Consolidation

Consolidating loan payments has become a great solution for individuals who qualify. In layman’s terms, consolidation is the process of taking out a single loan to combine other unsecured and secured loans into one payment. The primary goal when obtaining a consolidation loan is to pay a lower interest rate overall so you can dig yourself out of the hole quicker.

There are several different options to choose from when you are considering consolidation. While some are financially responsible moves, others are not. The best way to consolidate your loans is by getting a secured consolidation loan. Secured loans are commonly referred to as home equity loans. One of the downsides of doing this is your payments are attached to your home. If you do not own a home or you do not want to risk defaulting on payments you may want to consider alternative options.

Consolidation agencies are an alternative for borrowers who do not own a home and want consolidate their loans. When you choose debt consolidation vs debt settlement with an agency it is important to read the fine print. Many consolidation companies have earned a bad reputation for capitalizing on the vulnerability of people looking for relief. A legitimate agency will develop a plan with you to pay off your balances. Once the plan is mapped out, you will pay the agency one lump sum and payments will be forwarded to your collectors. As you can see, you must trust the agency you choose to forward on the money.

Settlement Options

Settlement works much differently than consolidation. Instead of trying to consolidate all of your balances into a smaller single payment, you are trying to lower your balances due in hopes of settling for less. When you choose settlement options, you will need to do research on the agencies you select. Some agencies also refer to settlement as negotiation. The agency contacts your creditors and explains what you are offering to pay. Generally, the creditors will not accept the first offer. However, in today’s turbulent economy, collectors are willing to accept less than what is owed. If a debt settlement company says they can reduce your balances by more than 50 percent go elsewhere. Agencies should not make any promises on how much they can save you, as settlement is a case-by-case situation.

Digging yourself out of the hole is not quite as easy as getting in the hole. If you are tired of worrying about how you will pay your minimum amounts due it is time to start researching consolidation and settlement. Each program has its pros and cons. Choose the best method of relief and take control of your debt before it takes control of you.

Advantages of Withdrawing From Your 401k

The obvious advantage of withdrawing money from your retirement to pay off your debt is the fact that you can avoid paying a heavy amount of interest. When you make payments towards installment loans and credit card debt, your payments are applied to both principal and interest. If you calculate how much is being applied to principal, you will find that a large chunk is dedicated to paying interest. As times passes, interest continues to accrue. Paying small monthly payments will hardly make a dent in your account balances.

When you cash out your 401k to reduce your debt you are paying off the principal and eliminating accruing interest. For individuals who do not have access to a large sum of money this seems like a great solution. While you can save money on interest payments, you will need to consider your age and penalties before you make your final decision.

Short-Term Penalties and Long-Term Consequences

One of the biggest disadvantages of cashing out 401k to reduce your debt is that individuals who withdraw funds from their 401k account before retirement are required to pay the highest marginal tax rate on the money taken out of the account. In addition to this, account holders will also have to pay a standard 10 percent early withdrawal penalty if the funds are taken before the age of 59.

All of the money withdrawn in the year will be added to the account holder’s taxable income. What this means is if you borrow $20,000 from your retirement at the age of 50, you will have to pay a $2,000 penalty and $20,000 will be added to your income for the year putting you into a higher tax bracket. When you calculate the penalties and fees, you are losing up to 40 percent of your total withdrawal just to take cash out to pay off debt.

Cashing out your retirement savings account to take control of your debt also has long-term effects on your retirement. If you cash out your 401k, you are taking away your chance to earn compound interest that would allow you to live a comfortable life during retirement. While cashing out your retirement account to pay account balances sounds like a great short-term solution, the total long-term costs and the loss of future earnings could really impact your life. Consider other alternatives and make the decision that will cost you less in the long run.

Sometimes the most basic approach is the best and in the case of paying off debt the debt snowball has proven to be the best way to get out of debt.

How does the snowball work
The debt snowball popularized by Dave Ramsey, advocates that you line up all of your consumer debt from smallest balance to largest. In addition and this is an important point, it does not care what the interest rate is.

This point is often debated by financial pundits and is viewed as a weakness of the plan. They say that from a mathematical point of view that you are better off including the interest rate into the debt elimination process because you may end up paying more in interest when it is all said in done.

Why the snowball works
People often get into debt for several reasons but the most common one is due to the lack of self control or lets just call it a behavior that is conducive to piling up debt. What I mean is that self control is required for anyone that chooses to live below their means.

What the debt snowball focuses on is trying to reverse this behavior pattern. It requires a shift in your spending habits from spending all that you make to living below your means in order to repay debt.

For instance, if you have 3 credit cards that have a balance of $500, $1,500 and $7,500 respectively. At a high level, that is a lot of debt to pay back and may seem too difficult to achieve.

However, by braking the process down into small steps you are able to achieve success sooner, create momentum and stick with the process for the long term.

Going back to the example, you focus all you of energy on the card with the $500 balance first. Find extra money in your budget, sell something or whatever it takes but focus on that card only.

Once it is paid off, you will feel a sense of accomplishment. You may be thinking this is doable after all and thus momentum is created. Now, take the money that you were applying to card number 1 to card number 2 and so on until all of your credit cards are paid off.

Don’t lose focus
Make no mistake that it could take months to years to not only reverse the pattern of over spending but to also get out of debt. It may taken to you awhile to get into debt and it will take you some time to get out.

By systematically attacking your smallest balance and working your way up to the largest, you’ll soon realize that you can do this.

Lastly, commit to stop using credit cards while you are in the debt elimination process. Establish a budget and try spending cash for your purchases. You may have to tighten the belt in the short term but in the long run it will be well worth the effort.

Many who go about trying to settle debt try to do so themselves. They may have little experience in trying to negotiate to settle debts and can make matters worse for themselves by agreeing to pay the debt plus high penalties. Some who try settling debt on their own end up also paying those who a company has hired to collect those debts. This is an expense that a person in debt should not even consider taking on.

People that are in debt often get letters in the mail from collection companies that buy their debt. Usually when it gets this far it is already reported on your credit report. This can cause your credit score to take a serious dive. The companies that buy the debt usually do so for pennies on the dollar. You should never offer them anything near the amount of money they request you pay them to settle your debt. These debt collection agencies are really trying to turn a profit off people who don’t know they will take a much lower amount of money to settle the problem.

If you feel the debt you are accused of owing is wrong, you can dispute the claim. Sometimes the lender or company that says you owe them is mistaken. Maybe you sent the last payment in and they made an accounting error. If you can prove that the debt is an error, you should attempt to do so. Why pay what you don’t owe?

One of the best ways to go about settling debt is hiring a professional to help you. In many cases this professional may be an attorney. These attorneys usually have years of experience in dealing with helping clients get out of financial troubles. They can negotiate a fair settlement that makes everybody involved happy. After years of handling these cases they know all the ins and outs of how to settle debts.

About the Author
The Author has good experience in the finance field, who has been writing on various related topics such as debt settlement & debt relief attorney to help people understand the Debt Settlement process and help them save their home from foreclosure.

Even though it may seem like it will take quite some time, it is still the best way to gain control of your finances. Having too much debt brings a lot of trouble with it. Consider some of these ideas as you try to decide whether paying of debt is worth it.

No debt reduces stress
Most people who find themselves in debt tend to have a greater stress level according to an article by MSNBC:

• 27 percent had ulcers or digestive tract problems, compared with 8 percent of those with low levels of debt stress.
• 44 percent had migraines or other headaches, compared with 15 percent.
• 29 percent suffered severe anxiety, compared with 4 percent.
• 23 percent had severe depression, compared with 4 percent.
• 6 percent reported heart attacks, double the rate for those with low debt stress.
• More than half, 51 percent, had muscle tension, including pain in the lower back. That compared with 31 percent of those with low levels of debt stress.

Why do we subject ourselves to these debt induced health problems when they could be avoided for the most part? Are we trying to keep up with our friends and acquaintances? Are we being influenced by all the advertising that we see or hear on a daily basis?

Living a lifestyle that we can not afford effects many of us and even though we probably know that we shouldn’t buy things that we can not pay for we still make that purchase because we think that it will give us some sort of comfort. However, when the first payment comes in, that is when it hits us – we now have to pay for it!

Our grandparents paid cash for everything. If they didn’t have the money then they didn’t buy it. It could be because many of them lived through the Great Depression.

So, it stands to reason that if we feel like we are in more control of our money that we will not be subjected to the stresses that can present themselves as a result of too much debt.

Life’s emergencies become an inconvenience
Another reason that paying off debt should be a priority in your personal finances is that you will be in a better position to handle life’s emergencies.

It seems, although it is sort of theory, that emergencies come in waves. Does this scenario sound familiar? Your car needs a new alternator, the home air conditioning went out and one of your children now needs braces.

If the only extra money you have goes to debt repayment then this scenarios gets really stressful. However, if you have determined to live below your income and have been diligently building up an emergency fund over the course of time then these problems are a slight nuisance instead.

Easier to build wealth
The largest benefit of paying off all your debt is that you can now focus on building a huge pile of cash that will grow over time.

Imagine, if you didn’t have any consumer debt like credit card payments or car payments, how much money you would have available to invest. In addition, if you were able to pay off your house which for most people is their single largest expense, think about how much money you would then have to invest.

Make it a point to attack your debt with everything that you have. Eat out less, sell stuff or even try to earn more money. Whatever it takes decide to payoff your debt as soon as possible so that you can enjoy life knowing that you are in control of your financial future.

The first step is to examine what is known as the statute of limitations in your particular state. Most states in the US place a seven-year limit on when a collection agency is able to take you to court to get a judgment against you to pay an outstanding debt. If you have debt that is older than seven years, the collection agency or creditors can no longer sue you for the money. In fact, these debts will no longer appear on your credit report. While creditors may threaten you, they have no true recourse for any debt you may have that is older than the statute of limitations.

Another way to negotiate with creditors is to offer a settlement. This is especially effective when it comes to unsecured loans such as credit card purchases. The longer you have owed the less you will have to pay in a settlement. The average settlement is usually about one third of the original debt. While the collectors at first may ask for more, it is best to hold out until they agree to the payment of one third. Another important factor to keep in mind is to get any agreement you make with a creditor in writing before making a payment. A verbal agreement over the phone is not enough to ensure that the collector will meet their end of the bargain.

There are many ways to negotiate credit card debt that will not lead you down the path to bankruptcy. It is important to keep careful records as to when you speak to the collection companies and what has been said. In fact, if possible it is best to communicate only in writing. Once you open the door to settlement, the calls will eventually cease. By holding out for the least settlement amount and not agreeing to make payments over time you will walk away with a much better deal in the long run.

Create a budget
The first step in eliminating credit card debt is to create a budget. If you have already done this then you are ahead of the game. If not, spend some time working on this important step. The reason that a budget is critical is that you want to understand exactly where your money is going. In order to quickly get out of debt, you may need to stop spending money in areas that is now less important. For instance, it may make sense to shut off cable for the time being until you have some breathing room. By freeing up some cash that otherwise spent, you are now in a position to apply the money to the credit cards.

Create an emergency fund
Save up enough money to account for any emergency that may come up for instance car repair. It is important that you stop using credit in this process. The amount required depends on your overall budget but should be around $1000 at least. This step may take a little time but will be pivotal in allowing you to stop using credit and focus all of your resources to getting out of debt.

Layout your credit card statements
After you have created your budget and are committed to sticking to it and have a funded emergency fund, you will want to find all of your credit card statements and line them up from smallest balance to largest. An important point here is that you really don’t care about the interest rate of the respective card. The reason is that you want to get some early success by paying off a loan. By focusing on the smallest balance you can achieve an early win, which will then provide some momentum meaning you will be more likely to stick to it for the long term.

Attack your debt
After you have paid off the smallest credit card, take that payment and now apply it to the balance of the credit card that has the next lowest balance. Now, you are really starting to pick up some speed. With each credit card that is paid off, be sure to take that payment and apply it to the next one until all of your credit cards have been paid off.

At this point, you will want to consider closing some or even all of your credit cards. Ideally, you will not them any longer. If you are unsure, just keep one open for the time being. Continue to build up your emergency fund which will make a credit card less of a concern. Lastly, this process can take some time depending on how much debt you have but it is proven to be the best way to get out of credit card debt.

Debt negotiation

Although many people don’t, if you do happen to have a little cash to throw at your debt, you can try debt negotiation. There are a variety of debt negotiation companies on the market however the best route is to contact an attorney who specializes in negotiating with creditors. Negotiation involves having your representative contact your creditors to negotiate a one or two time payment to eliminate the debt. Attorneys who are good at this can sometimes get loans reduced to about half of what was originally owed. Your circumstances must fit certain criteria to do this such as accounts that are severely delinquent and cash available to partially pay off an account. Even though this can be a very effective method for eliminating debt, there are some drawbacks. Accounts paid off in this manner are reported as paid for less than owed. Some companies may also not be open to negotiation regardless of how good your attorney is.

Debt counseling and consolidation

If your accounts are still in relatively good standing such as none that are more than 90 days past due, credit card counseling or consolidation. Companies that offer these services are generally very reputable. If you don’t want to spend time checking companies out you might try and ask friends or acquaintances if they have used one before. Some companies provide both of these services at the same time. Consolidation involves grouping all of your accounts into a single payment which is easier to manage. This can be done in two different ways. Some companies will offer to give borrowers a new loan to pay off all their accounts. The borrower will then make one monthly payment on the new loan instead of multiple payments to different creditors. This makes managing the debt much easier and can also lower the interest rate on all accounts overall.

Another method that some companies use is to deal with your creditors directly and set up a budget and payment plan. Individuals make one monthly payment to the consolidation company which in turn distributes it equally to all the individual’s creditors. The counseling part comes in when the company helps the borrower draw up a monthly budget and can give suggestions or education on money management. The overall idea with either method is to make loans more manageable so that they can quickly be paid off.

In closing, there are other options to eliminate credit card debt without bankruptcy. Even if you have accounts that are delinquent there are still some options before going through the courts to get your debts paid off. Bankruptcy is not an easy process and there are typically more drawbacks than benefits to using the process. It will also stay on a credit report for a very long time during which is may be difficult if not impossible to obtain new credit.

Also called a no equity debt consolidation loan, how it works is a second mortgage is taken out on the house. Banks will loan up to 125 percent of the appraised value with a good credit history. Most banks only allow those that they have a solid belief in their ability to pay back the combined mortgages to get the loan; after all, if it took them that long to save the money to buy the house in the first place, the bank wants to ensure that they can do it again at twice value plus interest. So, lets look at some of the advantages and disadvantages of this type of debt vehicle.

Advantages
There are advantages in obtaining a 2nd mortgage debt consolidation. First, for consolidation, this type of loan allows the borrower to combine what they owe, credit cards for instance, into one loan, which allows them to pay interest on just one loan rather than two. This ensures that the loan will be repaid just a little faster, which is good for both the borrowers’ credit rating as well as for the bank, which has another loan wrapped up. This is good for both parties. Lastly, many times the interest is tax deductible. However, be sure to consult a tax adviser before including the interest on your next tax return.

Disadvantages
However, this is not to say that 2nd mortgage debt consolidation loan is the best option for everyone. Besides the obvious point that it is essentially an additional mortgage that also uses your house as collateral, some borrowers forget to read the fine print, so they may miss some of the important notes, such as how the interest rates work, which can sometimes increase over time, or penalties for failed payments. There is also the possibility that the lending institution can ask for a foreclosure if too many payments are missed which could mean the loss of the home. Obviously someone seeking such a loan is advised to not sign anything immediately; even if the potential borrower is willing to deal with it then and there, patience is always a good virtue to which to ascribe. Waiting allows someone a chance to look over the loan without pressure, and possibly even a chance for the papers to be shown to a certified financial adviser, which is always advised when dealing with large sums of money.

Overall, a 2nd mortgage debt consolidation of some form is ideal for someone that can take care of both mortgages normally, and is looking to catch a break. Just remember to take a good look at the paperwork or there may be some serious buyer’s remorse.

Where to begin
The first step is to make a firm decision to accomplish this task, no matter what stage the debts are in. The second is to set out a clear budget for paying all credit lines down, and the third is to communicate this to the creditors. There may be situations in which settling an outstanding balance or declaring bankruptcy is the easiest way to handle overwhelming accounts, but the goal is to prevent the problem from growing this large.

Create a written budget
Arrange a credit card budget by making a list or spreadsheet of all credit lines. The list includes amounts currently owed, interest rate, minimum payment and due dates. Prioritize the largest balances first, or if they are close, prioritize the highest interest rate first. This is the account which will receive the largest payment; the rest will get the minimum or the amount you can afford to pay.

The large payment may be twice as much as the others or more, this is up to the debtor. The account holder needs to allocate funds to go towards paying down this one card faster than the rest. Possibilities for coming up with this extra cash include sacrificing a leisure activity or home luxury, generating additional funds from a job or second income stream, or simply using money which used to be paid to other accounts.

Establish communication with the credit card companies
Once the budget is set, call creditors. Explain the situation and let them know your plans, especially if an account is past due or has gone to in-house collections. The issuing company needs to document your account if it is past due and is not being collected on. If it has gone to collections in-house, communication is important to prevent the account from being permanently closed and sold to a third party collector.

With this plan, when the balance on the prioritized card is at zero, the additional funds are shifted to the next priority account, and so on until every card is at zero. This type of plan is what is often referred to as the debt snowball. Do not close the cards if the bank has reinstated your good name but only if you can stick to your budget. If you think that they card are too tempting to use then close them. However, open lines in good standing contribute to a healthy FICO score and a good score will help when trying to buy a home.

Third party collectors
Accounts which have been sold to a third party will settle for pennies on the dollar. Verify the company’s right to collect on the debt, and if proof is provided, settle the debt and move on. While this is not an ideal situation, the marks on your credit report will disappear faster than a bankruptcy.