|Posted on July 10, 2018 at 2:20 PM||comments (17)|
Did you know that credit card debt can be harmful to your health? While it’s difficult to imagine anyone creating harm for themselves when using their credit cards, this should give you pause if that next purchase adds to a seriously overweight credit card balance. In that respect, knowing how to pay off credit card debt is no different than going on a life extending diet.
Today, the growth in debt is linked to the growing gap between the increase in the cost-of-living and income growth. In 2016, the growth in medical and housing costs far outpaces income growth, making it difficult for many families to keep up without relying on credit cards. With that being said, accumulating debt opens the discussion of paying down that debt.
The Importance of Paying Off Your Credit Card Debt Early
For many people that don't know how to pay off credit card debt, the use of credit card debt has been a short-term solution to a temporary problem that could have long-term consequences. But, because it is an expensive form of debt, it eventually becomes a problem. With too much credit card debt, many households can only afford to make the minimum payment on their bill, which almost guarantees the problem will be around for many years.
The Minimum Payment is Not Your Friend
Most people understand that you should make more than the minimum payment on your credit card bill unless you truly have a credit card debt wish. But other people don't know how to pay off credit card debt, so they don't realize how damaging the issue can be. The minimum payment is the absolute smallest amount you are allowed to pay off on your credit card balance each month to avoid any late fees or negative marks on your credit. However, depending on how your credit card issuer calculates it, the minimum payment will barely cover the current interest charges, with very little applied to your balance.
The minimum payment is calculated in one of two ways: The percentage method or the percentage + interest + fees method. The percentage method is a flat percentage of your total balance. The typical percentage ranges between 1% and 3%. So, if your card balance is $1,000 and the percentage charged for a minimum payment is 2%, your minimum payment would be $20.
With the second method, the credit card issuer combines the flat percentage fee (between 1% and 3%) with any outstanding charges and fees. So, for the same card balance of $1,000, if you had any late fees from the previous month they would be added along with interest charges. This method could have the effect of paying down your balance a little faster, but it will still be a long road.
With either method, the minimum payment could be a flat dollar amount if the calculated minimum payment falls below that amount. To know exactly how your minimum payment is calculated, you need to read the terms and conditions of your credit card agreement.
To put it terms of real numbers, consider a credit card balance of $5,000 with an annual percentage rate (APR) of 15%. If your minimum payment is calculated based on a flat percentage of 1%, your minimum payment would be $112.50. At that rate, it would take 266 months, more than 22 years to pay off, and you will have paid nearly $5,800 of interest along the way.
That should be an incentive for anyone to, at the very least, pay more than the minimum payment each month. But there are equally compelling reasons for going much further to try to pay off your credit card debt completely in as short a period of time as possible.
Credit Card Debt, the Dream Killer
Carrying a high amount of credit card debt for any length of time can be a dream killer, especially if you don’t have an income that exceeds your debt. If it hasn’t already, it will begin to hurt your credit score, especially if your credit utilization ratio is much over 50%. Your chances of qualifying for any type of loan diminish, which could keep a new house or a new car out of your reach. And your credit card payments, which could increase more if interest rates rise, will prevent you from saving for critical goals, such as a college education for your children or your retirement.
The Best Investment You Can Make
The good news is that this is a fixable problem. Even better, once you start on a path of paying down your credit card debt, the process can start to snowball, picking up speed along the way. That’s because each dollar you pay off towards your debt reduces the amount of interest you will pay off over the long term.
It is kind of like the compounding of interest in reverse. With compounding interest, your money earns interest and then the interest earns interest, compounding the growth of your money over time. In reverse, the interest you no longer have to pay off on a declining balance frees up more money to pay off principal. Over time, as your principal balance declines, so do the interest charges.
The effect of paying down your principal along with your interest is the same as earning a return on your money, but it can be a much better return than if you invested in the stock market. If you invested $200 a month in the stock market, you could expect to earn around 8% per year, which has been its average over time. The same $200 applied to paying down your credit card balance would reduce your interest charges at a rate of 15%, or whatever the APR is.
That is nearly double the return. The difference is, after a period of time investing in the stock market, you will end up with an accumulation of capital. At the end of a period of time paying down your credit card debt, you will end up with no debt. That is another big incentive for never going into credit card debt again.
As the process matures, you will begin to see your cash flow increase. If you focus on paying off your smaller balances first, you will free up cash flow more quickly. But that excess cash flow should be added to your planned monthly payment on all of your credit card debt. So, if your total monthly payment for all of your credit cards was $350, and you suddenly have an extra $75 from paying off one of the cards, your new planned payment for credit card debt should be $425.
By maintaining your planned monthly payment, and increasing it whenever you can, you can easily accelerate the elimination of your credit card debt to a much shorter period of time. But, it will take planning and a lot of discipline to stay on course. If you can envision that extra cash flow becoming available for things like saving for a car, a down payment on a house or for retirement savings, it becomes the motivation for staying on course.
Using Balance Transfers to Pay Off Debt Early – Make Sure You Have a Plan
If you still have a decent credit score, you may qualify for a 0% introductory rate balance transfer card, but this option comes with a big caveat. First, unless the introductory period is for at least 12 months, you will likely find yourself simply kicking the can down the road. If, for example, the introductory period is just six months, and there is little likelihood of your paying off the transferred balance, it could end up costing you more. Not only might the post-introductory APR be higher than your current rate, many balance transfer cards will retroactively charge interest on the amount that you already paid. For people with less than very good or excellent credit, balance transfers offers can be nothing more than a trap. You may be offered a 12 or 18 month 0% rate, but you may be issued one with only six months at 8%.
Whether transferring debt to a 0% credit card is a good idea or a recipe for a bigger problem down the road depends on your specific situation. More importantly, it depends on your ability to follow through with a plan to pay off that debt. Otherwise, you could compound your problems.
It can make sense, considering that your only expense during the introductory period is the transfer fee, which can range from 3% to 5%. That’s a low cost of money when compared with the double digit interest rate you are paying on your current cards. If you are serious about getting out of debt, you should only consider the 0% introductory offer if you have a serious plan and the discipline to carry it out.
Your Balance Transfer Debt-Payoff Plan
Go as long out as you can: Any debt pay off plan needs an adequate amount of time to succeed. You should only consider offers with at least a 12-month introductory period. Anything less may be too difficult to budget for, especially if you have been having trouble meeting your current payments. Plus, the longer the introductory period, the lower your actual cost because the transfer fee can be amortized over a longer period of time.
Some cards are offering introductory periods of 15 to 18 months, which will give you more room to utilize the 0% interest rate. But, under no circumstances should you keep applying if you get denied for a longer term card. When the banks see too many credit inquiries at one time, you will be considered a higher risk.
Budget like you mean it: Before applying for a card, it is imperative that you establish a strict budget that reprioritizes your expenditures towards credit card debt payments. In other words, you should be willing to sacrifice a few luxuries to ensure that you will be able to meet your plan requirements. If your plan requires that you make a $500 payment each month, then that should be your first priority item and the rest should be budgeted around that. Your budget should include a cash flow projection which shows how your payments will be maintained throughout the year.
If you don’t want to see a repeat of this credit card debt situation next year, you should also budget for setting aside $100 or more each month in an emergency fund that you can use for un-budgeted expenses or for holiday shopping.
Don’t use the card for any other purpose: Most introductory rate cards only offer a 0% rate on the balance transfer, not on purchases or cash advances. Using your balance transfer card for any purpose beyond transferring high cost credit card debt to low cost debt, will blow up your plan. Put the card on ice (literally put it in the freezer), and don’t use any credit cards unless you have budgeted for paying the balance in full each month.
Do not reduce your monthly payment: When you receive your monthly bill for your balance transfer card you will be pleasantly surprised to see how low your minimum payment requirement is. It could be half as much or more than what you had been paying. That’s because there are no current interest charges. So, your whole monthly payment will go towards reducing your balance. To make this plan work, you need to continue with your planned monthly payment. In fact, this is your opportunity to eliminate the balance if you can find some more money in your budget for the next 12 to 18 months.
The key to a positive balance transfer experience is to make it a part of your budget process and cash flow management. The goal should be to lower costs and increase cash flow while paying down debt. It is essential that you pay off more than the minimum due with an aim towards paying off the transferred balance before the end of the introductory period.
If you are unable to do so, your minimum payment will jump dramatically and you may be required to pay accumulated interest charges. If you are able to pay down the balance, you will then be in a position to transfer another high interest balance. This can go on as long as you maintain a good credit standing and you make more than the minimum payment on your transferred balance.
Using a Personal Loan to Payoff Credit Card Debt Early
If you have access to lower rate debt, such as a personal loan, it might make sense to borrow lower cost debt to pay off higher cost debt. But it is critical that you stick with your debt pay off plan and target date. Although replacing credit card debt with a personal loan may make sense in some circumstances, it should always be done with careful consideration of the potential drawbacks. Here are a few things to think about when deciding whether to use a personal loan to pay down your credit card debt.
When a Personal Loan is a Good Idea
Lower Your Interest Rate
If you are able to replace 18% to 29% debt with 4% to 12% debt, it would make sense to do so. As a general rule of thumb, if you can lower your overall interest rate by 2 percentage points, it would be worth considering. The issue is whether you can qualify for less expensive debt. If you have been able to maintain a good credit standing, you might be able to qualify for a personal loan with a bank or credit union, with a loan rate of 4% to 10%. If you have less than great credit, you could try applying with an online platform lender like LendingClub or Prosper. They might be happy to approve a personal loan for you, but you might be looking at rates between 12% to 29%.
Consolidate Credit Card Debt
For some people, having to manage multiple credit cards can be a problem in and of itself. It is easier to manage just one payment per month. It can simplify your budgeting and make it easier to commit to a long-term plan. The plan will blow up, however, if after you consolidate your balances into a personal loan, you continue to accumulate balances on your credit cards.
Repay Debt Faster & Earlier
Most personal loans are issued with a fixed interest rate and a fixed term of three to five years. That provides you with a set target date, which is the motivation most people need to focus on a goal.
When a Personal Loan Is a Bad Idea
You Still Can’t Control Your Spending
Replacing one debt with another is not a good idea if you still haven’t addressed the underlying behavior which got you into the problem. At best it would be kicking the can down the road a bit. At worst, it can balloon into a bigger problem. Your debt is only a symptom of a larger problem which is uncontrolled spending or trying to live beyond your means.
You Don’t Have the Discipline to Stick to a Plan
Replacing your credit card debt with a personal loan could lower your monthly payments, but if you don’t have the discipline or fortitude to stick to a plan, it could be for naught. If you were able to lower your monthly credit card debt payment from $600 to $450, the question becomes, “what will you do with the extra $150?” If you have the discipline to apply it to your loan to pay off your debt even faster, then it makes sense. If not, then you really haven’t improved your situation.
Your Debt is Out of Control
If your credit cards are maxed-out, you could have trouble qualifying for a personal loan with a reasonable interest rate. You may be better off seeking debt counseling which can also offer the opportunity to consolidate your credit card debt payment under better credit terms.
Should You or Shouldn’t You?
In considering the use of a personal loan to replace credit card debt, it comes down two things – the math and your behavior. If you can lower your costs and shorten the amount of time to pay off your debt, the math works. However, if you struggle with changing the behavior that got you into debt, a personal loan may turn out to be just a temporary fix.
Negotiating with Your Credit Card Company
Credit card companies, whether a credit union or a bank, are known to negotiate on certain things. The better your standing with the company, the more they might be willing to negotiate on such things as a credit line increase, a change of due dates, waiving a late charge or lowering a minimum payment.
Lowering Your Interest Rate
On issues that could help you pay off your credit card debt faster, the only one that could possibly be negotiated is your interest rate. To even stand a chance at getting an interest rate reduction, you need to have an impeccable payment history and a very good to excellent credit score. Short of that, it may not be worth the effort. However, if you are able to do so, you could cut your interest costs, which will enable you to apply more money to paying off the balance.
Say you have a credit card you obtained several years ago when you had less than great credit. Since then, your credit has improved and you’ve made on-time payments. Very rarely will a credit card company offer to lower your interest rate. But, if you call and present your case as to why you’ve earned a lower rate, they might consider it. It might help to mention that you’ve been offered a lower rate credit card from a competitor. The credit card company is under no obligation to comply with your request. However, they also don’t like losing a good, profitable customer to a competitor.
On the other hand, if you want to negotiate a settlement or workout plan of some sort, it means you are in bad financial straits and can no longer make the payments. That is a different kind of negotiation altogether. In many cases, the credit card company won’t entertain such arrangements until you are already behind on your payments. If you need to go this route, you should first know what exactly these arrangements can do for you and how to position yourself for a successful negotiation.
Lump Sum Settlement
If you’re hoping to negotiate for a lump sum settlement where you can pay off your credit card debt for less than you owe, you won’t have any luck until you've been behind on your payments for a while. In fact, you may not be able to get a credit card company to work with you until it is clear you have no other option than to apply for bankruptcy. The credit card company would prefer to settle for less than to lose it all through a bankruptcy discharge.
To successfully negotiate a lump sum settlement, you will need to have access to a lump sum of money. Say you are able to negotiate a $5,000 credit card balance down to $2,500. The creditor will want the total amount to settle. In most cases, they will allow you pay it over three installments. Be sure to get the settlement agreement in writing and confirm that the settlement amount satisfies your bill.
Be aware that a settlement for less than what you owed can result in a tax on the amount forgiven. If $5,000 is owed, and $2,500 is forgiven, you will owe taxes on the difference.
If you can negotiate a workout arrangement, you could have your interest rate reduced or eliminated. During this period, the bank may also stop assessing late fees or over-limit charges. You can also see if the bank will forgive past fees to reduce your balance.
While a workout arrangement could lower your payments, it won’t do anything to pay off your credit card debt faster unless you are able to come up with more money each month to apply toward your balance.
Getting a Second Job or Side Income to Pay Off Debt
All of the credit card debt reduction solutions presented thus far center on reducing your costs. For many people, another solution to consider in conjunction with lowering costs might be to increase their income, which can be applied to debt reduction. That might mean taking on a second job or a side gig with low pay initially, but the effect on your debt reduction will be significant.
If you’re paying 18%, 23% or 29% on credit card debt, each dollar you contribute to paying off the balance reduces your exposure to those high rates. In effect, the reduction in your exposure to high interest rates works out to be an increase in the marginal wage you’re earning. So, even an $8 an hour wage can have an outsized impact on your financial situation.
Fortunately, second job or side gig opportunities to explore are more plentiful than ever in today’s economy. Here’s a few of the more popular or unique ones to consider.
The digital world is creating an entirely new ecosystem of jobs that can be performed from anywhere there is an Internet connection. One of the more popular is being a virtual assistant. Virtual assistants perform any number of office functions, such as bookkeeping, payroll, and administrative duties, all from the comfort of their home and often on a flexible schedule.
Any office experience is helpful along with working knowledge of computers and the use of Microsoft Word, Excel, and PowerPoint. Aside from searching the jobs section on Craigslist, you can get your foot in the door through freelance sites such as Upwork where you can bid on hundreds of jobs. You should expect to start at the lower end of the pay range – between $8 to $12 an hour – but, with experience, you can earn up to $40 per hour.
The sharing economy has opened many new avenues for people to earn money on their own. Perhaps the biggest opportunity to earn decent side money is as an Uber or Lyft driver. Using your own car, you can drive on the meter anytime you want, earning as much as $1,500 a week depending on your availability. As a side gig, it would be fairly easy to pick up a few hundred dollars a week to put towards credit card debt.
Sports Referee or Umpire
If you like sports, you can spend your nights and weekends working as a referee for various sports leagues. Each sport has its own association from which you receive training and certification. At the sub-varsity level in high school you can earn $30 to $40 a game. At the varsity level you can earn $80 to $200 a game. During a typical weekend tournament you might umpire five to ten games.
You’re Only Limited by Your Creativity and Desire
The opportunities for earning money on the side are almost limitless. Anyone trying to understand how to pay off credit card debt can find something they enjoy on the side to help them pay off some of their debt.
At the End of the Day, It's Up to You
This guide offers several actionable strategies for paying off your credit card debt early. However, nothing happens until you put a plan together, set a target and commit to hitting that target. This could include any one or a combination of these strategies. To ensure your success, it would be important to change the patterns of behavior that created your credit card debt problem. As part of your plan, you should commit to the following:
Live Under Your Means
Your credit card debt reduction plan will be nearly impossible to achieve without additional cash flow. Going forward, you need to commit to a strict plan with an emphasis on reducing unnecessary spending. To save yourself thousands of dollars in interest and improve your financial security, you can afford to make a few sacrifices for a few years.
Put Your Credit Cards on Ice
Somebody somewhere came up with the idea of putting your credit cards in a baggy of water and placing it in the back of the freezer. The concept being that if the temptation ever arose to use them, by the time they thawed, the urge would pass. At the very least, you need to distance yourself from your cards. It is not recommended that you cancel any credit accounts, except perhaps your retail accounts. If you feel you have the discipline, you can carry one around for emergencies.
This article originally appeared on LendEDU.
|Posted on April 10, 2018 at 4:35 PM|
WILL NEW BILL HELP PEOPLE FILING FOR BANKRUPTCY DUE TO MEDICAL DEBT?
A new bill seeks to change the laws governing medical debt bankruptcies, which represent a substantial proportion of bankruptcies in the U.S.
Many people in Irmo, South Carolina, have struggled with medical bills at some point; today, even people with insurance may find it difficult to keep up with rising healthcare costs. According to CNBC, medical debt was identified as a leading cause of bankruptcy in the U.S. during a 2013 NerdWallet study. A recent report from the Consumer Financial Protection Bureau confirmed that over half of bankruptcy cases sent to collections involve medical debt.
Despite the passage of the Affordable Care Act, medical debt remains a substantial problem. Even seemingly reasonable medical costs, such as prescriptions and annual deductibles, can accumulate into substantial debt over time. Unfortunately for people who file for bankruptcy, the filing process and long-term consequences can be unfavorable for people with medical debt.
Unique aspects of medical debt
Medical debt is distinct from other types of debt, The Huffington Post points out. In most cases, people do not know what their healthcare expenses will be when they decide to seek treatment. Even if a rough price is known, unexpected costs often increase the final amount due. Some debtors do not even realize they owe money until they receive notification from a collections agency or notice the debt on their credit report.
According to the same article, people with medical debt often do not fit the profile of a typical debtor. A CFPB survey of 5 million people found that those with medical debt were more likely to repay their debt than people with the same credit score who had other forms of debt. This suggests that credit score decreases may penalize medical debtors too harshly, and that measures, such as credit counseling, may not be necessary for those with medical debt.
In recognition of the differences between medical debt and other types of debt, two senators have introduced a new bill, the Medical Bankruptcy Fairness Act of 2014, which would address some of these issues.
The bill would make three key changes to make it easier for medical debtors to file for bankruptcy and move on afterward. According to the bill text, these changes are:
Allowing debtors to forgo credit counseling. This counseling is currently mandatory, but it is not typically helpful to medical debtors, who often have little real control over the debts they accrue.
Letting debtors exempt $250,000 in property, making it easier for debtors to keep their homes. Currently, most debtors can only keep their homes by filing Chapter 13 bankruptcy, which involves a court-ordered repayment plan.
Allowing forgiveness of student loans in certain cases. Currently, debtors can rarely discharge student loans through bankruptcy, even if they have additional forms of debt.
The bill was assigned to a Congressional Committee in June. If the measure ultimately passes, it may help people struggling with medical debt substantially.
In the meantime, anyone considering filing for bankruptcy to relieve medical debt should meet with an experienced attorney. An attorney can provide advice on the different chapters of bankruptcy and help people understand the likely long-term outcomes of filing.
Keywords: bankruptcy, Chapter 7, Chapter 13
|Posted on April 10, 2018 at 4:35 PM|
DEBT A MOUNTING PROBLEM FOR AMERICAN RETIREES
Retirement is supposed to be a time to relax and enjoy the fruits of a career's worth of work. Unfortunately, the recent recession has taken a huge toll on the investments that many Americans were counting on to fund their retirements.
This means that a lot of Americans may face the prospect of not having enough to live on during retirement. In fact, a recent survey conducted by TD Ameritrade found that nearly three-quarters of all Baby Boomers plan to place significant reliance on their Social Security payments during retirement. However, the average Social Security check is only $1,230 per month, which may not stretch as far as many retirees will need it to.
The problem is even further compounded by the fact that so many seniors are coming into retirement with debt. The federal Survey of Consumer Finances showed that almost 65 percent of Americans over age 64 had mortgage debt in 2010. By contrast, only about 27 percent of seniors still owed money on their mortgages in 1989. During this same period, the average outstanding mortgage debt nearly tripled.
Credit card debt is also an issue for older Americans. A survey conducted by AARP found that more than one-third of respondents used credit cards to fund basic living expenses like food, utilities and housing payments. The average debt load was approximately $8,248.
All of these things can lead to significant financial problems, including bankruptcy. The National Foundation for Credit Counseling says that nearly one-third of its clients who end up filing for bankruptcy are over age 55.
Financial health during retirement
Filing for bankruptcy is not a sign of failure. Economic conditions for retirees are worse now than at almost any other point in recent history. In many cases, bankruptcy can offer a solution to unmanageable debt and a fresh start that allows retirees to focus on enjoying their golden years.
With that said, most people would prefer to avoid getting into a situation where bankruptcy is necessary. While no one can control the economy, there are some steps people can take to help secure their financial health during retirement:
- Set a budget: Retirement means living on a fixed income. This lifestyle will be easier to adjust to if you set a realistic budget and stick to it. It's also a good idea to avoid carrying a balance on a credit card, since interest charges can add up quickly.
- Streamline your expenses: Stop paying for things you don't need. If you don't watch much TV, then don't pay for cable. If you hardly ever use your cellphone, don't buy the most expensive plan.
- Evaluate your insurance: Most people don't need to pay for life insurance once they reach retirement age, so long as they have a good estate plan in place. However, having sufficient home and auto insurance can help protect against unanticipated expenses.
- Manage travel expenses: Traveling is one of the most fun parts of retirement. It is also one of the most expensive. It's worth taking the time to plan and shop around in order to save money.
If you do get into financial trouble, know that help is out there. An experienced bankruptcy attorney can work with you to review your financial situation and make a plan to get you back on your feet.
|Posted on April 10, 2018 at 4:30 PM|
BANKRUPTCY AN OPTION FOR SOUTH CAROLINIANS STRUGGLING WITH DEBT
Nearly one million people filed for personal bankruptcy in the United States during the first three quarters of 2012. Many people in South Carolina go through bankruptcy in order to make ends meet and relieve themselves of demanding debts.
Chapter 7 bankruptcy
The purpose of bankruptcy is to give a person struggling with debt a fresh start by discharging certain debts. Chapter 7 bankruptcy allows people struggling with debt to liquidate their assets and pay off creditors. The assigned bankruptcy trustee will put together all of the person's assets, sell all of the assets that are considered nonexempt and use the proceeds to pay creditors.
This discharge is only for individuals. After bankruptcy, the individual is no longer liable for the debts that were discharged. Once a bankruptcy petition is filed, an automatic stay is issued, which means that creditors must stop all collection efforts until a court order is issued or the bankruptcy case is resolved.
A person filing for bankruptcy must provide the court with a wealth of information regarding their finances, including a schedule of assets and debts, information about current income and current expenses as well as a financial affairs statement. If people are filing for bankruptcy individually, they still must provide the same information for their spouses. Some types of property are exempt from creditors; state law varies as to what types of property are exempt.
The bankruptcy case trustee
Each bankruptcy case will be assigned a trustee whose role is to liquidate the assets in order to maximize the payoffs to the creditors. The trustee holds a meeting within 21 to 40 days after the filing of the petition is filed. The meeting will include the trustee, the person filing for bankruptcy and the creditors that wish to attend. The debtor is put under oath and asked questioned by the trustee and the creditors about the assets, debts and other financial issues. The trustee will also request financial documents from the debtor. The debtor will also be questioned by the trustee to make sure that the implications of going through bankruptcy are understood.
Approval or disapproval of discharge
After the meeting is completed and all the necessary documents are gathered, the court will make its decision. The grounds for disallowing discharge are quite narrow. For example, if the debtor provided the court with inaccurate information or refused to cooperate with the trustee, the discharge may not be approved.
Individuals struggling with financial hardship should contact an experienced bankruptcy attorney to help them through the process. A bankruptcy attorney will help an applicant gather necessary information for the bankruptcy petition, help create schedules and report expenses and petition the court for discharge of debt at the conclusion of a Chapter 7 or Chapter 13 bankruptcy.
|Posted on April 10, 2018 at 4:30 PM|
CONGRESS URGED TO CHANGE BANKRUPTCY RULES ON CERTAIN STUDENT LOAN DEBT
Many students in South Carolina and elsewhere in the United States are graduating with historic levels of student debt while also facing challenging job prospects. The dual issues of a high debt burden and low job prospects can set young individuals on a path to financial insecurity. Under today's personal bankruptcy laws, student debt is generally not dischargeable, but that may eventually change for one type of student loan.
Recently, the U.S. Department of Education and the Consumer Finance Protection Bureau urged Congress to review the bankruptcy exemption for private student loans. According to The Wall Street Journal, Richard Cordray, the CFPB chief, said it would be sensible for Congress to consider modifying the bankruptcy code, "in light of the impact on young borrowers in challenging labor-market conditions." In addition, Cordray said the law that prohibits the discharge of private student loans has not achieved the law's objectives in bringing down the costs of borrowing and providing greater access.
Experts in favor of reform believe the threat of discharging private student loans in bankruptcy will force lenders to provide borrowers with more options for financial relief in the event of economic hardship. The change may also incentivize lenders to adopt underwriting criteria that will prevent students from taking on massive educational debt. The chief operating officer of Sallie Mae also supports allowing private student loans and even public student loans to be eligible for discharge during bankruptcy. Sallie Mae, in particular, is in favor of a policy that would allow borrowers who make a good faith effort to repay their student loans over a five- to seven-year time period and still face economic difficulty to be eligible for discharge of their student loans in bankruptcy. However, many banks and private lenders are opposed to the proposed reform.
Those who oppose reform say debt forgiveness for private student loans through bankruptcy will increase the costs of student loans for all borrowers because it may raise the interest rates of student loans. Private lenders and others who are opposed argue that the root of the problem is the increasing cost of tuition.
For students with a high student loan debt burden the issue is of real concern, but under current bankruptcy rules the discharge of any student debt is extremely difficult. To discharge student loans, a debtor must show that:
He or she cannot maintain a minimal standard of living based on current income and expenses
Additional circumstances exist that demonstrate the current situation will not change for a significant portion of the repayment period of the student loans, and
He or she has made a good faith effort to repay the loans
While it may be difficult to discharge student loan debt in bankruptcy, bankruptcy protection may be appropriate for the discharge of other debt. A burdensome student loan debt payment can impede the ability to pay other obligations and debts such as car loans and credit card bills.
If you face an unbearably large debt burden, contact an experienced bankruptcy attorney to discuss your legal options for financial relief.
|Posted on April 10, 2018 at 4:30 PM|
REBUILDING CREDIT AFTER FILING BANKRUPTCY
Most people are aware of how important it is to maintain a good credit score. One of the reasons that many people who are overwhelmed with debt are hesitant to explore filing bankruptcy is the fear that it will do even more damage to their credit scores than they have already done in falling behind in paying their bills. However, those who have filed bankruptcy can take steps to rebuild their credit scores and should be aware of some common pitfalls to avoid during the process.
One of the best ways to begin rebuilding credit is to apply for a secured credit card. A person can open a secured credit card with a bank or credit union by giving the bank the amount of money equal to the credit limit. For example, if a person gives the bank $500, the card's limit is $500. After several months of reliable payments, the person can raise the credit limit by giving the bank more money. Some banks allow up to $10,000 limits on secured cards.
The cardholder must make sure that the bank will report the card's activity to the three major credit reporting agencies, however, or the card will not help a person build positive credit history. Additionally, a person seeking to rebuild credit should avoid institutions that require hefty fees to open a secured credit card, as the fees will eat up much of the credit limit before a person can make any purchases and the card will not help build credit as much.
This path will eventually lead to the ability to take out unsecured credit cards, as well. However, a person needs to be diligent in paying the balance off every month. Carrying a balance on a credit card does not build positive credit and could lead to a person spiraling into the same situation that led to filing bankruptcy in the first place.
What to Avoid
People trying to rebuild credit need to apply for new credit selectively. Numerous credit inquiries lower a person's credit score, so a person should be confident that he or she will receive credit before even filling out an application.
People should also be wary of getting credit from finance companies that charge excessive fees and exorbitant interest rates. Credit from such businesses does not look as good on a credit report as credit from a bank or credit union.
Consult an Attorney
Trying to find a solution to financial problems can be overwhelming. If you are struggling with debt, consult an experienced debt relief attorney who can discuss your situation with you and advise you of your options.