How to Repay Your Debts
Here are some basic cues on debt repayment. The first things we must discuss are the frequently asked questions regarding your debt payment and a little helpful insight on how to get out of that situation.
Do I have any options when my debt seems so overwhelming already?
Having debts and being harassed by creditors can really be an overpowering experience. However, one can still be on top of the situation by remembering that these creditors only have one single motive: to receive payment from you. In keeping this in mind, you know that your creditors will be agreeable to working with you to a plan that will ensure your payment to them. Regardless of your circumstances, you should learn to communicate with your creditor in order to plan some solutions for you to be able to pay the amount due. Some of these solutions could be an omission to pay for the next 3 months and just adding these amounts to the principal loan. There are tons of solutions which you can open up with your creditor.
One of the hindrance people faces is due to their thinking that it is futile to negotiate with their creditors. As discussed earlier, this should not be the case. You can also ask for the help of local credit counseling services and nonprofit organizations to help mediate your debt issues with your creditor. You can also access online information for free; one such useful site on helping you overcome debt problems is from the Federal Trade Commission website.
I have no means to pay my car loan, is it possible for my car to repossessed or do I have other choices?
When you realize that you haven’t got the funds to finance that car loan and the due time is getting near, you begin to feel that sinking feeling. As you get in your car and do some errands, your mind keeps on wondering, will this be the last time I will be using this car? You can remedy this problem by confronting it right away. It is best to communicate with your creditor once you know that you won’t be able to pay the loan on time. You also need to understand that your creditor is running a business establishment, and as much as possible, your creditor views you as an investment and will probably make arrangements to accommodate your crisis. It is better this way because you have the option to make some solutions together with your creditor rather than risk losing your car from being repossessed.
What if the lending company already has your car in their possession? What are your options? Do not fret because there are still ways you to have your car back. The usual way to get your car back is to pay upfront. You have to pay for the loan payments you have failed to pay plus the cost incurred from repossessing the car. There are also times, which depend on your financial situation, where you need to pay the full amount and other costs incurred for repossessing the vehicle before you can get your car back. And if you really do not have the money to pay for your repossessed car, the lending company can auction your car and any discrepancy between your loan amount and the cost of the car, you will have to pay.
A lot of cases spring from people who simply are at a loss on what to do. When faced with this scenario one must have the initiative to look for ways to minimize the negative impact on one’s situation. Take for example, when the ending company is about to repossess your car, better surrender your car voluntarily as this will lessen the repossession costs, so this will entail that you will have fewer or lesser incurred costs to pay once you are able to pay for the missed payments. Or, the lending company can just let you go, but this would depend on how much the loan balance is. Another option that you can pick is to sell the car by looking for a buyer. This way, you will be ensured to get the best and highest price for your car. Using the money from the car sale, you can pay off your debt and hopefully there is a little bit of extra money for you.
With regards to my missed payments on housing loans, when will the lending company start foreclose of my house?
With the recent housing bubble, a lot of homeowners have been hit hard by the disastrous economy and faced home foreclosure problems. For the year of 2008, 2 million Americans faced this problem. The usual process in home foreclosure is that, you will receive a foreclosure notice from the bank when you have defaulted on a consecutive four to five monthly payments. But, as the case with other loans and lending companies, they would want to keep you as a customer than to sell the foreclosed home at a lesser price. That is why banks have programs, wherein you can pay only the interest of the missed one or two months. Another bank program is you can choose to have the missed payments added back to the principal amount. But, in order for you to avail of these bank programs, you need to talk and confer with them personally.
If you are facing an imminent housing foreclosure, there may be a bit of good news for you, because you may have a bit of help coming from the federal bailout program. So, you just have to make ends meet and you may be part of the lucky few who can avail of the $100 billion dollar housing bailout program of the government.
Just recently, several low cost or free counseling services on foreclosure avoidance have sprouted nationwide. A list of these approved foreclosure counseling services can be had from the Housing and Urban Development Department of the United States, to help Americans in their housing foreclosure needs.
I feel that my house is in danger of being foreclosed; will selling my house cut my losses?
Knowing that foreclosure is just around the corner and there’s no way for you to reverse the procedure, a better option is for you to find a buyer personally rather than the bank auctioning off your house. The rule of thumb is to find a buyer who will buy your house at exactly the amount you owe the bank, however it is much better if you can sell your house at a much higher rate than the amount of mortgage. On the other hand, if you are going to sell the house at a much lower rate than your mortgage, which is termed as a short sale, your bank has the privilege of hindering the process. A short sale happens once in a blue moon and needs supporting documents from you to verify that you are qualified for one, because in a short sale the bank will forgo collection of your remaining mortgage, after you have remitted the proceeds from the sale of your house.
My current utility bill is very high, am I allowed to pay in staggered amounts?
The answer to that depends on your current situation and where you live, because there are those who are given the chance to pay in staggered amounts and others who are required to pay in full. Let us take a look at different scenarios; if your utility bill has certain peaks and lows, the utility company may average your consumption so that you can pay the same amount monthly. In consideration of the economic instability, utility companies give special consideration to low income earners by giving them a reduction in the cost of their water, electricity, sewage and gas.
Another situation like water leakage would require you to pay the full amount owed. This is because Utility companies are also business entities, once they have delivered the item, like water, and it has passed your water meter, you are already fully responsible of the item. No matter if you have or have not intentionally used the water or item, this is already beyond the responsibility of the utility company.
I have a creditor. Is he allowed to access my wage, assets or tax refunds and make a lien on my property?
The usual process before this can happen is for your creditor to take you to court. And only after getting a judgment can he access your wage, and even if he can access your wage, he can only get as much as 25% or your income. But, even so, you can still contest the 25% awarded to your creditor, all you have to do is to prove that you cannot subsist on only 75% of your income.
Further, there may be times when your creditor can garnish your wage without the process of court, but this depends on the kind of creditor you have. Number one, the IRS has the clout to garnish your wage without court proceedings; however you have the right to challenge the garnishment within a 30-day time frame. Number two, if you have defaulted on your education loan, up to 15% of your earnings can be garnished by the department of education plus 10% of your earnings can also be garnished by the state agency. And last, if you have failed to pay an alimony or child support, as much as 50% of your earnings can be garnished.
A lien on your property can also be an option for your creditor or they can got funds from your bank account. Aside from the IRS, your creditor can only do these said actions by taking it to court and must make use of law enforcement agencies in order to legally conduct placing a lien on your property of taking money from your bank. However, there is a special case like your house mechanic who worked on your house, he is able to place a lien on your house without going through the process of court, and this is called a mechanic’s lien.
Lastly, the hardest money to take from you is your tax refund. However, there is still a special exception to this like if there is a request coming from the IRS, child support collection agency or the Department of Education.
Will I land in jail if I am not able to pay off all my debts?
Almost always, a person will not land in jail for not paying his debts, as the US has already eradicated debtor’s prison ever since the year 1850. However, you may still be jailed for the followings debts or acts in accordance with your debts:
- You have been found guilty of not fulfilling your income taxes, willfully;
- Usually, with regards to child support, you have snubbed and not obeyed a court order;
- You are hiding or trying to hide yourself or properties from your creditor just to evade payment, especially if the said creditor has a court ruling in favor of them.
Learning to Prioritize your Debts
So, which of your debt should you consider paying first above the others? Did you know that debts were not created equally? That there are debts which are more important and debts which are less important. So, if you are having difficulty in making ends meet, you can prioritize payments of your debt. You need to give priority payments to essential debts. You can read further in order to know which debts are classified as essential and debts which aren’t.
Debt that is Essential in Nature
An essential debt should be found at the top or near the top of your priority list of payments. A debt is considered as essential if the consequence gained from not paying the debt is immediate or can be harmful to one’s health or life.
Mortgage or rent – Payment of your rent is the top priority because this ensures that you have a place to live, not unless you can move in with someone else.
If you have other financial woes and you own your house, you can weigh out your options. Like selling your house and renting a modestly priced apartment, while having the extra cash from the proceeds of your home, for your debt payments. But, of course, you also have to check the housing market rates, it could be that the rates for the time being is low and maybe your house could yield a higher price by next year, then these are some of the setbacks that you have to be alert for.
Child Support – Defaulting on the payment of child support is cause enough to put you in jail, not unless you can prove to the judge that you really have no money to pay for it.
Utility Bills – Payment of these bills should be near at the top of your list, because the moment you default on these luxuries like gas, electricity or water will not only inconvenient you but may also cause you harm.
Car loan payments – If you believe that owning a car is a necessity to you because it is an important part of your money making scheme, then it should be found near the top of your prioritized debt payments. However, if you believe that you can live without a car, you can consider giving it up rather than wait for the time that it will be repossessed. Or you can also opt to have a much cheaper car, and then the difference in the proceeds, you could use it to pay your other bills.
Other Loans with Collateral – If you have a debt wherein you used collateral to ensure its repayment, you have to think over if the collateral is of great value to you. If it is, then its repayment should be part of your essential list of debt payments. If you are not able to fulfill your debt, the creditor can instantly take the property without going through court proceedings.
Now, you still have to be careful on not paying your debts even at the expense of the collateral because this could mar your credit record for as long as seven years. This could mean a negative effect on your borrowing capability in the future.
Not Paying Taxes – You can immediately ask for a restructured payment plan with the IRS, especially when they are about to take your bank account, properties, pay check or house.
Debt that is Non-essential in Nature
A debt is considered non-essential if the consequence of not paying is not immediate or damaging. It is always a person’s goal to pay off all his debts as much as possible, however due to unforeseen circumstances there will be instances in one’s life when you cannot pay all you debt. Thus, one must learn to prioritize debt payment. Also keep in mind that failure to pay a debt will be seen in your credit record for seven years.
Charges on gasoline or department store – Nonpayment of these bills will result to loss of your credit advantage from these establishments. If your debt is large enough, the establishment can file a legal action against you.
Credit from your relatives and friends – These people to whom you have borrowed money are sometimes very lenient in payment terms. Probably you feel obliged to repay them morally, and you should. You can even talk to them regarding the payment terms to make it light and easy on your par.
Subscriptions for magazines or news – this is a non essential debt; however willful nonpayment of such obligation may lead to collection exploits.
Bills on Accounting and Legal – These are part of nonessential debts, but like other debts, if left unpaid will give way to various legal actions.
Other loans without collateral – This kind of debt is not attached to any of your property. Thus, if a creditor wants to collect payment, the creditor has to file legal action against you and must have a judgment in favor of him in order to take your property or collect payment.
Unsure if it is an Essential or Nonessential Debt?
There are debts that are hard to classify because they seem to have both features of essential and nonessential debts. Though the consequence of not paying the debt may not be that detrimental or immediate however, it has other factors that may cause a great burden or pain to the debtor for not paying. In these cases, one must learn to strategize, like checking how close you are to your creditor that you may be able to gain a bit of advantage or by checking if there are already collection efforts being made to collect payment from you.
These debts may include the following:
Vehicle Coverage – States like California requires you to have car insurance in order to drive, the state may even deny your car registration because of absence of the said coverage.
Health Insurance – If you miss payment for your medical coverage, you may have difficulty renewing this coverage especially if you are undergoing medical care for a disease. This may also be detrimental to you especially if you get sick during the time when you have defaulted on your payment.
Credit Cards – nonpayment of your credit card could entail loss of the privilege of using your card. Difficulties arise once the credit card issuer files a lawsuit against you. Also keep in mind that the interests and charges of credit card can add up, creating a bigger debt.
Car loans, especially when it plays an important role in your job – The hassle of not having a car for your work can rationalize the importance of its payment.
Things your children needs – hiring a tutor for your child may seem not important, however if it for your child to cope up with reading difficulties, it is therefore essential rather than opting to let him grow up not being able to read, thus substantiating the need to pay for the tutor.
Court judgments – debts and creditors with court judgments are already considered essential because they already have the ruling to garnish your wage or take your property, because if you default from this, you may face prison. If you are still thinking about the items you got from this debt were not essential, this is already beside the point, because there is already a court order in the behalf of the creditor.
Education Subsidies – This depends on who your creditors are. If your creditor is not yet bothering you on payment, then it is a non essential loan. However, if it is already the IRS then paying your student loan is already a priority.
As a quick rule of thumb, never pay your nonessential debts first just because you are being overwhelmed by the creditor’s collection tactics, because if you do, you will be left with no money to pay for the important items or services that you need from your essential debts.
Just a Quick Rundown of Debts that Needs Paying First
When you are in a financial strait, definitely you won’t be able to fulfill your monthly debts. You need to make a choice on which debts to pay and which debts to forgo for the time being. However, you must learn to segregate which debts needs priority and which don’t. Do not base your payments on which creditors are harassing you more, just to keep them quiet.
- First on the list should be payments for food, medicine, health and other daily requirements.
- Next, is your shelter be it in the form of rent, mortgage or lot payments and other accompanying fees such as association fees. If you default on this obligation, you will be left shelter less.
- Third is the payment for basic utilities and that includes water and electricity. Utility expenditures like cable and phone are not that essential.
- If your vehicle is important for your livelihood then it requires priority payment. However, if you can afford to exchange your car for a much cheaper model, then do so. This will make your car loan more affordable.
- Payments for child support are also considered as top priority, in order to avoid getting imprisoned.
- Due to the consequences involved in not paying taxes, this also entails a high priority in your debt settlement.
- Student loans can be categorized nonessential if your creditor is not yet harassing for payments. Payment can only be considered essential if your salary or tax refund is already in danger of garnishment.
- Lastly, give the lowest priority to your unsecured loans like gasoline charges, legal and accounting bills, credit cards, and news and magazine subscriptions, money borrowed from relatives and friends and department store charges.
Debt Repayment Tips: Informally Dealing with Your Creditors
There is no doubt that as a debtor, you have already experienced firsthand the nitty-gritty calls and harassment of debt collectors via letters and phone calls. There are times when the stress is too much to bear as a result of these harassment; one finds the lure of filing for bankruptcy ever more alluring. But, one needs to consider the long term implication of filing for bankruptcy like the negative effect of this to your credit rating and your capability to buy large purchases in the future. So, as a debtor one has to consider other less severe options like confronting your creditors and workouts.
It is always the best way to pay off your creditors promptly, however life is really unreliable and difficult to foresee the challenges ahead that is why there will really come a time when we are not able to pay our bills. If your financial situation is just for the time being, then you can request from your creditor to just pay a smaller amount or to have your loan stretched to a longer period. Your credit collector will be amenable to these ideas if you have been a punctual payer, or if the collection agency is trying to avoid the hassle and expensiveness of a court proceeding.
There are also credit counselors to whom you can go to, to help you deal with your creditor agree on a repayment plan. However, you must be aware of credit counselors who take advantage on consumers who asks for upfront fees. These credit counselors will talk with your creditors in order to agree on a lower payment or lower fees and rates. In most cases, it is only the credit counselor who gains from these efforts, leaving the debtor in much worse shape, financially.
The term workout means to have a mutual negotiation with regards to debt modification such that the debtor does not need to file for bankruptcy.
Sometimes workouts are also coined as extensions or compositions. The latter is a contract between two or more creditors and the debtor, where the creditors consent to receive only a partial payment to fully satisfy their claims. An extension on the other hand, is a contract between the debtor and creditor to extend the length of time for credit collection, or simply stated, the acceptance of the creditor of lower payments spread over a longer period of time. There are laws that govern extensions and compositions.
In entering into an agreement with his or her creditors, the debtor avoids the bad publicity that often accompanies bankruptcy, while achieving the same result of solving a part or all of your debts. As a matter of fact, the workout discharge is more encompassing than a bankruptcy discharge because in the former, a debtor can still file for a bankruptcy in the future while the latter has stipulations such that you cannot file certain bankruptcy types. In a workout, as opposed to bankruptcy, most creditors cannot cram down concessions on nonconformist creditors. All of the creditors present must consent to the terms of the workout.
Know the Do’s and Don’ts of Refinancing
Refinancing is a process where you pay your old payables by applying for another loan, in order to pay for the old one. This is one way debtors try to solve their financial problems, however there are situations where refinancing can only worsen your situation.
What to Do
Do evaluate and compare the refinancing costs against the price of your present loan. You need to check out all the costs concerned in refinancing before picking a lending institution. The usual pitfall of a debtor is to compare only the interest rate; you must avoid this at all cost. Instead you have to evaluate all outlay you will incur.
Do apply for a refinance when you can avail of a lower interest rate unsecured loan against your present higher interest rate unsecured loan. However, you must ensure that the new price you will need to shell out is much cheaper than the old one and that the rate will be the same in the few years to come, because there are instances when this low rate is just a come-on for customers but will eventually increase.
Do apply for a refinance for your secured loans like car loan or mortgage, for a much cheaper interest rate loan. There may be no difference in the length of time for repayment or the length or repayment may be shorter as compared to your present loan, so long as the interest fee is substantially lower.
Do refinance your home in order to pay your credit card or car loans, so long as you are not in financial difficulty or at risk for losing your home. Plus, only avail of home refinancing if it is beneficial at a tax standpoint.
Do look out for refinancing rip-offs. When you think that the offer is too good to be true, then it probably is. Especially, when you receive unsolicited advice to merge your debts into a single mortgage or an option to sell your house with the possibility of buying it back.
What Not to Do
Don’t apply to refinance your bank debt with a refinancing institution just to avail of much lower monthly dues, because the interest rates are always higher plus you have to pay for insurance, fees and other incurred costs.
Don’t have your home refinanced at a much higher value than its market price because the interest rate will always be higher compared to the standard mortgage lenders’ rates. Further, you might not be able to less the interest paid for such a loan and you are also risking losing your house to foreclosure in the event of lagging payments.
Don’t refinance your unsecured loan with a secured loan because of the risk of losing the collateral in the event of nonpayment.
Don’t avail of a refinancing scheme just because you are being harassed by your debt collector. For in reality, debt collectors do not have much choice in making you pay them.
Repayment Options for Student Loans
There are various student loan options available that will fit in with your budget. So, when you have to apply your student loans, you have to know the different lenders that have repayment plans that will fit your budget, of course these plans also depend on the type of loan you have.
If your student loan is either issued by a bank or the government, you have several plans to choose from. When, your student loan is a school issued federal loan, you can inquire from your school regarding the repayment options. Student loans that have lesser repayment options are private loans without federal funds.
In order to know more about your repayment options it is best to contact your lender. However, you must never wait to inquire about your student loan when you are already very lagging with your payments. When you are already very behind with your payments, these loan repayment options are almost always no longer available to you.
Also you have to know that you are not locked up in your payment method. You have the option to change repayment plans at least once a year, even the holder of your federal; loan knows this.
Separate rules apply to private and federal student loans. The different choices mentioned n this article relates only to federal loans. If you do not know what type of loan you have, you can find out by checking the website of the National Student Loan System.
The Standard Repayment Method
When you are capable of paying the monthly dues, then it is best for you to continue with that repayment method that was originally laid out by the lending institution. Your present plan may have the most expensive monthly due, but it will turn out cheaper in the long run because of lesser interest costs incurred. The amount and length of time you will pay your loan largely depends on the loan balance. The usual practice for a $10,000 loan is to pay a monthly sum of $125 over a maximum of ten-year period; this is not inclusive of forbearance and deferment.
The Graduated Repayment Method
This type of plan is your best bet if you are just beginning your career or if you believe that your business or career is going to modestly increase in every few years. This graduated plan has a scheme where you start paying low monthly sums and this increases in a 2 to 3 year time frame. The amount differs in time, but the maximum period of repayment is still 10 years.
Compared to the standard plan, this type of plan would have a higher total payment due to the higher interest price, because the interest is calculated base on the remaining balance. Since you would only be paying a small amount in the beginning of the plan, then your interest is high because your remaining balance is high.
The Extended Repayment Method
This plan can only be availed if you have a loan of more than $30,000. The plan will give you much lower monthly dues over a longer period of time, compared to the previously mentioned repayment plans. The term could be as long as 25 years. But, for this plan it is only logical to note that your interest is much higher.
You also have the option of mixing the graduated and extended plan. This style can give you a much lower monthly due, but amplifies you costs all the more.
The Income-based Repayment Method
This mode of repayment is based on the inconsistencies of your salary. During the times when your salary is high, your debt payment is also high. While, when your income is low, your debt payment is also low.
Each year, your loan is recalculated on the basis of your yearly salary, loan amount and the size of your household. However, when you are married, your monthly required payment is based on your joint salary.
Federal Direct Student Loan
If you have this kind of loan, you can opt for an income based method of repayment. The cost of your monthly dues will vary from month to month and year to year. You are also assured that the amount you will pay will not be more than 20% of your salary. You can check out the possible highest amount you would pay by going their online website.
Further, under the income based plan, when your salary is very low, there is a possibility of not paying even a single cent. But, you have to remember that your remaining balance increases if this happens because of the interest that it is earning.
After 25 years, if you still have not paid off the loan, you have the chance of being forgiven by the government. But, the IRS will be monitoring your taxes regarding the amount forgiven, if you cannot establish that you are really insolvent or destitute.
The Federal loans from Financial Institutions
If the kind of loan you have is the Federal loans from financial institutions, then you also have the option for an income based repayment method. It is also somehow the same with the Federal direct student loan; however you have no chance of being forgiven for the remaining amount or nonpayment due to a low income. With this type of repayment scheme, the best minimum amount you could pay should be equal to the accrued interest for that month.
Refinancing of your Student loan or Loan Consolidation
In order to lower your monthly payments and/or lengthen the period of your repayment, you can apply for a loan consolidation. This happens by combining all f your loans into one loan but this increases the cost of interest over the full tenure of your loan. There is also a chance that you can have your loans refinanced, or even just one loan, in order to avail of a lower rate of interest.
If you are experiencing the following, you should consider loan consolidation:
- You have a federal student loan and you are not able to pay the monthly dues, plus you are not eligible to apply for payment postponement.
- This may be a bit tricky to do because most student loans now have a fixed interest rate, but you want to have a lower rate of interest.
- You want to be eligible for the latest school grants or a new loan, so you need to pay off your present loan.
- You want to apply for the income contingent repayment method but you are not under the direct loan program of the government.
There are various lending institutions that have consolidation loans, even the government. Each consolidation lender have their own differences, thus your repayment choices will also differ. In order to make a good decision, you can have a quote from the different lending institutions and from there base your decision.
You have to ensure that you are availing of the best deal offered. Because once you have availed of a loan consolidation, you cannot avail of it again, except for a very few exceptions.
A lot of lending institutions are marketing loan consolidation aggressively, due to its popularity. In order to take advantage of the program, you have to be sure of your decisions, by knowing all the choices you have and you must understand all the implications of the consolidation loan. You can check out the Federal Direct Loan information website, which is a respectable resource of information regarding loan consolidation.
Forbearance or Loan deferment
During times when you cannot cope with paying your monthly dues, even with the most accommodating repayment scheme, you will still not be able to pay for it. Usually, you are given the chance to postpone your payment temporarily or you can ask for a reduction on the amount due. These relief periods are known as forbearance and deferments. The former is when the interest is paid by the government and the latter is when the interest is not paid so, your balance also rises.
If you are experiencing economic hardship, recently loss a job or going to school full time, you can avail of a forbearance or deferment. However, you need to contact your lender at once, even before you become delinquent with your payments, in order to have a much wider options with regards to availing of deferment or forbearance. You just need to talk to your lender’s representative.