What Happens in Debt Consolidation?

/in , /by

Put simply, consolidation is when you take all of your various debts and fuse them into a single payment. However, this simple concept involves several important details that need to be accounted for before proceeding with debt consolidation. The rest of this article covers the different forms of consolidation and what needs to be considered before taking out a loan.

  • Seek out the free services of a nonprofit credit counselor. Several organizations can inform you on how best to manage your finances and settle your debts in a way that prevents future issues.
  • Figure out why you are indebted. Knowing why you got into debt can help you untangle yourself from it. For example, if your spending has overtaken your income, a consolidation loan is not likely to achieve much unless you also raise your income or lower your spending.
  • Establish a budget. List your expenses each week, month, or year, then look at your debts to see how you can tweak your spending to diminish them.
  • Communicate with your creditors to see if they will consent to lowering your payments. There is always a chance that a creditor might lower your minimum monthly payment, ignore some fees, lower your interest rate, or even change your recurring due date to better synch with your paydays, all in order to help you escape debt sooner.

Types of Consolidation Loans

If you are looking into consolidating debt, there are a few options available to you, each of which has several considerations you be mindful of.

Credit Card Balance Transfers

Most credit card companies will offer you a 0% or low-interest balance transfer as an invitation to consolidate your credit card debt to a single card.

What Should I Know?

While those promotional rates for transfers are nice, they do not last forever. Once the disclosed period of time for the promotion concludes, that interest rate is going to rise and that rise is going to hurt how much you will need to pay back. You will also likely have to pay a balance transfer fee, either as a percentage of the amount you transferred or a fixed amount, whichever winds up paying out better for the creditor.

If you use the same credit card to make new purchases, you will not be able to apply a grace period for those purchases and must pay interest on them until the entire balance is settled, including the balance you transferred, to begin with. If your payment is more than 60 days behind, the credit card company can elevate your interest rate on all of your balances, even the transferred balance.

Debt Consolidation Loan

Many varieties of lenders will offer debt consolidation loans. These convert all of your debts into one payment, streamlining your number of payments. Notably, this new loan is often set at a lower interest rate than what you may have been dealing with.

What Should I Know?

A lot of these lowered interest rates from a consolidation loan may be teasers, lasting for a limited period. Once that time ends, you can expect your interest rate to rise. Although your monthly payment might be lower, that may be because your lender is playing a shell game with how long you will need to pay it off. In short, you might owe less by consolidating, but the fees and costs incurred will mean you wind up paying more money than if you had not consolidated.

A piece of advice: If you are considering this sort of loan, compare and contrast the loan’s terms and interest rates to see how much you’ll be paying in total with interest and fees. Even this bit of homework can pay off in less of your money going to other parties.

Home Equity Loan

This sort of loan is set up to allow you to borrow against the equity of your home. When you use it to consolidate your debt, the loan is used to pay off your existing creditors; after that point, you shift to paying back the home equity loan itself.

What Should I Know?

This sort of loan may yield a lower interest rate than other loans but using your home’s equity to manage your credit card debt is risky. Fail to pay the loan back and your home could be foreclosed. You could also be on the hook for closing costs, potentially hundreds to thousands of dollars, with this sort of loan.

Also, be mindful that putting your home’s equity up for a loan risk placing you “underwater” if your home’s value drops. If that happens, you will have an uphill challenge when selling or refinancing the home. If you use your home’s equity as a means of consolidating debt, it may not be available to you for an emergency or to cover expenses like renovations or repairs.

Other Factors to Consider Before Consolidation

Using new debt to manage old debts may just be a stopgap measure. Few people succeed in paying off debts in this manner without also cutting back on how much money they spend.

Loans that you take out to consolidate debt may wind up eating more of your wallet than if you had stayed on your previous debt payment plans, thanks to the various fees and rising interest rates involved with consolidation. If your debt winds up harming your credit score, you will not be likely to find lower interest rates on your balance transfer, consolidation loan, or even your home equity loan.

Watch out for any promotions about debt consolidation that appear to be too effective to be a reality. A lot of companies will promote consolidation services when they are actually debt settlement companies that will charge you up-front fees in exchange for a promise to settle debts. These debt settlement firms will also try to get you to stop the repayment of your debts and shift your financial attention to transferring money into a special account. Lastly, these services are far from reliable and merit an extra level of scrutiny before you ever consider agreeing to deal with them.

When Is Debt Consolidation a Good Idea?

/in , /by

Debt consolidation is a financial strategy that combines all your existing debts into one single loan, making it easier to manage and pay off debt. The benefits of consolidation include lower interest rates, fewer payments to keep track of each month, and increased credit scores over time. However, consolidation is only sometimes the best option for everyone; depending on your circumstances, it could worsen things if not done correctly. Find out when it is a good idea to consolidate your debts.

When You Have Multiple High-Interest Loans

When you have multiple high-interest loans, it can take time to keep up with the payments. The interest rates may be so high that even making the minimum payments is a struggle, and you find yourself getting deeper and deeper into debt. In this situation, consolidating your debts is often a smart move. Consolidation allows you to combine all your loans into one loan with one monthly payment at a lower interest rate, making it easier to stay on top of your debt.

When You Have Equity in Your Home

You can use a home equity loan or a home equity line of credit to pay off high-interest credit cards or other debts with a lower interest rate. By using your home as collateral, you can get a lower interest rate than what you would pay on different types of loans. However, remember that if you use a home equity loan to consolidate debt, your home is on the line if you cannot make payments. So, you must ensure you can afford the charges and understand the loan terms and conditions. Additionally, consider what happens if your home value declines, as you may owe more than your home is worth.

When You Are Close to Retirement

As you approach retirement, you should lower your debt load and reduce monthly expenses. Consolidating high-interest credit card balances into a lower-interest loan can help you do that. However, before signing on for consolidation, it’s essential to consider all the costs and potential risks, as this type of loan may only be the best fit for some. Another factor to consider when consolidating debt close to retirement age is its impact on your credit score. If you plan to apply for a loan after retirement, having a high debt-to-income ratio could affect your ability to get approved or result in higher interest rates.

Different Types of Debt Consolidation Loans

The first type of debt consolidation loan is an unsecured personal loan. This loan is ideal for people with good credit scores and no collateral to secure the loan. The interest rates for unsecured personal loans are usually higher than secured ones because the lender takes on more risk.

Second, a secured personal loan is ideal for people with assets such as a house or car that you can use as collateral. Secured personal loans have lower interest rates than unsecured personal loans since the lender has some security in the form of collateral.

Balance transfer credit cards are also another type of debt consolidation loan. This type of loan allows you to transfer your high-interest credit card balances to a single credit card with a lower interest rate. The interest rate on balance transfer credit cards is generally lower for a limited time and may come with a balance transfer fee.

A home equity loan is another type of consolidation loan. If you own a home, you can use its equity to secure a lower interest rate loan. Home equity loans have a fixed interest rate and a fixed term. However, if you default on the loan, the lender may foreclose on your home.

Lastly, a debt management plan is not a loan, but a way to manage multiple debts. This plan involves working with a credit counseling agency to negotiate with creditors for lower interest rates or monthly payments. This type of plan is ideal for people with a lot of credit card debt.

Avoiding Common Pitfalls When Considering Debt Consolidation

Debt consolidation can be an effective strategy for managing your debts and reducing your monthly payments. However, there are some common pitfalls to watch out, including:

• You need to address the root cause of debt: Consolidating your debts can relieve financial stress, but it won’t solve the underlying problem of overspending or living beyond your means. You must address the root cause of your debt to avoid ending up in an even worse position after consolidating your debts.

• Choosing the wrong consolidation method: There are several ways to consolidate your debts, including balance transfers, personal loans, and home equity loans. Each method has benefits and risks; choosing the right one for your unique situation is essential. For example, a balance transfer might be a good option if you have high-interest credit card debt, but there may be better choices if you have a lot of outstanding loans.

• Not comparing rates and fees: When looking for a consolidation loan or balance transfer offer, shopping around and comparing rates and fees is essential. Some lenders may offer low teaser rates or attractive terms, but they may hide high fees that offset any potential savings.

• Taking on new debt: Consolidating your debts can give you some breathing room, but it can also make it tempting to take on new debt. This can be a dangerous cycle that keeps you stuck in a constant cycle of debt. Before taking on any further obligation, ensure you have a solid plan for managing your finances and avoiding future debt.

• Ignoring the impact on your credit score: Consolidation can impact your credit score, both positively and negatively. Using a balance transfer or personal loan may result in a hard inquiry on your credit report, which could temporarily lower your score. On the other hand, paying off your debts could improve your credit utilization ratio and boost your score in the long run.

In conclusion, debt consolidation offers a personalized solution to help you pay off your debt and save money on interest charges. However, it’s essential to recognize the pros and cons associated with this strategy and emphasize the need for caution when moving forward. Speaking with a qualified debt consolidation attorney for additional guidance is necessary, as they can provide a clear picture of how debt consolidation can help your situation. An expert can also review all your options and determine which is best for your circumstances.

Options and Consequences of Debt Relief

/in , /by

When you have significant debt it can do so much more than eat up your income. Constant worry about finances can affect your relationships and your physical and mental health. So when you see the words debt relief, it’s easy to concentrate on the “relief.” It’s important, though, to understand all your options and what consequences come with them. In this blog, we’ll look at debt management, debt settlement, and debt consolidation. You’ll know exactly what they are and the implications of any choice you make.

Debt Management – What it is

With debt management, your financial situation is reviewed by a credit counselor, who then creates a debt management plan for you to follow. Generally these run for terms of 3 to 5 years. Some organizations may take control of your monthly payments, making them on your behalf.

Consequence – It costs money

Most places require you to pay an enrollment fee, and then there is a monthly fee for each credit card you have. Don’t be fooled by places that claim to be free; they may do the analysis of your financial situation for free, but the actual debt management will cost you.

Consequence – It decreases access to credit

Most debt management companies require you to agree not to seek any additional credit during the time that the debt management plan is in place (and 3 to 5 years is a long time not to need additional credit). Also, the fact that you’re engaged in a debt management plan will be noted on your credit report, so even if you’re allowed to access credit, it will be more difficult to get.

Consequence – It usually doesn’t work

At least half of clients do not successfully complete the debt management plan. Obviously, failing to complete a plan would have implications for your credit score, and you would find yourself right back in the same situation, but with the added negative of that failure.

Debt Settlement – What it is

Debt settlement differs from debt management in that the organization you work with negotiates with your creditors on your behalf to decrease the amount you owe. Sometimes, they offer a lower lump sum payment to the creditor; sometimes, they seek debt forgiveness or lower interest.

Debt Settlement – It costs money too

Just like a debt management plan, you will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan.

Debt Settlement – The IRS is involved

It’s crucial that you understand that any forgiven debt is reported to the IRS and the IRS treats that as income. So while you may be barely keeping your head above water financially, you might be shocked to discover that instead of a tax refund, you end up owing money to the IRS.

Debt Settlement – Your credit score may plummet

Debt settlement companies are not concerned with your credit report. Their job is to get the current debt lowered or forgiven. Most debt settlement companies ask you to suspend payments to your creditors while they negotiate on your behalf. This strategy has a tremendously negative impact on your credit report since the most significant factor is payment history.

Debt Consolidation – What it is

In its most basic form, debt consolidation combines multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. The most common ways to pursue debt consolidation are to obtain another credit card where you can transfer all your other debt; or to take out an actual loan for this specific purpose.

Debt Consolidation – You may lose possessions

If you take out a secured loan, then whatever you have put up as collateral is at risk. Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. So if your bank has also financed your auto loan, for example, and you fall behind on the loan payments on your debt consolidation loan, you could wake to discover your car has been repossessed.

Debt Consolidation – Access to credit decreases

If you are trying to consolidate your debt by acquiring another credit card, that will create a “hard inquiry;” if you are taking out an actual loan, it will do so as well. Hard inquiries result in lower credit report scores, so even if you are successful in acquiring a new credit card or a consolidation loan, your credit score will definitely suffer.

If you’re interested in debt relief, contact the experts at Burr Law. We’ll guide you to the best solution for your particular situation.

Key Considerations of Debt Consolidation

/in , /by

Do you feel like you’re being nickeled and dimed to death with all of your monthly financial obligations? Maybe you’ve seen ads about debt consolidation where you just pay one time and your debt actually decreases. In this post, we will look at debt consolidation and explore its implications.

Debt Consolidation: What Is It?

In its most basic form, debt consolidation works by combining multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. You will maintain your access to credit, though incurring more debt increases the likelihood of the debt consolidation failing.

How To Do It: Unsecured

One of the easiest ways to consolidate your debt is to obtain a new credit card that offers 0% interest for a period of time (usually 6 to 12 months). Once you get the card, you can transfer the balance from other credit cards where you are paying high interest to the new card and use the 6 to 12 months to pay down the principal. Of course, that only consolidates your credit card debt. And if you’re already behind on your monthly payments to your credit cards, you are unlikely to qualify for a new credit card. Since credit cards are unsecured loans, this method of debt consolidation can decrease your indebtedness without risking collateral.

How To Do It: Secured

Alternatively, you can take out a debt consolidation loan. There are a number of financial institutions offering debt consolidation loans though almost all are secured loans. That means that you must put up assets as collateral, usually your car or home. If you do not adhere to the repayment plan, you risk losing your collateral. There is an additional danger if your debt consolidation loan comes from the same financial institution that services other loans you have, like your car loan. It’s a hidden danger called cross-collateralization.

Cross-Collateralization

You may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. For example, if you get your debt consolidation loan through the same bank that financed your car, under the cross-collateralization clause, if you default on the debt consolidation loan, the bank could repossess your car—even if the car payments are current.

Debt Management Plans

Some people go to an agency that creates a debt management plan for them and negotiates with the credit card companies on your behalf. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years, and at least half of clients do not successfully complete the plan.

Negative Tax Consequences

Depending on your financial condition, any money you save from debt relief services such as debt consolidation may be considered income by the IRS, which means you pay taxes on it. Credit card companies and other creditors may report settled debt to the IRS, which the IRS considers income.

Debt consolidation sounds like the perfect solution on the surface, and it may well be your best option. However, you should be aware of all of the implications of debt consolidation before you enter into it. Contact the experts at Burr Law; they will give you the best advice for your particular situation.

Understanding Your Credit Report

/in , , , , /by

Finances are complicated, and they are further complicated by your credit report. Your credit score fluctuates constantly, and knowing how various things will affect your credit report is important to your overall financial planning. Here, we’ll explore the various factors that cause your credit score to go up or down, and how long those factors will continue to affect your credit score.

Fair Credit Reporting Act

The Fair Credit Reporting Act–also known as the Consumer Credit Protection Act–was enacted on October 26, 1970. It is designed to protect the integrity and privacy of a person’s credit information. It requires credit reporting agencies, and those that report credit information to those agencies (like credit card companies), to make sure all information is fair, accurate and confidential. Information in a consumer report cannot be provided to anyone who does not have a purpose specified in the Act.

Components Of Your Credit Report

Before exploring how various actions affect your credit report, it’s important to know how your credit score is calculated. Not every action has the same impact. Here is how your credit score is determined:
Payment history – 35%
Amounts owed – 30%
Length of credit history – 15%
Credit mix – 10%
New credit – 10%
This makes up your FICO credit score, the most common method used. Obviously, payment history is crucial and it’s important to remember that even if a company does not report your usual on-time payments, they will certainly report a missed or late one.

Time Frame

Your credit report is not a static document. Your credit score changes all the time, and actions that have lowered your credit score do disappear from your credit report. The time frame varies from two to ten years. Generally, those negative actions will fall off your report after seven years. Another thing to understand is that the severity of the impact diminishes with time, too. So a bankruptcy five year ago will matter less than when freshly filed.

Credit Inquiries

One of the most insidious ways that your credit score can be lowered comes from credit inquiries. Also called “hard inquiries” or “hard pulls,” a credit inquiry of this type happens when you apply for another credit card. It’s important to know that even department store credit cards can cause a hard pull. Credit inquiries remain on your credit report for two years, and can have a negative impact on your credit score—from 5 to 20 points per pull.

Seven-Year Itch

Most negative actions will remain on your credit report for 7 years. These include debts that have gone into collection, charge-offs (where the business is no longer actively trying to collect the debt), and late payments that are over 30 days past due. The later the payment, the worse it is for your credit score. It also includes Chapter 13 bankruptcy, starting from the date of filing. Chapter 7 bankruptcy stays on your credit report for 10 years.

Credit Repair

When you have financial difficulties, your credit score will be impacted, whether or not you declare bankruptcy. This impact does not have to be devastating, and it can be mitigated. The experts at Burr Law can guide you in re-establishing your credit in ways that meet your particular situation. Remembering that payment history is crucial, and that many accounts do not typically report on-time payments, you can work to have your timely payments noted. While auto loans, mortgages, credit cards and some others are typically reported, other things like utilities, phone payments, and even streaming services can be reported. If you have a monthly expense that isn’t being reported and you want those timely payments to count toward your credit score, Burr Law can help.

Understanding your credit report can lessen your anxiety around declaring bankruptcy. When your credit score is suffering from late payments and debts in collection, bankruptcy isn’t going to make things worse. It can make things a lot better, and the professionals at Burr Law can guide you in repairing your credit too.

Overwhelmed with Debt?

/in , , , , , /by

The COVID-19 pandemic has had dire economic consequences for many people, and there have been protections put in place to help people survive this difficult time. Those aren’t going to last forever, though, and you may be looking at your financial situation and wondering just how you’re going to manage. If you feel overwhelmed with debt, it’s important to think things through now and have a plan in place while you still have a number of options. There are basically three different approaches you can take: debt consolidation, debt management, and bankruptcy. This post explores each of them.

Debt Consolidation

Debt consolidation is just what it sounds like: you gather all your debts into one place so that you’re making one payment a month. There are several ways to consolidate your debt. If most of your debt is unsecured credit card debt, you can take out another credit card that offers 0% interest for a period of time (often 12 to 18 months) and then transfer your other credit card debt onto that new card. You then have that given time to pay down the principal. This method only works if all or most of your debt is credit card debt. If you have other sources of debt, you may need to take out a consolidation loan. These loans are financed by banks, and the main concern here is that you trade your unsecured debt for secured debt, as most will require collateral. Even if your consolidation loan doesn’t require specific collateral, it may well have a cross-collateralization clause. That means that if you get a consolidation loan from the same bank that financed your auto loan, and you fall behind on your consolidation loan payments, the bank can repossess your car. So debt consolidation can certainly work, though it has some important limitations, and poses some significant risks.

Debt Management

There are a number of debt management companies that will act on your behalf to manage your financial situation. The debt management company negotiates with the credit card companies on your behalf, and establishes a repayment plan for you. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years, and at least half of clients do not successfully complete the plan.

Bankruptcy

Individuals usually file either Chapter 7 or Chapter 13 bankruptcy. Chapter 7 bankruptcy is known as “liquidation” bankruptcy, and in order to qualify for it, you must not make more than your state’s median household income. In Wisconsin, that amount is $67,355 (as of 2019, the latest available figures). Although the word liquidation sounds threatening, the truth is that there are exemptions and you will almost certainly keep your home (if you have a mortgage) and your car. If you have a second home or other luxury item, those may be sold to pay your debt. Chapter 7 bankruptcy is quick, usually taking three to four months, and it eliminates all your unsecured debt. Chapter 13 bankruptcy is also known as “wage-earner’s” bankruptcy. It functions a lot like the debt management plan; a trustee appointed by the court drafts a plan, you and your creditors agree to it, and then the trustee administers the plan. It lasts between 3 and 5 years. There is no means test like Chapter 7 bankruptcy, but there is a cap on how much you owe. To be eligible to file for Chapter 13 bankruptcy, you must have less than $419,275 in unsecured debt, like credit cards or medical bills, and you also can have no more than $1,257,850 in secured debts, which includes mortgages and car loans.

If you’re overwhelmed by debt and considering your financial future, you have options. Contact the experts at Burr Law to talk through your specific situation, and have them help you chart the best course forward.

Debt Consolidation vs Debt Settlement

/in , , , /by

When you’re in debt, it can seem like there’s no way out. Credit card payments, rent or mortgage payments, car payments, student loan payments . . . you may feel like you’re being bled dry. If it’s just impossible to keep juggling all your financial obligations, it’s time to think seriously about your debt management problems. In this blogpost, we will explore the options of debt consolidation, debt settlement, and bankruptcy.

Debt Consolidation: What Is It?

In its most basic form, debt consolidation works by combining multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. You will maintain your access to credit, though incurring more debt increases the likelihood of the debt consolidation failing. One of the easiest ways to consolidate your debt is to obtain a new credit card that offers 0% interest for a period of time (usually 6 to 12 months). Once you get the card, you can transfer the balance from other credit cards where you are paying high interest to the new card and use the 6 to 12 months to pay down the principal. Of course, that only consolidates your credit card debt. Alternatively, you can take out a debt consolidation loan; most are secured loans though, and you risk losing your collateral, usually your car or other significant tangible property.

Cross-Collateralization

Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan. For example, if you get your debt consolidation loan through the same bank that financed your car, under the cross-collateralization clause, if you default on the debt consolidation loan, the bank could repossess your car—even if the car payments are current.

Debt Management Plans

Some people go to an agency that creates a debt management plan for them and negotiates with the credit card companies on your behalf. It’s important for you to know that agreeing to a debt management plan comes with a number of hidden costs – monetary and otherwise. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also, most credit card companies will require that an account entering into a debt management plan be closed, so you lose your access to credit. And the fact that you’re engaged in a debt management plan will be noted on your credit report. Most debt management plans run for three to five years, and at least half of clients do not successfully complete the plan.

Negative Tax Consequences

Depending on your financial condition, any money you save from debt relief services such as debt consolidation may be considered income by the IRS, which means you pay taxes on it. Credit card companies and other creditors may report settled debt to the IRS, which the IRS considers income.

Bankruptcy

There are two types of bankruptcy you can pursue: Chapter 13 and Chapter 7. Chapter 7 is means tested, so you need to make no more than your state’s median household income ($67,355 for Wisconsin in 2019). If you qualify for Chapter 7 bankruptcy, your unsecured debt can be completely eliminated. The whole process takes about four months, and then you can start over with a clean slate. Chapter 13 bankruptcy lasts between three to five years, similar to debt consolidation. With Chapter 13 bankruptcy, the moment you file, there is an automatic stay on all collection actions, and you will almost certainly retain possession of your home and vehicle.

If you’re experiencing significant debt management problems, it would be a good idea to talk to one of the experts at Burr Law.

How Does Debt Relief Affect Your Credit?

/in , , , /by

The unrelenting pressure of overwhelming debt can cause all kinds of problems outside of the financial realm. It can affect your love relationship, your familial interactions, and your physical and mental health. You know you need debt relief, but worry that pursuing it may further deteriorate your credit score. In this blog post, we will examine the different kinds of debt relief and their implications for your credit.

 

Debt Management – What Is It

With debt management, the entirety of your financial situation is reviewed by a credit counselor, who then creates a debt management plan for you to follow. Generally these are for terms of three to five years, and often you must agree not to seek any additional credit during the time that the debt management plan is in place. Some organizations may take control of your monthly payments, making them on your behalf. You will pay a monthly fee for the service.

 

Debt Management – Credit Implications

The fact that you’re engaged in a debt management plan will be noted on your credit report. If you adhere to the regime for the entire time, your credit score should not be affected. However, at least half of clients do not successfully complete the plan. Obviously, failing to complete a debt management plan would have negative implications for your credit score.

 

Debt Settlement – What Is It

Debt settlement differs from debt management in that the organization you work with negotiates with your creditors on your behalf to decrease the amount you owe. Sometimes, they offer a lower lump sum payment to the creditor; sometimes, they seek debt forgiveness or lower interest. You will be expected to pay an enrollment fee as well as a monthly fee for each credit card on the plan. Also any forgiven debt is reported to the IRS who treats that as income.

 

Debt Settlement – Credit Implications

Debt settlement companies are not concerned with your credit report. Their job is to get the current debt lowered or forgiven. Most debt settlement companies ask you to suspend payments to your creditors while they negotiate on your behalf. This strategy has a tremendously negative impact on your credit report since the most significant factor is payment history.

 

Debt Consolidation – What Is It

In its most basic form, debt consolidation combines multiple debt payments into one monthly payment through obtaining either a secured or unsecured loan. That monthly payment is sometimes lower than the individual payments combined, and the interest you pay is sometimes lower as well. Sometimes you may risk losing collateral that you aren’t aware you have placed in jeopardy. That can happen when your debt consolidation loan has a cross-collateralization clause that lets the lender take other property it has financed if you default on the debt consolidation loan.

 

Debt Consolidation – Credit Implications

Because you are taking out an additional loan, your credit report will reflect a “hard inquiry” and that will lower your credit score. Often, your credit score decreases by a relatively small amount, and that decrease is temporary.

 

The ultimate debt relief, of course, is filing for bankruptcy. The general fear that filing for bankruptcy means the end of ever acquiring new credit or home ownership is unfounded. The experts at Burr Law can talk you through the different options and the various implications for your credit.

When Does Bankruptcy Clear From Your Credit Report?

/in , , , , , , , /by

If you’re considering filing for bankruptcy in Wisconsin, you probably have a lot of bankruptcy questions. It’s important for you to have all the information you need in order to make a truly sound decision, and in this post, we will look at one of the most commonly asked bankruptcy questions: When does bankruptcy clear from your credit report?

Credit reports are simply a fact of contemporary existence, and they are consulted every time you apply for a new credit card, or an automobile loan, or any type of financial undertaking. You may not be aware that in Wisconsin credit reports are also considered by landlords, and by some employers. So concern about your credit report is absolutely reasonable when making the decision to file for bankruptcy.

Filing for bankruptcy becomes part of the public record, so if anyone is truly interested in the bankruptcy filing itself, they can access that information.

Generally speaking, bankruptcy stays on your credit report in Wisconsin for about 10 years. Remember, though, that even if you don’t file bankruptcy, your creditors can obtain a judgment against you for your debt, and that judgment would appear on your credit report. A judgment can remain on your credit report for seven years or until the statute of limitations expires, whichever is longer. In Wisconsin, the statute of limitations on a judgment can be up to 20 years! So a bankruptcy may well fall off of your credit report before a particular judgment.

Bankruptcy will mean a drop in your credit score immediately after filing, but about 12 to 18 months after you receive your bankruptcy discharge your credit score should go up because your debtor to income ratio becomes much better than when you filed the bankruptcy. However, you may already have a poor credit score due to your debt-to-asset ratio (your debt is high compared to your available credit) and delinquent accounts; in that case, the decrease in your credit score may be less than you suppose. If your credit score was good before filing bankruptcy, the drop may be more pronounced.

The type of bankruptcy that you file may also affect how its presence on your credit report is viewed by prospective lenders. Chapter 7 Bankruptcy completely wipes out your debt by selling whatever eligible assets you have; Chapter 13 Bankruptcy sets up a three to five year plan to repay a portion of your debt. Obviously, prospective lenders would consider a Chapter 13 Bankruptcy in a more favorable light than a Chapter 7 Bankruptcy. When applying for credit after bankruptcy, you should be straightforward about the bankruptcy and your reasons for choosing that option.

Attorney Michael Burr and the Burr Law Offices can answer all of your bankruptcy questions. You concern about your credit report is certainly warranted, and we can help you understand all the implications of a decision to file bankruptcy. Consult the experts in Wisconsin bankruptcy law at the Burr Law Offices, and bring all your bankruptcy questions with you.

Bankruptcy Pros and Cons

/in , , , , , , /by

When you’re in financial distress, it can sometimes seem like there is no way out. There are all different kinds of reasons people find themselves flailing in a sea of debt. Whatever the reason, when creditors are circling sharks, bankruptcy may be the lifeboat you need. Over 12,000 Wisconsinites have filed bankruptcy so far this year (January 1 through September 30, 2019). In the Eastern District of Wisconsin (including Milwaukee and its surrounding areas), 9,466 bankruptcy cases have been recorded
(www.wiwb.ucourts.gov, www.wieb.uscourts.gov). So bankruptcy is neither shameful nor unusual.

Filing for bankruptcy is a serious decision, though. You want to have all the information and understand all the implications before proceeding. Let’s take a look at some of the bankruptcy pros and cons.

PRO: Bankruptcy Stops All Collection Activities By Any And All Creditors. When your debt is crippling, it comes with collection agents working relentlessly to extract money you don’t have. Letters that threaten dire consequences, phone calls that badger you at all times of day or night, these tactics can make you feel hunted, haunted, or both. The moment you file bankruptcy, all collection activities must stop, including any garnishment, foreclosure or repossession.

PRO: Bankruptcy Eliminates or Decreases Debt. With bankruptcy, all your unsecured debt is either eliminated or reduced. Most people file Chapter 7 Bankruptcy, and with that type, you don’t need to worry about any sort of repayment. “The entire process takes from 3-6 months, after which your debt is cleared” (David Chandler, https://www.consumeraffairs.com/finance/bankruptcy_02.html). Some people choose Chapter 13 Bankruptcy, and with that type, you do repay a portion of your debts, determined with the court. This process lasts from 3 to 5 years. In both cases, your debts are cleared, once and for all.

PRO: Bankruptcy Avoids Draining Resources. The bill collectors don’t care where you get the money to pay them, and you may be tempted to take it from your retirement funds, social security or other protected assets. When you declare bankruptcy, not all your assets are liable for your debt repayment. Social security and retirement funds are protected. Filing bankruptcy allows you to retain those protected assets while getting rid of the debt.

CON: Bankruptcy Means No Credit Cards Until You Receive Your Bankruptcy Discharge. While bankruptcy rids you of your debt, it also rids you of your credit cards. Not having credit cards makes some things more difficult. For instance, car rental agencies usually require credit cards; hotels often do too. It also means that unexpected large expenses cannot be paid with a credit card; car repairs may need to wait. Once you receive your bankruptcy discharge you can apply for credit, including credit cards and you should receive that credit or credit card.

CON: Bankruptcy Complicates Credit/Loan Prospects. Bankruptcy remains on your credit record for 10 years, and it can make getting an auto loan or other kind of loan more difficult, but not impossible. And while you may receive credit card offers shortly after declaring bankruptcy, they often come with high interest rates. Naturally, your credit rating will drop, but will improve and be back to normal about 1 year after bankruptcy discharge. Professional advice can assist in charting a positive strategy and ways to improve your credit score.

CON: Bankruptcy Becomes Public Record. When you file for bankruptcy, it becomes a matter of public record, and anyone can request those records. Except it will not appear on the State of Wisconsin, CCAP website, which list case filed in Wisconsin.

A Wisconsin legal team that specializes in Chapter 7 and Chapter 13 bankruptcy proceedings can help you make the right decision for you and your family. If you need help with dealing with debt in Wisconsin, Burr Law Office can provide you with practical solutions that suit your needs. We can help you make the best possible decisions for yourself, your family and your future. Call us today at (262) 827-0375 to schedule a free bankruptcy evaluation. At Burr Law Office, we are here to help.