Can Debt Restructuring Help Ease Financial Stress? Maybe, but Beware the Pitfalls

Has your credit card debt spiraled out of control? Are you juggling payments to a long string of creditors, feeling like you’re never making a dent in the amount of debt you owe? Even worse, is this debt growing each month because of high interest rates?

Faced with this stress, you might be considering a debt-management strategy known as debt restructuring. It’s a form of debt management that’s not as well-known as debt consolidation, but one that might be an option for consumers whose debt has gotten so bad that they’re considering filing for bankruptcy.

But while debt restructuring might help you gain control over your debt, it could also leave you with a new loan that comes with a sky-high interest rate. You might end up paying far more than what you originally owed when you pay back this new loan.

What Is Debt Restructuring?

American Consumer Credit Counseling, an Auburndale, Massachusetts-based non-profit, says that in a debt-restructuring arrangement, people who are struggling with credit card or other debt take out a new loan, using that loan to pay off what they owe their creditors. They then must repay their new loan – with interest, of course – by making regular monthly payments.

In an ideal world, the terms of the new loan will result in a lower monthly payment that these consumers can afford. Even better, the new loan should leave consumers with a lower number of monthly payments while reducing the amount of overall interest that they pay.

Consider the Risks Associated with Using a Debt Settlement Company

If you’ve maxed out your credit cards and are getting deeper in debt, chances are you’re feeling overwhelmed. How are you ever going to pay down the debt? Now imagine hearing about a company that promises to reduce – or even erase – your debt for pennies on the dollar. Sounds like the answer to your problems, right?

The Federal Trade Commission (FTC), the nation’s consumer protection agency, says slow down, and consider how you can get out of the red without spending a whole lot of green.

Debt Settlement Companies

Debt settlement programs typically are offered by for-profit companies, and involve the company negotiating with your creditors to allow you to pay a “settlement” to resolve your debt. The settlement is another word for a lump sum that’s less than the full amount you owe. To make that lump sum payment, the program asks that you set aside a specific amount of money every month in savings. Debt settlement companies usually ask that you transfer this amount every month into an escrow-like account to accumulate enough savings to pay off a settlement that is reached eventually. Further, these programs often encourage or instruct their clients to stop making any monthly payments to their creditors.

Debt Settlement Has Risks

Although a debt settlement company may be able to settle one or more of your debts, consider the risks associated with these programs before you sign up:

1. These programs often require that you deposit money in a special savings account for 36 months or more before all your debts will be settled. Many people have trouble making these payments long enough to get all (or even some) of their debts settled. They drop out the programs as a result. Before you sign up for a debt settlement program, review your budget carefully to make sure you are financially capable of setting aside the required monthly amounts for the full length of the program.

2. Your creditors have no obligation to agree to negotiate a settlement of the amount you owe. So there is a chance that your debt settlement company will not be able to settle some of your debts — even if you set aside the monthly amounts the program requires. Debt settlement companies also often try to negotiate smaller debts first, leaving interest and fees on large debts to grow.

3. Because debt settlement programs often ask — or encourage — you to stop sending payments directly to your creditors, they may have a negative impact on your credit report and other consequences. For example, your debts may continue to accrue late fees and penalties that can put you further in the hole. You also may get calls from your creditors or debt collectors requesting repayment. You could even be sued for repayment. In some instances, when creditors win a lawsuit, they have the right to garnish your wages or put a lien on your home.

Beware of Debt Settlement Scams

Some companies offering debt settlement programs may engage in deception and fail to deliver on the promises they make — for example, promises or “guarantees” to settle all your credit card debts for, say, 30 to 60 percent of the amount you owe. Other companies may try to collect their own fees from you before they have settled any of your debts — a practice prohibited under the FTC’s Telemarketing Sales Rule (TSR) for companies engaged in telemarketing these services. Some fail to explain the risks associated with their programs: for example, that many (or most) consumers drop out without settling their debts, that consumers’ credit reports may suffer, or that debt collectors may continue to call you.

Avoid doing business with any company that promises to settle your debt if the company:

  • charges any fees before it settles your debts
  • touts a “new government program” to bail out personal credit card debt
  • guarantees it can make your unsecured debt go away
  • tells you to stop communicating with your creditors, but doesn’t explain the serious consequences
  • tells you it can stop all debt collection calls and lawsuits
  • guarantees that your unsecured debts can be paid off for pennies on the dollar

Researching Debt Settlement Companies

Before you enroll in a debt settlement program, do your homework. You’re making a big decision that involves spending a lot of your money — money that could go toward paying down your debt. Check out the company with your state Attorney General and local consumer protection agency. They can tell you if any consumer complaints are on file about the firm you’re considering doing business with. Ask your state Attorney General if the company is required to be licensed to work in your state and, if so, whether it is.

Enter the name of the company name with the word “complaints” into a search engine. Read what others have said about the companies you’re considering, including news about any lawsuits with state or federal regulators for engaging in deceptive or unfair practices.

Fees

If you do business with a debt settlement company, you may have to put money in a dedicated bank account, which will be administered by an independent third party. The funds are yours and you are entitled to the interest that accrues. The account administrator may charge you a reasonable fee for account maintenance, and is responsible for transferring funds from your account to pay your creditors and the debt settlement company when settlements occur.

A company can charge you only a portion of its full fee for each debt it settles. For example, say you owe money to five creditors. The company successfully negotiates a settlement with one of your creditors. The company can charge you only a portion of its full fee at this time because it still needs to successfully negotiate with four other creditors. Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you another portion of its full fee. If the company’s fees are based on a percentage of the amount you save through the settlement, it must tell you both the percentage it charges and the estimated dollar amount it represents. This may be called a “contingency” fee.

Disclosure Requirements

Before you sign up for the service, the debt relief company must give you information about the program:

  • The price and terms: The company must explain its fees and any conditions on its services.
  • Results: The company must tell you how long it will take to get results — how many months or years before it will make an offer to each creditor for a settlement.
  • Offers: The company must tell you how much money or the percentage of each outstanding debt you must save before it will make an offer to each creditor on your behalf.
  • Non-payment: If the company asks you to stop making payments to your creditors — or if the program relies on you to not make payments — it must tell you about the possible negative consequences of your action, including damage to your credit report and credit score; that your creditors may sue you or continue with the collections process; and that your credit card companies may charge you additional fees and interest, which will increase the amount you owe.

The debt relief company also must tell you that:

  • the funds are yours and you are entitled to the interest earned;
  • the account administrator is not affiliated with the debt relief provider and doesn’t get referral fees; and
  • you may withdraw your money any time without penalty.

Tax Consequences

Depending on your financial condition, any savings you get from debt relief services can be considered income and taxable. Credit card companies and others may report settled debt to the IRS, which the IRS considers income, unless you are “insolvent.” Insolvency is when your total debts are more than the fair market value of your total assets. Insolvency can be complex to determine. Talk to a tax professional if are not sure whether you qualify for this exception.

Other Debt Relief Options

Working with a debt settlement company is just one option for dealing with your debt. You also could: negotiate directly with your credit card company, work with a credit counselor, or consider bankruptcy.

Talk with your credit card company, even if you have been turned down before. Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free. You can find the telephone number on your card or your statement. Be persistent and polite. Keep good records of your debts, so that when you do reach the credit card company, you can explain your situation. Your goal is to work out a modified payment plan that reduces your payments to a level you can manage.

If you don’t pay on your debt for 180 days, your creditor will write your debt off as a loss; your credit score will take a big hit, and you still will owe the debt. Creditors often are willing to negotiate with you even after they write your debt off as a loss.

Contact a credit counselor. Reputable credit counseling organizations can advise you on managing your money and debts, help you develop a budget, and offer free educational materials and workshops. Their counselors are certified and trained in consumer credit, money and debt management, and budgeting. Counselors discuss your entire financial situation with you, and help you develop a personalized plan to solve your money problems. An initial counseling session typically lasts an hour, with an offer of follow-up sessions.

Most reputable credit counselors are non-profits and offer services through local offices, online, or on the phone. If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the US Cooperative Extension Service operate non-profit credit counseling programs. Credit card issuers must include a toll-free number on their statements that gives cardholders information about finding non-profit counseling organizations. The US Trustee Program — the organization within the US Department of Justice that supervises bankruptcy cases and trustees — also maintains a list of government-approved organizations. If a credit counseling organization says it’s government-approved, check the US Trustee’s list of approved organizations to be sure. Your financial institution, local consumer protection agency, and friends and family also may be good sources of information and referrals.

But be aware that “non-profit” status doesn’t guarantee that services are free, affordable, or even legitimate. In fact, some credit counseling organizations charge high fees, which they made hide, or urge their clients to make “voluntary” contributions that can cause more debt.

Bankruptcy. Declaring bankruptcy has serious consequences, including lowering your credit score, but credit counselors and other experts say that in some cases, it may make the most sense. Filing for bankruptcy under Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the Chapter 7 bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to pay off your debts over three to five years, without surrendering any property. After you have made all the payments under the plan, your debts are discharged. As part of the Chapter 13 process, you will have to pay a lawyer, and you must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief.

You must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief. You can find a state-by-state list of government-approved organizations at the US Trustee Program. Before you file a Chapter 7 bankruptcy case, you must satisfy a “means test.” This test requires you to confirm that your income does not exceed a certain amount. The amount varies by state and is publicized by the US Trustee Program.

Filing fees are several hundred dollars. Attorney fees are extra and vary. For more information visit the United States Courts, and read Coping with Debt.

The New Bankruptcy Laws Introduce New Challenges

The New Bankruptcy Laws Make it More Difficult to File Chapter 7 Bankruptcy

The most recent modifications to bankruptcy laws might cause it to be more challenging for you to file bankruptcy. If you’re in a higher income bracket you’ll no longer be permitted to use Chapter 7 bankruptcy. Rather, you’ll be required to file under Chapter 13 bankruptcy and pay off at least a few of your debts. If you want to file bankkruptcy, you must participate in credit counseling before you’ll be able to file. You’re likewise required to attend additional counseling in the field of budgeting and debt management. The extra counseling is a necessity to receive a release of your debts. And, since the law imposes new requirements on attorneys, you might have a more difficult time acquiring a lawyer to take over your bankruptcy suit.

5 financial hardships senior citizens face beyond retirement

Life after 60 can revolve around retirement – but thats not the only financial challenge thats likely to come up.

Many older consumers also have problems coping with debt payments, understanding their loans and recovering from financial scams, among other issues, according to a new report from the Consumer Financial Protection Bureau. The federal consumer watchdog analyzed the 103,000 consumer complaints it has received from people 62 and older since the bureau was created in 2011 to highlight some of the most common complaints.

Here are some of the most common financial struggles affecting older consumers, according to the report and discussions with financial experts.

1. Trouble keeping up with debt payments.

The move to fixed income in general can make it more difficult for retirees to cope with debt payments, be it a mortgage, student loans or credit card debt, says Mike Sullivan, a personal finance consultant with Take Charge America, a national nonprofit credit counseling and debt management agency. Debt puts a huge strain on the budget, he says, adding that some seniors are carrying more debt into retirement after years of helping children and grandchildren.

MoneyLion’s redesigned app gives personalized financial advice and instant access to personal loans

Personal finance management app MoneyLionwas created to help users save money, reduce debt and improve their credit. Today the app is being updated to provide users with more personalized information about how they can improve their financial health, as well as even faster access to personal loans.

Like other PFM apps, MoneyLion works by connecting with all of a user’s bank, credit card, student loan and other financial accounts and then providing them with information abouthow they could improve their financial health.

One way it does this is by giving users personalized recommendations to encourage positive financial behaviors. By analyzingtheir individual spending habits and credit, the MoneyLion app gives daily advice based on a user’smost recentfinancial information.

Anotherway it aims to help usersis byimproving their credit. It offers freecredit reports from TransUnion and Equifax, push notification credit monitoring and access to credit counseling and credit repair services.

Debt Consolidation, Negotiation, or Elimination: Which Should You Choose?

As of the first quarter in 2017, American household debt topped $12 trillion. The main contributors to this debt are home mortgages, auto and student loans, plus credit card debt. With mounting debt and the lowest savings rate since 2005 of only 1.9%, many consumers are desperately searching for relief.

Ads, emails, robo-calls and online pop-ups bombard consumers with debt negotiation, consolidation, and elimination plans, often giving conflicting advice. So what is the difference between these three types of debt management plans?

Debt Negotiation/Settlement

Debt negotiation companies claim that they will negotiate with a consumer’s lenders to lower the total amount of debt owed for an upfront fee. Unfortunately, some consumers who paid for debt negotiation services found out that the company never contacted their lenders, but instead, took their money and ran.

Because the debt negotiation company made it sound like they had everything under control, the consumer stopped talking directly with their lenders and ended up slipping deeper into debt.

Also, in certain situations, debt negotiation may damage your credit further.

According to DaveRamsey.com, “When you use one of these companies and then try to get a Conventional, FHA, or VA loan, you will be treated the same as if you had filed Chapter 13 bankruptcy. Mortgage underwriting guidelines for traditional mortgages will consider your credit trashed, so don’t do it. Real debt help is found only in changing your behavior.”

Debt Consolidation

Debt consolidation companies offer to roll up various debts allowing the debtor to make one lower payment to the company, rather than many payments to the different lenders.

While debt consolidation can make paying monthly bills more manageable, some companies tack on high fees and charge exorbitant interest rates, which means the consumer is paying much more in the long run.

Debt Elimination

Companies that offer debt elimination rely on many different schemes but they all hinge on the notion that credit lines are illegal. Debt elimination companies typically provide, for an upfront fee, a document for the lender that supposedly absolves the consumer of the debt.

Unfortunately, the document has no bearing whatsoever on the debt owed and consumers paying for such services have found that they’ve wasted money on a debt elimination scheme that would have been better spent on actually paying back their debts.

Consider the following tips, before contacting a debt management company:

  • Stay in contact with lenders and try to work out a plan with them first before enlisting outside help.
  • Always check the company out first with BBB. BBB Business Profiles on debt negotiation, consolidation, and elimination companies are available online for free at bbb.org.
  • Best practice: Start with a bona fide credit counseling service. Credit counseling services are often nonprofits that offer financial guidance for a small fee, or even for free. Reputable credit counseling services will help you create a budget plus provide coaching and training on how to manage your finances.
  • There is no easy fix for reducing debt and any company that makes huge claims and guarantees, probably can’t deliver. Sources: BBB North Alabama, bbb.org

For more details on consumer debt and advice on dealing with debt including how to manage a budget, go to Avoiding Debt-Relief Scams, The Truth about Debt Management, Microeconomic Data: Household Debt and Credit Report, Debt.com’s Personal Finance Statistics.

Alsocheck out BBB Tips on Budgeting and Credit Counseling – BBB Tip: Create a Budget and Stick to It! and BBB Tip: Overwhelmed with Debt? Understand Your Options.

BBB New Release:Debt Consolidation, Negotiation, or Elimination: Which Should You Choose?

If you would like to report a scam, call your BBB at 256-533-1640 or go to the BBB Scam Tracker. To find trustworthy businesses, visit bbb.org.

Pros and cons of a credit card balance transfer

A credit card offer that features a low- or 0 percent-interest introductory period on debt transferred from another credit card can be an efficient way to vanquish a large credit card balance over time without shelling out any (or very little) interest. Its also the only practical way to pay off one credit card with another. Credit card companies wont allow you to directly use a credit card to make a monthly payment.

Who should (and shouldnt) get one?

These cards are typically designed for and offered to individuals with good to excellent credit. You may not qualify if your credit isnt in tip-top shape. If you have damaged credit, a personal loan might be a better option, particularly if you can find a fixed-rate offer that is lower than your credit cards annual percentage rate.

Balance transfer cards are ideal for individuals struggling to pay off the principal of their credit card debt due to high monthly interest payments. With balance transfer cards, you can make one low-rate monthly credit card payment instead of several.

If you can really keep yourself on a budget . (a balance transfer credit card) can be a useful tool for paying down debts, says Thomas Nitzsche, a certified credit counselor and communications lead at Money Management International, a Sugar Land, Texas-based nonprofit credit counseling agency.

But if youre simply transferring balances from card to card, the new one wont eliminate your debt woes. In fact, you could wind up exacerbating them because balance transfers often involve fees and could carry high go-to interest rates once the introductory period is over.

You have to do a balance transfer for the right reasons, says John Ulzheimer, a nationally recognized credit expert formerly of FICO and Equifax. To do it to tread water for another 12 months before sinking is not worth it. To tread water while aggressively paying down your debt in 12 months – thats the right strategy.

Tips on balance transfer cards

Before jumping at an offer, read the fine print and calculate the costs. The key figures are the:

– Introductory interest rate.

– Annual percentage rate (APR) after the intro rate.

– Balance transfer fee.

– Minimum monthly payment.

Under federal law, the teaser rate must last at least six months. Many balance transfer credit cards will offer introductory rates for longer periods, anywhere from 9 to 18 months or sometimes even longer, Nitzsche says.

Use a credit card balance transfer calculator to figure out if youll be able to pay off the balance in full before the promotional period ends. Otherwise, you may end up paying a much higher rate on your credit balance.

In addition, stay away from using the card for further purchases while paying off the balance. Its important to steadily reduce your credit card balance on a monthly basis.

Dont forget to add in the cost of the balance transfer fee, which is typically around 3 percent of the balance. Also factor in what the new cards minimum monthly payment will be; often, its a percentage of the balance transfer.

Can I qualify?

Even if all the numbers pan out in favor of a balance transfer, you still have to qualify. That means you should have a good idea of what your credit looks like before applying.

Those with stellar credit (750 or above) will likely qualify for the best teaser rates. If your credit score falls below that, you may get a higher teaser rate, but it still may be lower than what youre paying now.

You have to set your expectations within the realm of reality, says Bruce McClary, vice president of public relations and external affairs with the National Foundation for Credit Counseling.

5 Lowest 15-year Mortgage Rates

Obtaining a 15-year fixed rate mortgage instead of a traditional 30-year mortgage means homeowners can save thousands of dollars in interest. One drawback of a 15-year mortgage is that consumers will be locked into higher monthly compared to a traditional 30-year mortgage or a 5 or 7-year adjustable rate mortgage, which could put the squeeze on homeowners when times are tight, said Bruce McClary, spokesperson for the National Foundation for Credit Counseling, a Washington, DC-based non-profit organization.

Cornerstone to honor Topeka banker for dedication to affordable housing

She will be the guest of honor at Cornerstone’s annual Housewarming Party fundraiser from 5:30 to 8 pm Thursday at the Kansas Expocentre’s Heritage Hall.

As lead banker at Capitol Federal for the Topeka Opportunity to Own (TOTO) loan program, Carter has frequently worked with Cornerstone’s tenants, Palmer said.

“She’s excited about what she does, and she works very hard to turn people into homeowners, and some of those have come through Cornerstone,” he said.

Cornerstone is an affordable housing provider that serves the “working poor.” Nearly 80 percent of its tenants don’t receive a government rent subsidy, according to its website.

Because Cornerstone owns all of its properties, Palmer said, its tenants become TOTO program homeowners. Through Housing and Credit Counseling Inc., they receive training on how to be a homeowner, such as upkeep and minor repairs, Palmer said. Once approved, he said, they “work with a lender, and that lender is usually Paulean Carter.”

Chris Burk, manager of HCCI’s credit counseling department, said one client’s experience captures Carter’s personality in a nutshell.

Before approving people for home loans, Burk explained, Capitol Federal wants to be able to see four lines of credit a person has had for at least a year to show how well they pay their bills. Sometimes they are willing to consider nontraditional types of credit, he said. One client had difficulty coming up with a fourth line of credit.

“The fourth one that Paulean was able to convince the underwriters to look at and accept was the lady’s church tithing that she’d been doing pretty much all her adult life, and used that as a line of credit,” Burk said. “That way, this lady was able to get the home loan.”

He said Carter “goes the extra mile” to help people get approved for home loans and to explain things to them, such as how they can improve their credit.

“She really cares about her clients,” Burk said.

Palmer said Cornerstone is excited to be giving Carter the award because of her years of dedication to affordable housing in Topeka.

This is the fifth year for Cornerstone’s Housewarming Party event. Awards previously have been given to people with strong connections to Cornerstone, Palmer said, but this year the committee expanded its search to people who have spent their careers dedicated to affordable housing. Carter’s name “came to the top of the list,” he said.

The Housewarming Party helps defray some costs of Cornerstone’s transitional housing program, in which people who are homeless may be referred by an agency for short-term stays during which they pay greatly reduced rent. The program aims to help people get back on their feet and move into Cornerstone’s affordable housing program or to other permanent housing.

Twenty-three of Cornerstone’s 175 housing units across Topeka are dedicated to housing people experiencing homelessness, according to Cornerstone’s website.

Tickets to the fundraiser cost $35 and are available in advance by calling (785) 232-1650 or emailing Palmer at chris@corner1.org. Tickets also will be available at the door.

Contact reporter Samantha Foster at (785) 295-1186 or @samfoster_ks on Twitter.