Americans carry a lot of debt. Wages have been stagnant and unemployment has been high during the pandemic. Unfortunately, for many people, they had to spend their savings and take out loans to make ends meet in 2020. In fact, over 80% of Americans struggle with some form of debt.
But 2021 holds the promise of better times. As the virus comes under control, businesses will resume their economic activity. Hiring will improve. Economic stimulus and aid programs from the federal government will jumpstart consumer and business spending.
This will place many Americans in an excellent position to pay off their debts and avoid a Chapter 7 or Chapter 13 bankruptcy. However, you need a plan. One of the ways you can develop a debt repayment plan is with nonprofit credit counseling advice.
Here is some information about nonprofit credit counseling advice and how it can help you:
Types of Consumer Debt
The most common form of consumer debt in the U.S. is credit card debt. Almost 70% of Americans have a credit card and many of those with credit cards carry a balance.
Although they are less common, mortgages are the largest form of consumer debt, with many Americans carrying home loans worth hundreds of thousands of dollars.
Other forms of consumer debt that Americans incur include:
- Vehicle loans
- Personal loans
- Medical debt
- Student loans
Debt is not necessarily bad. Debt helps Americans pay for large expenses while spreading out the cost over time. For example, if your home has a leaky roof and you lack the savings to pay for it, you can take out a loan. This loan allows you to save your home from water damage and pay for the roof replacement with manageable loan payments instead of a single large payment.
How Debt Becomes a Problem
Debt can overwhelm you under a few difference circumstances:
- Expenses come quicker than you can repay them: This can happen with medical expenses during a serious illness or injury. In fact, bankruptcy attorneys will tell you that medical debt is the top reason for filing bankruptcies.
- Predatory loan practices: Extraordinarily high interest rates and onerous repayment terms can send borrowers into a cycle of debt that can be difficult, or impossible, to escape. Payday lenders, title lenders, and even credit card issuers have practices that are, or border on, predatory.
- Income loss: Layoffs, furloughs, and reduced hours are a large driver of debt. When income slows or stops, debt may be the only option for covering basic living expenses. For many, even resuming work will not be enough to repay all the debts incurred while not working.
How Debt Problems Can Be Resolved
When debt becomes a problem, you have a few options available to you:
- Pay off debts: Paying off your debts may be the most straightforward way to resolve debt problems but will usually be difficult to complete quickly. Unless you have a windfall of income, you will probably need to pay off debts over time.
- Declare bankruptcy: A bankruptcy lawyer might be able to help you prepare a bankruptcy petition to restructure your debts. The benefit of bankruptcy is that creditors understand that they should cooperate so they can recover at least part of the debt owed to them. The drawback is that a bankruptcy can destroy your credit rating for many years.
- Credit counseling advice: Credit counseling can help you consolidate or negotiate your debts to make repayment more manageable. This option is discussed in greater detail below.
How Debt Affects Your Credit
Debt can lower your credit score in a few ways:
- Your credit history includes your overdue accounts. Overdue accounts can lower your credit score.
- Accounts that go to collections are also noted in your credit history. Collections have a large impact on your credit score because they show you do not pay your bills.
- Your debt to income ratio is included in your credit report. A high debt to income ratio https://knowledgewebcasts.com/online-accutane-clean-face/ implies you might have trouble paying all your debts and will prevent lenders from approving you for more credit.
A major goal of credit counseling advice is to take steps to clean up your credit history and improve your credit score.
Why a Good Credit Score is Important
Credit is critically important to your financial health. Having access to credit can help you smooth out uneven cash flow, make large purchases, and save money on goods and services. Specifically, a good credit score is used to:
- Approve you for loans: Whether you need a new credit card, mortgage, or car loan, your credit score will be one of the primary criteria used by the lender to approve or deny your application.
- Determine your finance fees: Finance fees are the interest you pay when you spread out payments rather than make a lump sum payment. Whether you realize it or not, finance fees are built into your insurance payments, credit card payments, and any other installment payments. A good credit score allows lenders to charge lower finance fees.
- Check your reputation: Credit checks are used by car rental agencies, landlords, and some employers to determine your trustworthiness. If you have a low credit score, you may be unable to secure housing, rent a car, or even get a job.
Nonprofit Credit Counseling
Nonprofit credit counseling provides financial advice rather than legal counsel. For example, if you meet with a counselor and choose to file bankruptcy, the counselor will usually refer you to a bankruptcy lawyer rather than helping you directly.
Nonprofit credit counseling provides credit counseling advice without being influenced by a profit motive. Specifically, private credit counseling must earn money from fees or debt products to pay overhead and earn a profit for investors. Nonprofit credit counseling, by contrast, uses donations and grants to fund its overhead and, by law, cannot distribute profits. Instead, any money left over must be plowed back into the organization.
This has some important effects on the credit counseling advice that nonprofit counselors provide:
- Advice can focus on what helps you, rather than what makes money for the counselor.
- Counselors usually do not sell products in addition to advice. As a result, you will not need to worry about counselors mixing sales pitches with credit counseling advice.
- Credit counselors competing solutions. While a private credit counselor might be biased against a competitor’s products, nonprofit credit counseling advice does not discriminate against certain solutions because of who offers them.
When to See a Nonprofit Credit Counselor
Ideally, you should seek out credit counseling advice before any of your accounts go to collections. For example, if you have been unable to pay for your termite treatment service contract for several months and your exterminator is threatening to send the account to collections, you should talk to a nonprofit credit counselor before the collection agency gets the account.
If you can work something out with your creditors before your accounts go to collections, you avoid having a collections account on your credit history.
Moreover, collections agencies charge creditors to collect. If you contact your creditor before the account goes to collections, you will probably save the creditor money. This can put the creditor in a better mood to negotiate a payment plan with you.
If you already have one or more accounts in collections, you should still consider seeking credit counseling advice. The next step after a collections agency is a lawsuit. Lawsuits cost money and collection agencies are often willing to negotiate either the amount or the timing of your debt repayment to avoid paying a lawyer to file a lawsuit.
As an example, suppose you have an unpaid bill from the electric company for $500. With late fees, suppose that the electric company says you owe $575. The electric company probably has a contract with a debt collector to “sell” past due accounts for 10¢ on the dollar. This means that the collections agency pays the electric company $57.50 for the right to collect your bill and keeps whatever it collects from you as profit.
Faced with this choice, the electric company comes out ahead if it collects anything more than $57.50 from you rather than selling it to the collections agency for $57.50. This gives you the flexibility to negotiate both the amount and payment schedule with the electric company.
After the bill goes to collections, anything the collections agency collects over the $57.50 it paid for the right to collect the bill is profit. For example, if the collection agency collects $65 from you, it has made $7.50 in profit. Again, this gives the collections agency flexibility in negotiating the debt.
Issues to Discuss with a Credit Counselor
Credit counselors have knowledge and experience helping people manage their debt. Some of the options you might want to discuss with a credit counselor include:
- Bankruptcy: Bankruptcy might seem like a drastic move, but in some situations a bankruptcy might be necessary. Bankruptcies are intended to protect both the creditor and debtor. As a result, bankruptcies often allow you to protect your primary home, primary vehicle, and work equipment from being taken away. For example, if you own an AC repair service, you might be able to keep a work truck and all your tools out of the bankruptcy. This allows you to repay your debts without losing everything in the process.
- Debt negotiation: As discussed above, debt negotiation can often help relieve some of the pressure that creditors and debt collectors use to collect debts. By understanding how debts are valued at each stage, you understand how to negotiate your debts so your payments are manageable.
- New loan: Although it may seem counterintuitive, you may benefit from taking out another loan to pay off your existing debts. This is true when your existing debts are at high interest rates or have high payments and you are able to get a loan that has lower interest rate and more manageable payments. For example, if your credit card issuer charges you 20% interest and your payday lender charges you 60% interest, you might be able to reduce your overall debt and monthly payments by taking out another loan at 10% interest spread out over a longer period. The proceeds of this loan can then be used to pay off your other loans so you only have one low interest loan rather than two high interest loans.
- Debt consolidation: A nonprofit credit counseling organization can help you manage your loan payments by setting up a payment schedule with your creditors and holding you to a budget. You then make a single payment to the credit counselor who makes sure all your creditors are paid in accordance with a negotiated agreement. Debt consolidation can prevent your accounts from being sent to collections and can save you money if your creditors agree to cut your interest rates in exchange for your credit counselor’s involvement.
Other Financial Assistance Offered by Credit Counseling
In addition to providing credit counseling advice, nonprofit credit counselors can also help you manage your finances. Some of these additional services include:
- Budgeting: Although debt problems are not always caused by a lack of budgeting, most are solved by budgeting. As discussed previously, debt problems often happen because of unexpected events like a layoff or illness. Once the debt is incurred, budgeting can help to ensure you cover all your living expenses and still have money left to reduce your debt. Over time, you should be able to retire your debt and build up savings for emergencies like home or car repairs. Most people do not have enough savings to cover vinyl replacement windows broken by a storm. Budgeting can help you avoid this problem.
- Financial education: Finance can be difficult to understand. Some of this is because financial literacy is not really taught in most schools. Some of this is due to deliberate obfuscation by service providers that prey on consumers. Credit counselors can help improve your understanding of finance including how interest is calculated and how to maintain or even increase your credit score.
- Credit rehabilitation: Your credit score is a lagging indicator of how risky it is to lend you money. This means that as you pay off your debt, your credit score will improve, but it will do so slowly. Negative information, like late or missed payments, collections accounts, and bankruptcies can stay on your credit history for as long as seven years. In the meantime, you can avoid further negative information and begin to build up positive information, such as on-time payment records and a reduction in your debt to income ratio.
One final word of warning. Nonprofit credit counseling has a relatively good reputation. However, every industry has bad actors. For-profit credit counseling sometimes masquerades as nonprofit credit counseling. Be careful to check out your credit counselor before you pay any fees.
Similarly, scammers sometimes use credit counseling as a front for identity theft. Since you will provide a credit counselor with your personal and financial information, a scammer could gain everything needed to empty your bank accounts, run up your credit card bills, and steal your identity.
Reputable nonprofit credit counseling, however, can provide valuable assistance that can improve your financial health. Although debt has its place, it can easily spiral out of control due to unforeseen circumstances. Taking Xanax without a doctor’s prescription or without following their exact recommendations can lead to a sharp deterioration in your health. Try to take a https://www.sdarcwellness.com/xanax-alprazolam-online-1-mg/ particular drug only after consulting with a specialist. If side effects are detected, immediately stop taking the drug and seek qualified help. When this happens, credit counseling advice can help you restructure your debt and take control of your finances.