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Debt Management Advice

June 26th, 2009 | Author: Debt Relief Pro

As credit card balances continue to accumulate for a majority of Americans even as the national economic future appears ever more dire, increasing numbers of borrowers are taking their financial obligations by the horns and investigating the debt management solutions that would allow them to lower their interest rates and eventually eliminate all of their consumer debt. The process is surprisingly simple and allows borrowers to better their credit ratings and FICO scores – which are largely calculated, you should understand, from logarithms that compare the utilization ratio of credit capacity to money actually owed – while reducing the amount of money they spend on interest payments.

The benefits of this should be obvious to every consumer: greater availability of funds as well as a healthier financial outlook should true emergencies pop up in years to come. Most borrowers will find one of the debt management companies, particularly the new debt settlement approach, of great assistance when attempting to correct past mistakes, but there is nevertheless much that ordinary citizens can do on their own before even looking into one of the specialty debt relief businesses. For many Americans, they have not really looked at their collected bills since debt became a problem, and the first thing to do when initiating debt management should be a close examination of each one of their debt burdens and regular monthly obligations.

After all of your bills are laid out in front of you, what comes next in most debt management solutions is to examine the obligations one by one. Once your various burdens have been recorded on an accountant’s ledger with different pages for secured debts (mortgages, auto loans, etc), unsecured debts (credit cards and department score charge account, generally) and the various utilities and insurance payment and other bills you must pay each month to keep your household running smoothly. At this point, you can decide upon the most important bills and rank them in order of priority. For families with relatively high levels of income and low monthly minimum debt payments, for example, there should be no problem when attempting to satisfy each monthly payment, even organizing some sort of automatic deduction from your bank account to make sure each payment arrives on time and there’s no problems with postal delays, while still putting money aside for emergencies and attempting to pay extra on those loans that have the worst interest rates. We do understand, however, that not all households endeavoring to resolve their debt management issues have such luxuries. No matter what your situation, home mortgage loans should be the first bills to be paid. Your residence will likely be your most treasured investment as well as a necessary fact of life. You shan’t dare risk foreclosure.

Afterwards, you should also make sure that car loans are paid on time as well as any insurance that could potentially be cancelled upon defaulted obligations. Only after those are paid, should you worry about the credit card bills, and, if you genuinely have not the capacity to get through every minimum in full, at least work on tackling those with the highest penalties for missed payments. Utilities, however counter intuitive this may sound, should probably wait for a bit when times are tight. They are the least likely to include penalty fees for missed payments and almost never report lapsed borrowers to the credit rating bureaus unless the accounts have already gone to collection. Furthermore, they often have payment plans available subsidized by the local government that could result in a month’s stay of responsibilities or, at worst, truly negligible monthly burdens. The same could be said for doctor’s bills or those burdens resulting from medical emergencies. Loans provided by hospitals often have no interest at all (and, in any event, they would rarely break five percent) and lender representatives will take pains to work with the borrowers to make sure they will not suffer undue hardships from repayment. Even when the debts are mentioned to the credit agencies, they do not overly affect the FICO scores and are treated far more advantageously by any debt specialist analyzing your credit history. There’s a degree of embarrassment whenever the head of household cannot pay every bill, but, for debt management to have any real success, you must have a realistic appraisal of what you can and cannot do on any given month.

That said, you also have to keep in mind the most important of all obligations: those responsibilities handed down by the government or the courts. When assigning priorities to your budgetary concerns, you will have to pay special attention to anything that is judicially or governmentally mandated, from alimony payments to tax liens to reparations from criminal proceedings, before figuring out debt management strategies, and, in the event such judgments or fees are handed down while in the process of debt management, you will have to change your budget accordingly. For that matter, when traditional debt management priorities dovetail as when the courts demand action for some discharged unsecured financial burden (an odd occurrence but not unheard of), then that debt must be repaid as quickly as possible almost to the exclusion of your other debts so as not to worsen your credit much less face garnished earning or bank account seizure (or, though this is truly unlikely, possible imprisonment). In these sorts of circumstances, successful debt management prioritization must take a different tactic than what we ordinarily suggest – attacking those debts featuring the highest interest rates or greatest fees – in order to protect your household against the long arm of the law.

You should, however, understand the distinction between governmental action and the (generally vague and often out and out misleading) threats offered from credit collection agencies. If you have had problems with consumer debt from any amount of time, you are probably all too familiar with the antagonizing spiel that bill collectors will seemingly call every hour to unfurl and all of their varied warnings should payments be delayed even one more day. Borrowers should remember that these collection agencies can say virtually anything that they want, with actual truth rarely a consideration, and they will use every rhetorical gambit in the book to ensure the coffers are filled. No matter what, do not let bill collector scare tactics change your debt management priorities or budgeting strategies. Your more important bills (and, if needs be said, the essential household expenses) must be looked after before worrying about collection agency rants. Don’t let your family go hungry just to avoid another guilt ridden phone call. For that matter, if you are working with a debt management company, you shouldn’t have to listen to them at all. The next time they call or send a threatening note, just give the address of the debt settlement or Consumer Credit Counseling company you have employed, and, by law, they will no longer be able to contact you in any way.

You should also look at more than just interest rates when figuring out which credit card bills to go after first. Most competent debt management authorities would urge you to consider just how much each account will cost in accordance with the varying small fees that credit card companies like to charge. These monthly (or, more commonly) annual administrative fees are absolutely without point or reason beyond profitably defrauding the consumer, and any card that forces borrowers to submit to such charges should be done away with as quickly as makes sense within the constraints of a well thought out debt management procedure. At the same point, when speaking of the various unneeded fees that unsecured credit accounts – or even secured loans; many sub prime mortgage companies
also attempt this chicanery – try to hide within the fine print of loan documents, you must also make sure to find out whether or not there is a penalty for early pay-offs. These so-called pre payment penalties are intended only to make the borrower pay out all the interest they can through the course of the loan, and they are one of the reasons that, whenever signing your name to a new credit account, each line should be dissected by someone with professional experience in parsing the sometimes intentionally complicated verbiage that lenders utilize to mask their true intentions. Nevertheless, if you already have agreed to the loan and can’t get out of the pre payment penalty, then with the help of a debt management specialist (or, perhaps, you may try this yourself while using a financial calculator) figure out whether or not eating the initial fees for fully satisfying the loan would be worth an end to the compound interest you would suffer through paying each month for the entirety of the term.

Of course, even once you’ve decided upon a specific technique of debt management, do not consider anything set in stone. You should assume – actually, to be more precise, you should expect – your priorities to change through the long, long process that debt relief entails. Whenever your earnings (especially, during this time of national economic uncertainty and rising unemployment) change or your household circumstances (if a child goes to college, for example, or a family member undergoes hospitalization or some other medical emergency) is significantly altered during the course of debt management, you must be sure to also alter your household’s annual budget to accompany the other changes and make the new funds available as needs must. Obviously, in the same way, if household expenses have actually been reduced (by, say, a child graduating from college) or your career advances and your income improves and additional money is made available for debt management, you should use those funds to pay down the worst of your credit card accounts. Even if you and your family essentially stay in the same basic budgetary situation for the remainder of the management procedure, which seems a virtual impossibility these days with such a dynamic economy and ever evolving American lives, you have to keep a close look on the debts themselves. Many of the secured and unsecured debts have written into the terms of their loans an eventual changeover to adjustable rates that, as you might imagine, only ever adjust upwards. The low fixed rates that, just two or three years ago when calculating your initial debt management budget, you thought you could essentially ignore by shrugging away monthly minimal payments until the real problem debts were taken care of, might suddenly triple in the span of only a few weeks. Even when speaking about the most seemingly solid and stable credit accounts, maintain total vigilance with the debt management program to ensure that your priorities remain accurate.

There are a number of these niggling little debt management solutions that may not occur to the average borrower already sufficiently troubled by increasing debt loads and household deprivations. This is one of the reasons that it is important to do all of the research that you can about debt management both online and by taking advantage of the resources and literature that the government or associated non profit groups shall mail out to interested borrowers as well as speaking with debt management professionals. To take just one other example, whenever that you are constructing your budget and calculating the priority with which to assign each credit card account, there’s more to look at than you may initially think. As you probably assume, most borrowers begin debt management by tackling first the worst interest rates so as to avoid the escalating debts from compound interest accumulation. What may be less known for the general public, many debt authorities instead suggest paying off the loan with the smallest overall balance. This may sound strange, since the smallest debts (in almost every case) generally accrue the least interest regardless of their interest rate, but there’s an incalculable jump to consumer motivation once even a credit account totaling a few hundred dollars has been done away with. Among the causes of borrower debt overload has to be the sense that such financial burdens, once they attain a certain towering status, could never be eliminated through traditional means – this is why so many consumers just stick their head in the sand or recklessly continue borrowing with less and less care to the actual terms of their loans – and the mental inspiration that ensues from eliminating even one bill time and again creates a rippling effect throughout the borrower’s entire household. Mindset and (even, if it is somewhat delusional in the early goings) positive belief in the powers of the household to eliminate debts through proper management could not be more beneficial as the process goes along.

While your authors do appreciate the motivational importance of paying down the smaller bills to prove to the borrowers that debt management can be a reality for their family – and, obviously, we also approve of and would even encourage borrowers to consider starting off with the worst interest rates to prevent more debt from accruing – there are several other, less noticeable aspects that must be thoroughly understood before making any final decisions as to debt management. To take just one example, when you are looking at the different interest rates, there’s a phrase that debt professionals use called ‘effective interest rate’ that aims to calculate the potential tax deductions available for each debt. While this generally only applies to home mortgage loans (not always, whatever the loan officer may say, second mortgages or equity loans; make sure such claims are checked out by tax professionals) or such obvious deductions as medical bills or student loans, there are some cases in which even credit card bills may have unforeseen positive side effects. For instance, those borrowers who are self employed, if they have financed any part of that career through their credit card accounts, may be pleasantly surprised to find that these supposed burdens could actually end up saving them money in the end. Even small, somewhat whimsical home businesses that make barely any money could be used as losses for the larger household income and, through so doing, the associated debts paid every month for that small business could also end up saving the borrower’s tax debts at the end of the year. At the same time, the point of debt management should be to eliminate all of these debts regardless of the tax benefits, but it may make sense to discuss your finances with an experienced accountant (as well as your debt management counselor, there’s rather complicated mathematics to be done to see what that ‘effective interest rate’ will be even after establishing potential income tax breaks) before deciding upon a course of action.

Also, for borrowers with the income to realistically consider such an idea, there may be some purpose to investigating whether your earnings should be put toward a plan of investment rather than earmarking all additional funds toward the elimination of debts. Considering the current state of affairs on Wall Street, we strenuously suggest each borrower think long and hard about even the most seemingly can’t miss investment. Unless you are absolutely assured at getting a rate of return that would be double the interest lost on the worst of your credit card accounts (the obligations that will not be repaid during your attempt at leveraging the debts), it’s probably better to avoid attempts at making money through speculative ventures until you have successfully finished the process of debt management to its conclusion and eliminated all of at least your high interest unsecured debts. Investment should be a respected part of every household’s financial portfolio, but, first and foremost, you have to make sure that you
do not continue racking up compound interest. Even the most theoretically stable investment will contain hidden dangers, and you may even be better off cashing in those current deals to better finance full debt relief.

These debt scenarios change so greatly through from consumer to consumer, that it is difficult for your authors to do much more than outlines the broader techniques of debt management successfully utilized by many borrowers we have talked with. For most debtors, they would be well served by taking advantage of a free consultation with one of the debt management companies in their area or available on line. Debt settlement firms, in particular, have demonstrated enormous worth through their practice of negotiating down the actual funds owed from representatives of the lenders in exchange for a promise of repayment that traditionally does not last longer than five years. Once again, the correct debt management solution changes along with the individual’s problems and the day to day requirements of their household, but a quick talk with one of the debt settlement companies seems at least worth the hour or so such a discussion would take. As we have mentioned, there are an endless number of small details that ordinary consumers less experienced in financial minutiae may miss when constructing their own plan of attack for debt management, and, though your debt relief approach and household budget may have to be regularly altered, it is so important when beginning debt management to have your first plan be a productive one.

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