Debt Management & Debt Settlement Program
Why do so many people find themselves in need of a debt management program? Since the 1970's the onslaught of unsecured credit card offers and enticing ways to leverage purchases using personal lines of credit, more and more individuals are finding themselves caught in the "Debt Trap". Unsecured Debt is the highest risk loan creditors can make; therefore it is also the most expensive money a borrower can borrow. Based on the profound reality of compounded interest very little of your monthly payments apply toward the principal balance. This is why it can take up to 6 years for every $3,000 you owe to pay your creditors off, and this is assuming you don't make anymore purchases. Like a boat that has struck a rock and is taking on water, housing unsecured debt requires your immediate attention and action to rectify the situation. Listed are the options an individual has to choose from relating to Debt Management.
1. Continue minimum monthly payments to credit card companies. This can take 30+ years to pay back, cost thousands in interest alone and require you to pay back over three times what you now owe. Unfortunately, millions of Americans who are struggling with their debts continue to just barely make their monthly payments. Most of these people just keep doing whatever they can to continue making minimum payments for the rest of their lives. If you are facing severe financial hardship, this is a no win situation. If you are only meeting your minimum payments, you are paying almost entirely interest charges; not paying down your debts.
This means that if you owe $10,000 today, it will cost you more than $20,000 over the next 20-30 years before you are debt free. And if you can't keep making their minimum payments, the creditors will begin harassing you. If you don't find help, you could end up with judgments and garnished wages as well as liens against your property.
2. Debt consolidation loan. This only works if you have good credit and equity in your home. If you have overbearing debt, then you likely do not have good credit. And why would you want to jeopardize your home by converting your unsecured debt to secure? If something happened, you could lose your home. (See below for more information on these loans.)
Debt Consolidation loans, which are used to consolidate bills, can transform an unsecured debt, (which is not backed by any collateral) into secured debt, which is backed by collateral. Since most people use their car or home as collateral, they place them at risk because if they fall behind and are unable to meet the conditions of their loan agreement, the collateral asset may be taken by their lender.
The interest rates associated with debt consolidation loan can also be as high as 18 to 25 percent. This is comparable to a high-interest rate credit card, and will give you no real advantage in reducing your monthly payments. A good portion of your money will only be paying off interest. At this rate it can take people 10 or 20 years or get out of debt. Finally, after some people find themselves in dire financial straits, they implement a debt consolidation loan only to run up further credit card debts and eventually filing for bankruptcy and losing almost everything.
3. Consumer credit counseling. These programs can take 6 years or longer to complete and you still pay back 100% of the debt plus interest. You also can be kicked out of their program if you miss a payment. They also freeze your line of credit for the entire time you are on the program so if you are thinking of buying a car or a house, you will not be able to get approved for another loan. If you open up your wallet or purse and pull out your credit cards, you will probably notice that most are VISA cards. Well, back in the 1960's, VISA and other credit card issuers noticed that more and more of their cardholders were making only minimum payments and a good percentage of people were just defaulting. What was their solution? You got it. THEY STARTED THE CREDIT CARD COUNSELING SERVICES! They actually were the source of the establishment of one non-profit, credit counseling group after another. The entire foundation of the industry is all about getting the credit card companies paid back as much as possible. Now do you want someone negotiating credit card payment reductions for you who is actually working for the other side?
4. Filing bankruptcy. This would negatively affect your credit from 7-10 years. Personal bankruptcy should be considered as a last resort to a debt management option because the outcomes are long-lasting and extensive. Since the new law went into affect, most people will qualify for a Chapter 13 bankruptcy which in most cases is a five year repayment plan to the creditors. A bankruptcy stays on your credit report for 10 years, affecting ones ability to obtain credit, buy a home, get life insurance, or even obtain a job.
Debt Consolidation (Counseling)
If you have $15,000 in unsecured debt at an interest rate of 18% and are making minimum payments, you can expect to be out of debt in approximately 51 months with a payment of approximately $395 (includes monthly processing fees) for a total of $20,221.
If you are looking for a real and sustained solution, Debt consolidation can be the right choice for you. It's a responsible and constructive way to solve your current debt situation and can assist you in becoming credit worthy. It's not for those looking for a quick fix.
Advantages:
Some creditors will reduce or eliminate interest rates. Reduction in interest rates depends on individual creditor policies and your charging and payment history. The average interest rates you can expect will be between 7-10%.
All of your payment dates are adjusted to one date in the month so that you make one payment/month. Your monthly payment is determined by the specific group of creditors you include in the program. Average payment works out to approximately 2.2% of your debt. Most of the time this can be lower than your current minimum requirements, however, it can be more.
Your monthly payments are processed by a debt consolidation company that has established relationships with the consumer credit counseling departments of the major creditors. They also provide our clients with educational materials that can assist you in understanding how you got into debt and how to stay out of debt.
Disadvantages:
Monthly payment is fixed by the creditors and it is your responsibility to make your monthly payments every month. If you miss payments you will be disqualified from the program and the creditors will set your interest rates back to the higher rates and may add fees. In addition, you may not be eligible for consolidation benefits for 5 years.
How to Qualify:
Provide your debt consolidation agent with a list creditors.
Your debt consolidation agent will provide you with the required monthly payment. If you can handle the monthly payment then....
Your debt relief agent will send you the required paperwork.
Sign the Contract
Make timely, consecutive monthly program payments and continue to make your monthly payments. You will continue to receive statements from your creditors which will reflect your adjusted interest rates and payments.
Credit Card Debt Payments w/Annual Compounded Interest
The following charts show how compounded interest affects the total amount that consumers pay on unsecured debts. Use the balances owe and interest rate you are currently being charged to find what you will pay and how long it will take, if you are only able to make the minimum monthly payments required.
10% |
|||
| Amount Owed | Total Interest | Years To Payoff | Total Payback |
| $1,000 | $277 | 5+ | $1,277 |
| $2,500 | $1,027 | 9+ | $3,527 |
| $5,000 | $2,277 | 13+ | $7,277 |
| $7,500 | $3,527 | 15+ | $11,027 |
| $10,000 | $4,777 | 16+ | $14,777 |
| $15,000 | $7,277 | 18+ | $22,277 |
| $20,000 | $9,777 | 20+ | $29,777 |
| $25,000 | $12,277 | 21+ | $37,277 |
14% |
|||
| $1,000 | $459 | 5+ | $1,459 |
| $2,500 | $1,771 | 11+ | $4,271 |
| $5,000 | $3,959 | 15+ | $8,969 |
| $7,500 | $6,146 | 18+ | $13,646 |
| $10,000 | $8,343 | 20+ | $18,334 |
| $15,000 | $12,709 | 22+ | $27,709 |
| $20,000 | $17,084 | 24+ | $37,084 |
| $25,000 | $21,459 | 26+ | $46,459 |
18% |
|||
| $1,000 | $731 | 7+ | $1,731 |
| $2,500 | $2,981 | 14+ | $5,481 |
| $5,000 | $6,371 | 20+ | $11,371 |
| $7,500 | $10,481 | 23+ | $17,981 |
| $10,000 | $14,231 | 26+ | $24,231 |
| $15,000 | $21,731 | 29+ | $36,731 |
| $20,000 | $29,231 | 31+ | $49,231 |
| $25,000 | $36,731 | 34+ | $61,731 |
22% |
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| $1,000 | $1,205 | 8+ | $2,205 |
| $2,500 | $5,330 | 20+ | $7,830 |
| $5,000 | $12,205 | 28+ | $17,205 |
| $7,500 | $19,080 | 34+ | $26,580 |
| $10,000 | $25,955 | 37+ | $35,955 |
| $15,000 | $39,705 | 42+ | $54,705 |
| $20,000 | $53,455 | 46+ | $73,455 |
| $25,000 | $67,205 | 49+ | $92,205 |
The above tables use annual compounded interest to determine length of time and total payback of your debts. If your interest compounds monthly or daily, your payback will be slightly higher. Many credit card companies automatically increase your interest rate due to issues such as credit limit, late or missed payments, or failure to pay requested amount due. When you signed your credit card agreement, you authorized this increase if you do not adhere to the terms and conditions as stated on your contract.
Please note these figures are based on a person making their required payment amount on time every month without being late or missing payments. The total payback amounts would be much higher once late fees have been added in with compound interest. Debt Consolidation can help reduce interest rates and increase the amount of each payment that goes towards paying off your principle balance.