Debt & Bankruptcy Guide
Credit Counseling and Debt Management to Learn Important SkillsCredit counseling and debt management are alternatives to bankruptcy and help borrowers to learn important skills such as budgeting and money management. Borrowers are taught practical money skills to avoid excessive debt, delinquencies, and bankruptcies. Counselors teach borrowers how to get rid...[Read More]
What to Expect if You Have Delinquent DebtsDebt becomes delinquent when a borrower is unable to make timely payments. When a payment is past due, lenders send letters and emails and call borrowers. Some banks also inform the reporting bureaus. Within a 6-month period, your financial institution will attempt to collect debt in different ways...[Read More]
Filing for Insolvency and Ways to Avoid ItInsolvency refers to the inability of companies and individuals to meet their debt obligations. Lenders can file a lawsuit against debtors and liquidate their assets to pay off the outstanding balance. While insolvency proceedings and bankruptcy are a last resort, borrowers usually negotiate with...[Read More]
Debt Ratio as a Measure of Financial HealthDebt ratio is an indicator of the amount of debt of a company, compared to its assets. It shows to investors, financial institutions, and other parties whether a business has loans and how much. A high ratio indicates that the company is a risky borrower while a low ratio shows that the business...[Read More]
Debt is a term that refers to something owed, whether services, goods, or money. Individual borrowers and businesses use borrowed funds to make investments or large purchases they could not otherwise afford. The debtor agrees to pay back the loan amount within a specified timeframe. Interest is usually assessed. Credit is a related concept and refers to a formal agreement whereby the borrower receives a loan or something of value. In essence, credit is a form of consumer debt – the debtor returns or repays money or resources at a later date.
Factors That Determine Creditworthiness
People have access to different types of financing depending on their needs, income, and credit history. The latter determines the borrower’s credit score, along with other factors such as types of loans and credit used, payment history (late or missed payments), new credit, and amounts owed. Other factors include length of credit history, number of delinquent accounts, and amounts past due.
Financial Problems, Delinquency, and Default
There are many reasons why people have financial problems and a poor credit score. Among them are a derogatory public record, serious delinquency, delinquent accounts, excessive debt, as well as too many accounts with balances. All these can lead to financial problems and actions on behalf of banks, including foreclosure. This is a legal procedure whereby a financial institution attempts to recover the funds borrowed by a person who is unable to keep up with payments. Some borrowers fall on hard times due to unpredicted events such as divorce, problems with a co-owner, job transfer, excessive or multiple debts, and prolonged illness. Borrowers who experience any of these often have serious financial problems and may default on their loans. Default usually occurs when a person is unable to meet his financial obligations. The borrower fails to pay toward the principal and interest on time. This happens when people are either unwilling or unable to make payments. Neglect or failure to pay back an existing debt is referred to as delinquency.
Defaulting on a loan can place an individual borrower or a business in serious financial trouble, including repossession and foreclosure. Collection agencies are companies that specialize in full or partial recovery of amounts due. They can take court action or use other means to force consumers to pay back their loans. Lenders hire collection agencies to recover accounts in default and collect receivables. Some financial institutions have subsidiaries or divisions that act as collection agencies. They can use different means but are not allowed to threaten or physically harm borrowers.
Debt Consolidation, Risks, and Ways to Consolidate
Borrowers who are knee deep in debt often consider debt consolidation while others declare bankruptcy. Consolidation is the act of taking a loan to repay existing debt. The new loan comes with a lower interest rate and monthly payments, making it easier for borrowers to pay back their debts. Credit card issuers, finance companies, and banks offer debt consolidation. Borrowers who offer some collateral enjoy a lower interest rate. The problem is that those who cannot make payments risk losing the collateral, which can be their home or vehicle. Before making a decision to consolidate, borrowers should list their expenses and income. Expenses include rent, tuition and school-related expenses, loans and mortgage payments, gas, groceries, electricity and phone bills, etc. Sources of income include investment income, wages, disability insurance payments, inheritance, and others. Listing all these helps debtors to come up with realistic limits, budget, and expectations. Comparing income and expenses allows borrowers to rearrange their finances and determine the amount they can allocate to debt repayment. In some cases, debt consolidation is not an option. This is when the borrower is offered a loan with a very high interest rate. Besides, the borrower pays a lot of money in the long run. There are alternatives to debt consolidation, one being to transfer existing balances. Find a balance transfer credit card with a low interest rate and transfer all high interest card balances. Make sure you check the balance transfer fees. Another option is to discuss your situation with your creditors. Be honest and explain why you are unable to keep up with your payments. The financial institution may agree to lower your monthly payments or interest rate.
Credit Counseling and Other Alternatives to Consolidation
Alternatives to debt consolidation include consumer credit counseling, debt management plans, home equity loans, and bankruptcy. Consumer credit counseling involves budgeting help, foreclosure counseling, and education on how to avoid excessive debt and bankruptcy. There are benefits to counseling in that it stops harassing calls from financial institutions. Counseling is confidential and free and offers valuable debt management and budgeting advice. It helps borrowers to save a lot of money on interest payments and pay their bills and credit card balances. Counselors give advice to borrowers on how to eliminate penalties and late fees. What is more important, credit counseling helps debtors to improve their credit scores. The first step to this is to check your credit report. You can obtain it from a credit bureau such as Halifax or TransUnion. Credit bureaus are agencies that offer, maintain, and collect credit information about consumers. Reports contain details such as how you pay your bills, whether you have late or missed payments, whether you have been arrested or sued, or have declared bankruptcy.
Bankruptcy and Non-exempt Assets
Bankruptcy is a legal proceeding that involves an individual borrower or a business. The debtor files a petition, and his income and assets are evaluated and measured. Some assets go toward repaying the outstanding balances. Debts that cannot be repaid are forgiven, but not all are discharged. These include spousal support, payments of orders of restitution, debts that have been incurred by means of fraud, homeowner association dues, as well as penalties and fines. Debt that cannot be discharged also includes student loans, taxes, and obligations that result from the operation of an aircraft, boat, or vehicle under the influence of drugs or alcohol. The same goes for property settlement.
Bankruptcy as a Last Resort
It should be noted that bankruptcy is not a way to deal with financial problems but a last resort. Secured creditors can still claim and repossess the borrower’s property. While it is true that bankruptcy helps eliminate debt, this is not true for liens. Alimony and child support survive bankruptcy, and borrowers still owe them in full. There are limited circumstances under which student loans are wiped out. The person must prove that debt repayment will result in undue hardship. The problem here is the strict standards and criteria to meet. Penalties and fines such as criminal restitution and traffic tickets and those that are not listed in the bankruptcy papers are not discharged.
When to File for Bankruptcy
What bankruptcy does is stop collection activities and harassment by creditors. This includes foreclosure, repossession, letters, and phone calls. Bankruptcy is also a solution for borrowers with unsecured debt such as credit cards, foreclosure balances, and unpaid utility bills. Other types of debt that can be discharged include unpaid rent, evictions, judgments, as well as lawsuits. The same goes for medical bills, supplier debts, deficiency balances, and vehicle repossession. It is best to discuss your financial situation with a seasoned bankruptcy attorney. They will inform you of debts you can eliminate, including gas cards, personal loans, department store cards, payday loans, etc.