Ask Bill your personal finance question

Divorce and Debt

Tell me about divorce and debt.

What are the necessary steps in taking care of current credit issues while trying to sell houses in a divorce and trying to purchase another house? Tell me about divorce and debt.

Read full question
Bill's Answer
3.4
/5.0
(5 Votes)

Bills.com | Find Learn Save

See the Bills.com resource Splitting Debt in Divorce.

The four primary concerns for most consumers carrying significant debt loads are: i) size of monthly payment and ability to make it ii) time to debt freedom, iii) total cost to pay off the entire debt, and iv) the credit rating impact of the resolution program. Be sure to evaluate each approach or tactic relative to your prioritization of these factors.

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

A Consumer Credit Counseling Service (CCCS), is one specific type of debt management plan. It is a very common form of debt consolidation. There are many companies offering credit counseling programs. In a CCCS program, you make one payment to the CCCS firm and they then distribute that payment to your various creditors. CCCS firms negotiate lower interest rates with your creditors. By obtaining interest rate concessions from your lenders or creditors, more of the payment you make each month goes to the principle balance, thereby speeding up the time it takes to become debt free. Because the program lowers interest rates, it less effective for someone whose interest rates are already low.

It is important to understand that in a credit counseling program, you are still repaying 100% of your debts, plus some interest. Often, in Consumer Credit Counseling program, the size of the payment is not significantly lower than your current monthly minimum payments you are sending to your creditors. This means that if you are having trouble making your current payment, a CCCS program may not be right for you. The program demands that you make a timely payment each month. If not, you could end dropping out of the program without having resolved the debt problem. Although there are no precise figures available, a high percentage of people who enroll in a CCCS program drop out. 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 affects your credit rating. Unfortunately, many lenders look at enrollment in CCCS program as akin to filing for Chapter 13 Bankruptcy; in both cases you needed the assistance of an outside firm to re-organize your debts.

Debt Settlement

Debt settlement, also called debt negotiation, is a form of debt consolidation that reduces your total debt. Savings can be as much as 50% and debt settlement programs will significantly reduce your monthly payments. Debt settlement programs are geared for people who have a financial hardship that makes it so they either cannot pay their bills or are about to start falling behind. 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. It is really the only true consolidation, where the original debts are paid off by a lender who assumes the new debt. The most common forms of debt consolidation loans are home loan refinancing, taking out a second loan on a home (or a home equity line of credit) or, obtaining an unsecured loan. Since the credit crunch occurred, obtaining an unsecured loan at a reasonable interest rate has become quite difficult or impossible. 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 unsecured 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 put 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. Bankruptcy is a public matter. You need to stand in public and declare that you are unable to pay your debts. Notices are published and your credit report will show that you filed for bankruptcy for at least seven years. Since the most recent federal bankruptcy reform went into effect, a few years ago, it is much harder to qualify for Chapter 7 bankruptcy. It may be the case that a Chapter 13 bankruptcy will be the only one available. In a Chapter 13 bankruptcy, a person's debts are reorganized. The debts are repaid, according to the terms established by the bankruptcy court. Chapter 13 bankruptcies usually run three to five years. If you are considering bankruptcy, I encourage you to consult with an experienced 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 established rules that govern the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules. If you know your rights, you can protect yourself from improper creditor contact.

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, defaulting on a debt 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 unsecured 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), your interest rates are a problem, 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.

Recommendation

Consult with an attorney if you have not already regarding your divorce and finances. Discuss your options for resolving the debt.

Get Debt Help!
3.4
/5.0
(5 Votes)

People also like to Read

Bills.com Team

Get all the information you need about voluntary repossession, be it a vehicle or a home that you considering for voluntary r... Read more >>

BS

Get more information as to how wage garnishments work. If you are facing a creditor judgment, Bills.com can help you save.... Read more >>

Mark Cappel

You may or may not be responsible for your deceased spouse's debts depending on which state you reside in. In community prope... Read more >>

Mark Cappel

When a person dies, his or her debts do not disappear automatically. However, the family is not responsible for the debts. Le... Read more >>

Mark Cappel

How to handle collection calls on 12-year-old debt. Your state statute of limitations and federal law set the rules collectio... Read more >>

2 Comments

Recent Best
1500 characters remaining
  • AM
    Jul, 2011
    April
    Canton, OH
    I have a question. My husband was married prior to us getting married. In the divorce settlement he was to pay a portion of the debt. He has been unemployed and has not been able to make those payments. He has stayed up on his child support but can not afford the settlement right now. His ex wife is now emailing me and asking me for this money and advising that if he does not pay that she will take it back to court. I am the only one working and struggling to make ends meet myself. She is purchasing a new home and seems to be doing well. I think that this is just an attack on him but that is neither here nor there. What if anything can she do if it does go back to court. His child support payments are almost $600 a month and with no income and unemployment done, we are lost. Just looking for the "worst case scenario" if possible. We do live in Ohio. Thanks
    0 Votes

    • BA
      Jul, 2011
      Bill
      Explain to the ex that the ex-spouses should communicate directly to each other or through their attorneys, and not through you or any other third party.

      Based only on the information you shared, the worst case scenario is the ex goes before the family court judge and explains the facts, and asks for relief. The judge could hold your spouse in contempt, and in some states order the state to withdraw any state licenses your spouse has. Or, the ex-spouse could sue your spouse for breach of contract in civil court.

      A lawyer with family law experience will have a more precise answer.
      0 Votes

loading...