt relief and debt counseling all synonymous? Actually no, they're not. They actually mean different things, and if you choose to avail yourself of one of these options to handle your debt, the option you actually choose could have long lasting effects on your credit and future financial picture.

Debt settlement is a term that most often refers to the process of negotiating with creditors to only repay a portion of a debt. Although that may sound like a fantastic option to many creditors, remember the whole free lunch thing. Using debt settlement services will impact your credit in a negative way and affect your ability to secure future credit, and the interest rates you pay for years to come. There are a few basic ways that these programs work, and before you enter into any such program you absolutely must go over any agreement with a fine toothed comb, preferably with the advice of an attorney who's well versed in such matters. It may seem like spending money to seek the advice of an attorney may just be compounding your debt problems, but a few hundred dollars up front may save you thousands of dollars and some financial migraines later.

Some debt settlement firms will simply charge you a flat fee for their services, but the more common scenario is for them to charge you either a percentage of the total outstanding debt or a portion of the savings they provide through the negotiated settlement. With most debt relief negotiations, the debt relief company will negotiate a settlement with each of your creditors that will represent between 40% - 50% of the original debt amount. They must negotiate independently with each credit card account. Debt relief companies can handle other types of debt as well, but credit cards are far and away the most common. Typically only unsecured debt is negotiated through this process, as unpaid secured debt will be satisfied by the creditor repossessing the security for the debt, such as a vehicle or land.

As the debtor, you will be required to set up a debt repayment plan for the agreed upon amount with each open account. This will include the payment to the debt relief company, the creditor, and the time frame for the repayment plan. You will then make payments either into an account set up by you, or an escrow account set up by the debt relief company. Once you have accumulated the requisite amount your debt will be satisfied. The process repeats with each debt until all your debts are paid at the individually agreed upon amount.

This is one of the places where things can go wrong for you as the creditor. Stories abound of less than scrupulous debt settlement companies simply keeping all the funds you've already paid should you miss a payment. This does happen, and needless to say that could cost you a bundle. If you feel that you realistically will not have the money to maintain such a settlement plan, you may want to consider another option, but even more important is to thoroughly evaluate any such agreement before you enter into it.

This highlights the importance of having a qualified, independent party look over the contract before you sign it. If you sign a contract that permits the firm to keep any funds paid to date should you miss a single payment, it's really your fault for such a debacle. If you feel such a clause is worth it in order to secure a substantial reduction in the amount of your debt, that's a decision only you can make. Remember that you will have your debt reduced a substantial amount, but there is also the debt company's fee to consider when calculating your total savings. In total, the savings may not be as large as you think.

The process lasts from 1 – 4 years in the majority of cases. It is exceedingly rare for the debt relief company to offer any sort of guarantee for their services. The key is that you should be using this technique as a way to avoid bankruptcy.

Debt Settlement Pros -

• Debt settlement / relief / negotiation can help you avoid bankruptcy.

• Debt relief companies can make creditors stop hounding you.

• Debt relief companies can get you debt free in less time than if you simply tried to repay your debts on your own.

• Debt relief will improve your credit in the long term because you will have no outstanding debt. It's up to you to stay debt free, however. Since about 30% of your FICO score is your amount of outstanding debt, reducing it to zero will improve your score.

Ah, but with anything there is also the not-so-bright.
Here are the -

Debt Relief Cons -

• Debt relief will give you a big drop in your credit score in the short term, however it will not be as bad for your credit as declaring bankruptcy.

• Debt relief programs require you to pay as agreed. If you fail to stick to the debt relief plan, you could lose every cent you've paid to date. Think of the rent to own scenario. Miss a payment, and there goes your TV. If you don't have the requisite amount of money in a single lump sum, it's time for some negotiation of your own. Before you enter into the debt relief arrangement, have the contract stipulate an installment payment system.

• You will owe more taxes to the IRS and possible the state department of revenue. In a spectacular example of hitting you when you're down the IRS views forgiven debt as taxable income. For example, that means that if you are in the 10% tax bracket and owe $18,000 in credit card debt, of which $9,000 is forgiven through the debt relief settlement, you will incur a $900 income tax liability. This will be reported to the IRS with a 1099 form. If you've ever been an independent contractor, you'll be familiar with such a form, as it's the same one used by those that hired you to report the income they paid you. Make sure you figure the increased tax liability into your calculations when deciding to use a debt relief or settlement company's services. This is an area where consulting a professional is vital, because you may be able to eliminate all your tax liability due to your financial status.

• The same process used by the debt relief companies to make the credit card companies stop hounding you, will also prohibit them from contacting you for anything positive. You may be able to do some debt negotiation on your own, but try this before you make the decision to use a debt relief company, because they will probably prevent the creditor from initiating any further contact with you.

Debt settlement or debt relief is not the same thing as credit counseling. Credit counseling is usually a precess whereby you meet with a person or team who looks at you financial state and makes recommendations about how you can improve it, and get debt free. There are for profit and non profit credit counseling services, although the non profit services are not necessarily free. See a post I did last year on non profit credit counseling for more information. It details 6 questions you must ask a credit counseling service to help make sure you're making the right decision.

Your credit is nothing to mess around with. There are pros and cons to any decision and the decision on weather or not to use a debt relief company as a solution to your financial problems is a mighty big one. They may be just the solution you've been looking for. On the other hand they could plunge you deeper into a financial pit of despair. Just make sure you go into a debt relief agreement, as with any of life's big decisions, with both eyes open. Don't make such a decision on emotion. To help avoid an emotion based decision it's sometimes better to take a few days to make your decision.

Here's to getting debt free, no matter what plan you use to get there.

Posted by debtblog at 01:22 PM | Permalink | Comments (0) | TrackBacks (0)