14 ways to handle your debts
by Scott Bilker |
There is always much advice as
to how to handle your debt. As with everything in life, there are pros and cons
to each strategy. Picking the right path depends on your personal situation and,
of course, careful consideration of the costs. My feeling is that the best
choice is the smartest financial choice. That means the least expensive
strategy. That said, let’s take a look at a few approaches to dealing with debt.
| DO NOTHING
(#1) |
| Method: |
Don’t take any
action. Hakuna Matata (no worries)! |
| Pros: |
You get to
keep your cash because you’re not paying back the debts. |
| Cons: |
Your creditors
will sue you—and win! You will destroy your credit history—guaranteed! |
| GET MORE CREDIT TO PAY OLD
CREDIT (#2) |
| Method: |
Apply for new
lines of
credit to increase your credit limits. Use this credit to pay all
current credit card bills. |
| Pros: |
This will work
at first. You will be able to continue spending and enjoying your
newfound credit lines. |
| Cons: |
It won’t take
long before you run out of the ability to get new credit. Additionally,
the interest charged on the debt will overtake your credit limits
thereby maxing you out with no ability to pay. It’s a guaranteed losing
proposition. |
| Note: |
It is smart to
avoid being late by using one credit card to pay another. However, the
idea of the continuous acquisition of credit to avoid debt is
destructive. |
| RUN AWAY TO ANOTHER COUNTRY
(#3) |
| Method: |
Fight or
flight—the latter. |
| Pros: |
See the world. |
| Cons: |
See the world
with no money. |
| H&H—HERMIFY & HIDE (#4) |
| Method: |
Run for the
hills. Change your name, address, and phone number, and wait until the statute
of limitations runs out on all your debts. |
| Pros: |
Sounds
exciting. Might feel like a movie. |
| Cons: |
You cannot
live your life in hiding. The skip-tracers (those that find people that
skip on their debts) will work overtime to find you and serve you (and
they’re not serving dinner).
|
| PAY THE MINIMUM FOREVER (#5) |
| Method: |
Manage your
cash flow so you can meet all your bills and nothing more. |
| Pros: |
You will
survive. |
| Cons: |
You’ll spend
your life paying thousands of dollars in interest payments to the banks!
Oh, the feeling of satisfaction you’ll have contributing to Capital One Financial's, CEO,
Richard D. Fairbanks, annual compensation of $280,083,843! |
| BORROW FROM
FRIENDS AND FAMILY (#7) |
| Method: |
Ask those
closest to you to help bail you out. |
| Pros: |
May be a quick
fix. |
| Cons: |
Risk
destroying your relationship with the people you love over money. If you
have to claim bankruptcy, the bank debt will go away. But if you cannot
repay relatives and friends, there could be hard feelings. |
| Note: |
This strategy
will work only when it’s a true business transaction and both parties
benefit. |
| NEGOTIATE WITH CREDITORS
(#8) |
| Method: |
Read my book,
Talk Your Way Out of Credit Card Debt and start calling the
banks. |
| Pros: |
You will have
some success—I guarantee it! You will learn how to deal with the banks.
You will save money. |
| Cons: |
None, you can’t
make it worse. However, you do need the stick-to-itiveness to make it work. And
it is work—but work that pays! |
| FINANCIAL PLANNER (#9) |
| Method: |
Use the
service of a financial planner to “rebalance” your budget and put more
money towards debt. |
| Pros: |
Outside,
professional help that will help to organize your finances. |
| Cons: |
It will cost a
little, but probably worth the fee. You are still left to follow through
on the new plan and budget. |
| CREDIT COUNSELING (#10) |
| Method: |
Contact, and
work with, a credit counselor who will create a personalized DMP (Debt Management Plan).
Allow the credit-counseling agency to negotiate with creditors and make your
payments. |
| Pros: |
They do all
the work. You send them a check and they do the rest. |
| Cons: |
Banks report
your dealing with credit counseling to the credit bureaus and this will
hurt your credit score. The companies are simply voluntary debt
collection agencies. That’s because some of their compensation is
derived from what’s known as “fair share.” This is a percentage of the
money they get you to pay (they collect). There have been
credit-counseling companies that have paid late or not paid their
customers' banks at all! Many say they’re non-profit, but that may not be
true. I’m not saying they’re all bad. I’m saying that you have to be
very careful and research each company before doing business with them
or you could be sorry. |
|
DEBT SETTLEMENT COMPANIES
(#11)
|
| Method: |
Use the
service of a debt settlement company to mediate your debts one-at-a-time
in lump sum payment and at a discount. |
| Pros: |
Professional
help. These companies will negotiate with your creditors and get the
debt settled for 45 percent or less of the total amount. Even with
their fee (typically 15 percent of what you save or the total amount),
it’s worth it from a dollars-and-cents perspective. |
| Cons: |
You send the
debt settlement companies your money, and they put it in escrow until
such time as they can negotiate with the banks. Banks must see that
you’re not paying before they negotiate. Why would they want to reduce
the amount you owe if you haven’t missed any payments? Of course, when
you stop paying the banks, they will report this to the credit bureaus,
and your credit score will be trashed. Additionally, any money
eliminated from the total debt will be considered income and you will
receive a 1099 and be responsible for taxes, which isn’t too bad. Again,
you must research the debt settlement company! Many have been known to
walk off with all the collected money, leaving their clients in far
worse shape than when they started. |
| HOME EQUITY LOANS (#12) |
| Method: |
Borrow money
against your home (or business) and use that money to pay off debts. |
| Pros: |
Home equity
loans are tax deductible, so your true interest rate will be less than
the quoted number. You may be able to get enough money easily to
eliminate all your debts. That’s because property values have increased
dramatically leaving them cash poor, equity rich! |
| Cons: |
Credit card
debt is unsecured. However, once you pay it off with a home equity loan,
the debt will be secured by your property. That means that if you have
to claim bankruptcy, you will still be responsible for that debt! |
|
SELL YOUR HOUSE (#13)
|
| Method: |
Get the most
you can for your residence, pay off your debt, and buy something
smaller. |
| Pros: |
You meet all
your obligations and get a fresh start. |
| Cons: |
You may not
have enough equity to pay off all debts. You lose the commission of the
sale to the realtor. You may not be able to buy something smaller
because of elevated home prices.
|
| DECLARE BANKRUPTCY (#14) |
| Method: |
Chapter 7 or
chapter 13. |
| Pros: |
If you’re
successful in getting a Chapter 7 bankruptcy, then all your unsecured
debts will be erased! You owe nothing! A true fresh start! |
| Cons: |
Bankruptcy
remains in your credit history for 10 years. Plus, because of recent
changes in the bankruptcy laws, you will be forced to comply with strict
standards that could push you into a Chapter 13 bankruptcy. With this,
you still pay your debts back over time and have all the negative
factors that go along with bankruptcy as well. |
|
