Bringing all your debt together

If you’re like most Americans, you have several forms of debt currently lingering over your head. Credit card bills are stacked up in one corner of the house. Some old student loan payments need tending to in another part of the house. And, of course, there’s the house, the one that’s a product of that mortgage that requires your attention every month. Regardless of whom you owe money to, though, debt consolidation can help. Rather than running around your place tidying up a bunch of little messes, debt consolidation brings everything together so you can attack the problem universally. However, while this process can be helpful, it can also hurt you in the long run if you are not careful. So be sure to do your homework and find out which consolidation process works best for you and understand what to expect when you consolidate your loans.

Avoiding scams or overpriced consolidations

First things first: Don’t be yourself in a worse position than you’re already in! Chances are, if you’re interested in debt consolidation, you’re already in a bit of trouble with debt or simply find yourself searching for a way out of debt. You don’t need to add to the problem by getting stuck in a situation where you end up paying more by consolidating than you would otherwise. So be careful about who you consolidate with. Always find a company that is certified. There are literally hundreds of online sites that will offer to “help” you consolidate your loans but very few who come through on the promise and actually help you. Ask friends who have gone through the process or find a credit counselor who can recommend the right one for you.

Stop spending and fix your credit

So, you want to know what to expect from the process? Well, first, you should know that you are consolidating your debts to get a better interest rate. That’s the key. Most credit card companies charge high interest rates that are hard to manage. The consolidator will help you to lower those interest rates and make them more manageable. Likely, you will be required to stop using credit as a source of funds. While some consolidators may let you use credit, most require you to stop using the credit cards during the course of the consolidation. This is for your own protection. After all, how can you eliminate debt if you are still amassing more debt in the process? You should be patient. Many consolidators will map out a plan for how long it will take you to pay off your debt. Overall, do the research before consolidating your debt and see which plan works best for you.

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Phone

Debt collectors are allowed to contact debtors by phone. Whether or not a debt collector can leave messages on answering machines varies from state to state. Federally, it is illegal for collectors to even inform third parties that you possess a debt, let alone the amount or to whom. Because of this, any messages they do leave on machines are usually limited to a fairly significant level. Exact laws vary, ranging from nothing specific beyond the federal limits, to banning answering messages entirely. Federally, there are no laws specifically stating a collector can or cannot leave messages on answering machines. Because of varying state laws and the chance of being heard by third parties, most legitimate debt collection agencies will not leave answering machine messages beyond a request to return the call.

In person.

This is the second lease recommended method of dealing with debt collectors, as well as the least preferred. Collectors can meet with debtors in person, should the situation call for it. For the collection agency, this is detrimental because it requires transportation, manpower, and time over most other methods. For a debtor, it is a problem because, like phone contact, it does not allow for any documentation of what was said or done. For these reasons, debt collectors rarely contact debtors in person.

Telegrams

Like in-person meetings, telegrams are rarely used for communication. They are now so far out of date that it is unheard of for someone to be contacted in this manner.

Fax

This is the closest to an “ideal” form of contact with a debt collector that is covered by the Fair Debt Collection Practices Act. It is faster than standard mail, and often than email, and provides both the debtor and the agency with documentation of what was said and done, to whom, and when.

Post cards

The federal Fair Debt Collection Practices Act prohibits debt collectors from contacting debtors by post card, due to the inability to prevent information from being spread to third parties.

Other methods

Some of the more modern methods of contact are not covered under the Fair Debt Collection Practices Act, leaving them up to states to legislate. These include voice mail, email, and instant messaging. Most states have legislated whether and how debtors can be contacted in relation to these methods. Even if a particular method is not legislated, however, any contact must still follow the FDCPA standards of behavior.

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Know the process.

Typically, collection agencies contact you because your name has been used to charge up a debt that was left unpaid for several months (or longer, if the payment period is longer). Generally, creditors wait several pay periods before resorting to collection agencies, although this varies depending on the debt and the locale—creditors in areas with short statutes of limitations generally go to collections and court faster than those in states with long statutes.

Know your rights.

Make sure you know both the federal Fair Debt Collection Practices Act and your own state laws regarding what rights you have. These include when and how you can and cannot be contacted, what that contact can and cannot include, required information you must receive, and investigating to ensure that your debt really is yours. If there is an argument over whether or not someone else charged a debt in your name, the collection agency is required to investigate the possibility.

Get information

Find out specific information. You are allowed—and in fact legally entitled—to ask as many questions as you want, as many times as you want, regarding your debts. Initial contact is often via pre-recorded phone messages, but once you do speak to a person, find out the names of the person to whom you are speaking (and every person to whom you speak in the future, should that person change), who claims the debt, the agency’s name, contact information for the agency, and how much they believe you owe them. Most of this information should be provided to you in a written statement within a few days of the initial call.

Assert your rights.

This is the extension that is why the first 3 steps are necessary. When you know your rights accurately, you are in a much better position to assert them. You have the right to ask them not to phone you, and to request a certain type of contact—fax, email, etc. The collector is not required to abide your particular type of preferred contact, but IS required to abide by your requests to NOT contact in a specific manner. You also have the right to tell a harassing agency not to contact you at all. They must abide by this, although they are also allowed 1 future contact to alert you to their intended proceedings.

Document everything.

This should be done with all financial information, particularly if the debt is contested in some way. This is also a good reason to avoid phone contact and use written, which provides an existing record of everything you’ve done. Legitimate agencies should have no problem dealing with you in this manner, assuming you respond to them in appropriate time. Keep a file of every document they sent you, everything you sent them, and notes regarding who did what when. Dating documents is also important. This is especially important in disputed debts, which can be resold to other agencies, and if you make a repayment agreement with the collector.

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Unsecured debts

Most debts fall under the category of “unsecured debts”, that is, debts where something was not put up as collateral that the creditor can take if the debt is not paid. The largest type of debt that usually falls into this category is credit card debt. Other unsecured debts include funerary costs, medical costs, and utility bills. All unsecured debts must be paid off before the estate is distributed to heirs.

Secured debts

The largest single debt payment most people have is usually a secured debt. Mortgages, home loans, car loans, and the like are all secured debts. These debts can be distributed without being paid off. In the case where this type of event happens, the debt does not disappear; it simply transfers to the heir. Thus, if you leave a $100,000 house to your children, but still owe $25,000 on the mortgage, the house will not be sold. It will be passed on to the children, but they will still owe the remaining $25,000 on the mortgage.

Debts exceeding assets

If a person dies with more debts than assets, the result is similar to what happens when a person declares bankruptcy without sufficient assets to cover the debts. All of the assets in the estate will be liquidated, sold off, and the resulting funds used to pay off the debtors. Any overage in the debts is simply forgiven; the deceased debtor’s heirs will not be held responsible for the dead person’s debts. The exception is if an heir has specifically signed on to pay off the debt, in which case it will be treated as the heir’s. If the debts equal or exceed a deceased person’s assets, no heirs will inherit anything, regardless of what may have been arranged beforehand.

Debts owed to deceased

Death does not eliminate debts owed to a person. If a person was owed a debt in life, that debt is still owed to the estate. The estate, and whoever responsible for handling it, is still entitled to take whatever actions the deceased creditor would have been entitled to. This can include contacting the debtor, turning the debt over to a collection agency, or taking legal action against the debtor. Any debts collected towards a deceased creditor is applied to the creditor’s estate, and then split according to whatever standards set for the estate. The exception to this case is if the decease specifically forgave the debt in his or her will or final documents. This functions similarly to granting someone or something a gift in a will, except that instead of giving them money or assets, you are forgiving a prior debt, in effect turning the prior debt into a gift.

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There are a number of financial institutions that are lending a help to people who have a problem of debts. Debts are mainly caused due to improper planning of the finances. If you spend more than what you can save or even earn then you may land up into debt. The use of plastic money is one of the main reasons for this problem. There are many people who use only the credit cards for payments. Under such conditions if you do not return the money by the due date, a heavy interest is charged. This interest is compounded every month thus increasing the repayment amount. Debt settlement is a way of getting rid of the existing debts with the help of another loan at a lower rate of interest.

There are a number of debt relief plans that are available for people who are into debts. If you have a bad credit history, then you may not be allowed to take any loans. This leads to the problem of a financial crunch. Moreover, you cannot opt for any loan unless all the dues are clear. Hence to reduce the burden of debt you can opt for the debt relief plans.

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In any game, including debt, there are strategies that will help you win. One of the easiest strategies to master is “no new cards.” As convenient as they are, and even though they have helped most of us through some experiences we may not have gotten through without them, credit card debt should be handled with great caution.

Remember, the maximum limit on each card with your name on it is the amount that goes in your indebtedness column on your credit report. In other words, let’s say you have four cards with a total maximum limit of $12,000. Creditors will look at that $12,000 as if you have indeed charged that much against them, even though you may only have a $250 balance on one of the cards.

One common marketing approach is to offer you a credit card at a low rate if you will consolidate all of your cards onto that card. People who are behind in their payments of other debts often apply for several of them.

The next time you get one of those offers in your mailbox, and I would guess it will be within a week since the average American gets twenty each year, look at it closely. If it looks at first glance like you have been preapproved for credit of $100,000, look again. Find the words “up to” in smaller letters. At the risk of having it show up on your credit rating, I don’t recommend applying for it.

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Now that you’ve learned who the players are in the debt game, we’re going to discuss types of debt. Fundamentally, there are two types of debt: secured and unsecured.

The type of debt you “play” with in the debt game may depend on a variety of factors such as your credit rating, the type of product you’re trying to purchase with debt, and regulatory limitations.

When a person or institution loans us money, they want to know when they will get their money back, how much they will be paid for their faith in us that they will get it back, and what will happen if we don’t pay it back. If a debt is secured by something, the lender expects that if we don’t hold up our end of the agreement, they can go to the security or collateral on the agreement and collect what is owed them.

If a debt is secured, it means you, as the borrower, will only receive the loan if you can offer collateral of some type to the borrower. In essence, if the lender expects either you (based on your credit history) or the loan to be risky, the lender will request collateral, or something with a value equal to the amount you are borrowing. The lender requires this to ensure that if you don’t hold up your end of the agreement, the company can collect on the loan by using the collateral to recoup what is owed.

What exactly is collateral? Collateral is something of value that we already own that can be used as a guarantee that a borrower will pay back that loan. Collateral can range from a car, boat, jewelry, or a house, depending on the size of the loan.

Similarly, if we rent a home, the landlord often takes a month’s rent in advance, the final month’s rent, and a security deposit at the time you sign the rental agreement. The money you give the landlord secures your lease agreement that you will, in fact, move in when you said you would, you will not leave without paying your last month’s rent, and you will leave the home in the condition you found it when you moved in.

Students often cannot come up with that much money up front. They may ask their parents to cosign on the lease, making the parents liable to the security on the rental agreement. That way, the landlord has recourse through either of the cosigners to get the money owed according to the rental agreement.

When you borrow money to buy a home, the mortgage lender will probably require you to put money toward the house as a down payment. The lender doesn’t want 100% of its money in the home in case it loses value before the loan is paid. The lender holds the title of ownership for the house until you pay it off.

Co-signing on a loan is, in a sense, a form of secured lending. Agreeing to be a co-signer on someone else’s loan can be a gracious thing to do for a friend or relative, but remember that business is business. Before you agree to put your signature on the agreement, be sure that you have read the terms and conditions of the contract and know what you are about to sign for. Although the borrower assures you that her plans are good and that she has no intention of not paying back her loan, “debt happens” and you may be the one ending up paying off the loan.

One of my clients was a 55-year-old widow who had most of her savings in a 401(k) tax-deferred retirement savings plan and an IRA that had been left to her by her husband. Her son decided to go into the carpet cleaning business and needed money to buy the franchise, a van and the cleaning equipment. He was confident that this was going to be a booming business, and he had dreams of a fleet of vans and a number of employees. He had dropped out of college and had only a few hundred dollars in savings to start his business.

His mother was pleased with his entrepreneurial spirit and agreed to co-sign his loan with the bank to start the business. Because her savings were all in tax-deferred retirement accounts, she became liable for the taxes at her current interest rate of 28 percent and a 10 percent penalty because she was not yet 59Yz. Even though the money was still in her savings accounts, she triggered these IRS events when she agreed to use them for collateral on her son’s loan.

Unfortunately, after a year in the business, her son had developed an allergy to the cleaning chemicals and had to abandon his business. Guess who got stuck with the loan payments! Mother will now have to work much longer than she had planned.

I love my kids, but I don’t think we as parents owe them as much as we often think we do in terms of financial help. We love and care for them as parents. We may help them to get started in a business or a career if we can afford to and choose to without guilt or obligation. But we are not required to jeopardize our own well-being or retirement to help our adult children financially.

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Okay, let’s see how you might play the debt game. Read the following situations and see what you’d recommend based on what you know about debt.

(1) You need $4,500 now. It is an emergency. What will you do? What if it isn’t an emergency how might this change your strategy?

Ideas: An emergency requires fast action. If you don’t have the cash, you need to get some, and credit cards or a personal loan from an FFA would likely be the source. If it is not an emergency, sell something you own of that value or get a part-time job for a month or two.

(2) You need over $5,000 within four weeks for an important opportunity but not an emergency.

Ideas: Work a second job, sell your car for a while and take public transportation.

(3) You know you’re going to be late paying a loan.

Ideas: You see where you can find the money to pay the loan immediately; you call the creditor and say you’ll be late on the payment; call the creditor when you pay the bill or when you discover that you will not make the date you promised to pay.

(4) You are preparing to buy a home.

Ideas: Study the housing market in your area; ask friends about their agents and if they would recommend her to you; get to know an appraiser to find out the inside opinion on preferred areas of town; get preapproved for a loan; shop the best mortgage companies.

We all play the debt game because there are times we must borrow to meet challenges and take advantage of opportunities. The important thing to remember is that as long as you are controlling the amount of your debt and paying it off in a timely way, you are ahead of the game.

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Debit cards, as you know, look just like credit cards. The difference is the payment comes directly out of your checking account instead of increasing your credit card balance.

When debit cards hit the scene, Cena was one of the first to trade in her old ATM card for the new, more convenient card. Her boyfriend was concerned about the safety of the debit card and was slower to get one. His concerns were shared by many who were concerned that using the card would enable someone to steal the card numbers and empty your checking account.

Most banks now have protection on their debit cards similar to that used by credit card companies. You will want to check with your bank to find out the protection your card carries.

Actually, debit cards have some real advantages to helping you be a smart spender.

• You can use the debit card instead of cash, reducing the amount of cash you need to carry and perhaps lose track of.
• Using the card means you don’t have to use the ATM machine, which saves you ATM fees.
• When you use your debit card, you are given an option to get cash back. This again saves you from having to pay ATM fees.
• Using your debit card instead of your credit card keeps you from reckless spending on things you don’t really need, because you know it will come directly out of your checking account.
• Using a debit card rather than a credit card will do wonderful things for your credit card balance. You will see the number of purchases decrease, making it possible to pay down your balance more quickly.

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Before we get into the players in the game of debt, you should understand that there is good debt and bad debt. What’s the difference? Simply put, sometimes it’s a good decision to go into debt if that debt will help you gain financially or in some other way. For example, getting a mortgage loan will mean you’ve got a debt to repay; but over time, your home should appreciate in value and, therefore, your debt will help make you money.

Good debt is, in the simplest of terms…

• When the item will outlast the time it takes you to pay it off.
• When the alternative to buying the item would cost you more or put undue hardship on your quality of life.
• When the interest rate is competitive.
• Bad debt is, in the simplest of terms.
• When you’ll still owe money after the item is consumed or worn out.
• When you can live without it by using some self-control or creativity.
• When the interest rate is not competitive.

In analyzing whether a debt is a good one, here is a simple filter to put it through. Will the debt.

1. Give the borrower a legally and morally sound opportunity to get out of the debt or obligation?
2. Be used for something that has a life-expectancy of three years or more instead of something that will be gone, depreciate in value, or be consumed before it is paid for?
3. Be secured by something at least as valuable as the loan itself so that the collateral can be sold to payoff the loan?
4. Be backed by someone or something that has the ability to pay off the loan if the borrower defaults.
5. Have a competitive interest rate? If the loan you’re considering is outside the competitive range, it may signal a problem. If you are a person with a history of credit problems or a low credit score, expect to pay a higher interest rate (up to 5 percent higher) to compensate lenders for taking what they consider to be a higher risk in lending to you.

When you need to borrow money to pay for something, give the loan the security test before you sign the agreement. When you do sign the agreement, make sure you have read, understood, and agreed with the terms and conditions. Don’t take anyone’s word for it until you do.

The Players

To understand debt, you must understand how lending organizations work. You can incur debt from any number of sources. These sources can range from large banks and credit unions to your brother who lent you $100 last payday. The vital part in all these transactions is knowing the terms of the loan-whether it is a mortgage, credit card charge, or whatever form your debt has taken.

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