On Disability and Need Debt Help

I'm on disability and I need help with my credit card debt. What are my options?

Six yrs ago I had an employee credit card with a fixed rate of 10.99 (1) and my husband had a card with bank (2) with a 9.99 variable rate. Card 1 was bought by bank 2. My husband and I were authorized users on each others accounts. Bank 2 now owned both cards and called to try to convince us to combine the debt to the variable rate card which we declined. A month or two later the variable card rate suddenly went up to 23.99 for no good reason as we always paid more than the minimum and all payments were on time. We called the company and combined the balances to the fixed rate card. A few months later we received a notice stating that the new minimum payment was being raised to 3% of the outstanding balance plus finance charges. We called and opted out by closing the card with a balance of $26,000. Five years ago we refinanced our home and paid off all other debt except this card. My husband is a disabled veteran. I became disabled due to a massive stroke 3 years ago. We have always made on time higher than minimum payments, but our balance is still about $23,000. We are now both on fixed incomes, my husband gets a VA disability and SSA disability and I get SSA disability and a very small long term disability from a work policy. Although it has been difficult we have all our bills paid on time and both have a FICO score of above 780. The card was sold to another company a year or two ago and everything remained the same until now. The company sent us notice that due to new government regulations, starting in March we must now pay 1% of the outstanding balance plus finance charges that vary from $205 to $230 each month. Our incomes didn't increase this year but the cost of utilities and health insurance did. So now we have a problem with this payment. We want to be able to pay this debt and don't want any negative credit reports but are unsure of what to do. We have heard that some credit card companies have hardship programs that might lower the interest rate to make the payments more affordable. What is the best way to go about applying for this? Also, is all of our income judgment proof, and if so, is this a bargaining tool? Thank you for any input you may provide. Barb

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You can try to negotiate with your creditors to reduce the interest and fees they charge. However, most consumers experience difficulties when trying to negotiate with their creditor for various reasons. First, the person you speak with, typically, is someone who does not have the authority to make the changes to the account. Second, most creditors will not negotiate a reduction in the rate and fees if the consumer is current with their payment. The reason for this is simple, if you are current with your payments this means to the creditor that you have sufficient funds to make the minimum monthly payment. The minimum monthly payment generates a substantial amount of profit for the bank. You may want to ask your creditor if they have a hardship program available that you can apply for. Whether you will be approved is dependent upon the rules the bank has established. Applying for a hardship program, if the bank has one, is a good place to start.

If the hardship program does not work there are several options you can consider. You must understand that there is no program, including a hardship program provided by the bank, that will not impact your credit. Even if you make regular monthly payments in a hardship program with the bank, the bank can still notate your credit report accordingly. This can result in a negative impact to your credit. Before I discuss the several options I will briefly explain to you what it means when government administered benefits are protected from garnishments.

Generally speaking, Government administered benefits, such as state pensions and social security, cannot be garnished by a judgment. However, if you deposit those benefits into a bank account and then co-mingle the funds with money from other, non-exempt sources, proving the exempt status of the funds may be quite difficult. My suggestion is to open a new bank account into which you would deposit all of your exempt funds, and maintain another account for any non-exempt funds you may receive (gifts from friends, income from work, etc.). You will then need to notify your bank that the funds being deposited into the exempt account should not be levied upon, and that the bank should refuse any levy orders it receives. The bank may or may not be able to guarantee that a levy will not be placed on your exempt funds, but taking these steps should offer you at least some level of protection. To learn more I encourage you to read an article I wrote, Advice on protecting your pension and social security from garnishment.

Since there are a variety of debt resolution options, including credit counseling, debt negotiation/debt settlement, a debt consolidation loan, bankruptcy, and other debt resolution options, it is important to fully understand each option and then pick the solution that is right for you.

Credit Counseling

Credit counseling, or signing up for a debt management plan, is a very common form of debt consolidation. There are many companies offering credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors.

It is important to understand that in a credit counseling program, you are still repaying 100% of your debts -- but with lower monthly payments. On average, most credit counseling programs take around five years. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report, and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy -- or using a third party to re-organize your debts.

Debt Settlement

Debt settlement, also called debt negotiation, is a form of debt consolidation that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years. It is important to keep in mind, however, that during the life of your debt settlement program, you are not paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Chapter 7 Bankruptcy. The trade-off here is a negative credit rating versus saving money.

Debt Consolidation Loan

Many people think first of a debt consolidation loan when seeking debt consolidation. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one loan for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt.

It is important to be aware that shifting unsecured debt to secured debt can create a volatile situation, if there is ever a chance that you cannot afford the new mortgage payment you are now putting yourself at risk of foreclosure! In the case of a debt consolidation loan, most mortgages are 30-year loan, which means that the total cost and the time to debt freedom could be very high, but the monthly payment will be lower than other options and there is no credit rating impact.

Bankruptcy

Bankruptcy may also solve your debt problems. A Chapter 7 bankruptcy is a traditional liquidation of assets and liabilities, and is usually considered a last resort. Since bankruptcy reform went into effect, it is much harder to file for bankruptcy. If you are considering bankruptcy, I encourage you to consult with a qualified bankruptcy attorney in your area.

Default

You may be curious what may happen if you do nothing. If you stop paying your unsecured debts, creditors have the right to collect the debt. First, you will likely receive collection calls and letters from the creditor directly. If you are still unable to pay the debt after several months, the creditor is likely to refer the account to a third-party collection agency.

Third-party collectors are known to be much more aggressive in their collection tactics than original creditors, so do not be surprised if the calls become more persistent, or even threatening. Thankfully, the Fair Debt Collections Practices Act has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.

In some cases, when all other collection efforts fail, a creditor will decide to file a lawsuit against the debtor. This is not a frequent occurrence, but it is within a creditor's rights and a possibility about which you should be aware. If one of your creditors sues you, the court will likely issue a judgment in the creditor’s favor. Depending on your state's laws regarding the enforcement of judgments, the creditor may be able to garnish your wages, levy your bank accounts, place a lien on your property, or take other action to enforce its judgment.

Regarding a credit report, default damages a credit score severely. In addition, default is a warning flag for many lenders, who will refuse to deal with a potential customer with a default on their record. As a result doing nothing and allowing default is a poor option for most consumers.

Summary

Although there are many forms of debt consolidation, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation. However, each consumer is different, so find the debt consolidation option that fits for you.

Lastly, here are some fast tips for your own quick Debt Consolidation Evaluator:

1. If you have perfect credit and have equity in your home -- consider a Mortgage Refinance.

2. If you can afford a healthy monthly payment (about 3 percent of your total debt each month) and you want to protect yourself from collection and from going delinquent -- consider Credit Counseling.

3. If you want the lowest monthly payment and want to get debt free for a low cost and short amount of time, AND you are willing to deal with adverse credit impacts and collections -- then evaluate Debt Settlement.

4. If you cannot afford anything in a monthly payment (less than 1.5 percent of your total debt each month) -- consider Bankruptcy to see if Chapter 7 might be right for you.

Bills.com makes it easy for you to apply for traditional forms of debt relief.

I hope this information helps you Find. Learn & Save.

Best,

Bill

www.bills.com/

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