Avoid These Debt Reduction Pitfalls


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Carrying a lot of debt almost seems to be the American way. But the challenges debt can pose are no laughing matter. Debt has the ability to negatively affect your future plans, outlook on life, ability to retire comfortably, and even enjoyment of life.

Unfortunately, many of us know from experience just how much impact debt can have on one's life. Yes, debt is one of life's great stressors.

Consider how much better you would feel if your debt were completely eliminated. You would be free to spend your money on whatever you want rather than debt payments. Oh, what a different, liberating lifestyle you could have! Getting out of debt can be one of the very best things you can do for yourself and your family.

Eliminating your debt requires conscious effort and a plan.

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Avoid These Debt Reduction Pitfalls

  2. 2. DEBT: A STRESSFUL WAY OF LIFE  Debt has the ability to negatively affect your future plans, outlook on life, ability to retire comfortably, and even your ability to enjoy life.  Consider how much better you would feel if your debt were completely eliminated.
  3. 3. MANAGING DEBT WITHOUT THE REPERCUSSIONS  Rather than being a slave to debt, you can effectively manage and eliminate it.  Identify the way that’s best for you and avoid the pitfalls that could come with your choice. Your answers to debt elimination are only a click away.
  4. 4. 6 OPTIONS FOR ELIMINATING DEBT Debt settlement Debt consolidation (home equity) Credit counseling Chapter 7 Bankruptcy Chapter 13 Bankruptcy Unsecured debt consolidation loan
  5. 5. KNOW THE DANGERS OF DEBT ELIMINATION SOLUTIONS  Potential Pitfalls: Credit Taxes Cost Time Potential for Legal Action
  6. 6. “Rather go to bed supperless, than rise in debt.” -Benjamin Franklin
  7. 7. DEBT SETTLEMENT: HOW IT WORKS 1. Stop making payments on your debt. 2. Negotiate a lesser amount than the true balance as payment in full. 3. The creditor will likely take something now rather than risk getting nothing later.
  8. 8. DEBT SETTLEMENT: POTENTIAL PITFALLS •Failure to pay is reported to credit bureaus until you pay the settlement amount. Credit •Unless you’re insolvent, balance after partial settlement is treated as taxable income. Taxes •Less expensive than other methods, except Chapter 7 bankruptcy. Cost
  9. 9. DEBT SETTLEMENT: POTENTIAL PITFALLS •Payments must be missed before creditors negotiate. •Saving sufficient funds to settle can take time. Time •Creditors may sue for non- payment. •Chances are slimmer if your assets are less than your debt. Potential Legal Action
  10. 10. “I say to you never involve yourself in debt, and become no man’s surety.” -Andrew Jackson
  11. 11. DEBT CONSOLIDATION - HOME EQUITY LOAN: HOW IT WORKS  If you’re a homeowner, you can use a home equity loan to pay off debts, providing there’s enough equity in the home.  Get a handle on your debts with a low-interest loan that’s easier to qualify for.  Pays off your debts, leaving you with a single monthly loan payment
  12. 12. DEBT CONSOLIDATION - HOME EQUITY LOAN: POTENTIAL PITFALLS Credit No negative impact Can help your credit Taxes Interest may be deductible. Check with your tax expert for advice. Cost Depends on interest rates and length of loan Keep the loan as short as you can.
  13. 13. DEBT CONSOLIDATION - HOME EQUITY LOAN: POTENTIAL PITFALLS Time Depends on the duration of the loan Potential Legal Action No risk if you repay the loan If you don’t pay: foreclosure of home
  14. 14. DEBT CONSOLIDATION - HOME EQUITY LOAN: ADDITIONAL PITFALLS  Avoid the temptation to rack up new debt in addition to the home equity loan.  Taking on new debt that has collateral (like a home equity loan) to pay off unsecured debt (like credit cards) makes your personal liability greater. (You’ll now lose your home if you don’t pay.)
  15. 15. “There are but two ways of paying debt: Increase of industry in raising income, increase of thrift in laying out.” -Thomas Carlyle
  16. 16. UNSECURED DEBT CONSOLIDATION LOAN: HOW IT WORKS  Similar to the home equity debt consolidation loan, except you don’t need collateral  Pays off your debts, leaving you with a single monthly loan payment  Depending on the source of the loan and your credit, the loan may have a lower interest rate than your debt. It might also be much higher!
  17. 17. UNSECURED DEBT CONSOLIDATION LOAN: POTENTIAL PITFALLS Credit •Can improve credit score •Increases amount of credit available to you Taxes •No tax ramifications Cost •Depends on the terms of the loan •Consider interest rate and length of loan
  18. 18. UNSECURED DEBT CONSOLIDATION LOAN : POTENTIAL PITFALLS Time •Your debts will be paid very quickly, but you will have a new loan to pay. •Determining Factor: length of the loan Potential Legal Action •No risks here unless you fail to make payments on the new loan
  19. 19. UNSECURED DEBT CONSOLIDATION: ADDITIONAL PITFALLS  These loans commonly come from those finance companies that send you loan offers in the mail.  Similar to some credit cards, the interest rate might be pretty good until you make a late payment; at that point, the interest rate will skyrocket.  That new interest rate may be applied all the way back to the beginning of the loan as well as to your current balance.
  20. 20. UNSECURED DEBT CONSOLIDATION: ADDITIONAL PITFALLS As with the home equity loan, avoid creating additional debt by using your credit cards all over again!
  21. 21. CREDIT COUNSELING: HOW IT WORKS  The credit counseling firm works with your creditors to eliminate penalties and fees and lower your interest rates.  Make one payment each month to the credit counseling company, who then distributes the money to your creditors.  The credit counseling company pays itself out of these funds.
  22. 22. CREDIT COUNSELING: POTENTIAL PITFALLS Cost Total cost can vary. Look at total savings vs. charges from credit firm. Taxes No tax advantages or disadvantages Credit No negative impact on your credit scores The creditors agreed to the new arrangement.
  23. 23. CREDIT COUNSELING: POTENTIAL PITFALLS Potential Legal Action No risk if you follow the program. Creditor already agreed to the plan in place. Time Varies based on the deal the credit counselor is able to obtain.
  24. 24. CREDIT COUNSELING: ADDITIONAL PITFALLS  Beware of unscrupulous firms!  Compare your savings on your debts to the firm’s total charges to determine if this option would be beneficial for your situation.
  25. 25. “Do not accustom yourself to consider debt only as an inconvenience; you will find it a calamity.” -Samuel Johnson
  26. 26. BANKRUPTCY – CHAPTER 7: HOW IT WORKS  Chapter 7 bankruptcy will essentially wipe out all your unsecured debt. It won’t help you with your house or car loan.  Any non-exempt assets that you own can be seized by the courts and sold to pay your creditors. However, most of your assets might be exempt.  State laws surrounding bankruptcy can vary dramatically; educate yourself before you take the plunge.
  27. 27. BANKRUPTCY – CHAPTER 7: POTENTIAL PITFALLS Credit •Credit score damage for up to 10 years •Credit scores may improve after debts have been eliminated. Taxes •Courts may take all or a portion of tax refunds due to you. •Consult a tax professional about laws in your state. Cost •A few hundred dollars based on complexity of your case •Higher interest rates on future debt
  28. 28. BANKRUPTCY – CHAPTER 7: POTENTIAL PITFALLS Time •A couple of months between filing and court appearance •Another couple of months until bankruptcy is discharged Potential Legal Action •By law, creditors must cease calling you after notice of the filing. •Creditors have the right to challenge your filing in court.
  29. 29. BANKRUPTCY – CHAPTER 13: HOW IT WORKS  Partially discharges your debts – you make payments to the court on the rest.  You can keep more of your property than with Chapter 7 (if you have a significant amount of personal property).  Stops foreclosures on your home.  State laws vary considerably.
  30. 30. BANKRUPTCY – CHAPTER 13: POTENTIAL PITFALLS Credit Credit score damage up to 10 years You can build it back after discharge. Taxes No tax implications for relieved debt Consult a professional if bankruptcy is being used to settle unpaid taxes. Cost Attorney’s fees for the process could cost $2,500. Total debt amount you pay is based on disposable income.
  31. 31. BANKRUPTCY – CHAPTER 13: POTENTIAL PITFALLS Time 36 - 60 months plus filing and court appearance time Potential Legal Action Bankruptcy is a legal process. No further action.
  32. 32. “He looks the whole world in the face for he owes not any man.” -Henry Wadsworth Longfellow
  33. 33. A DEBT-FREE EXISTENCE IS POSSIBLE ! Debt Free Debt Settlement Debt Consolidation (Home Equity) Credit Counseling Bankruptcy Chapter 7 Bankruptcy Chapter 13 Unsecured Debt Consolidation Loan
  34. 34. BE SURE TO CONSIDER THE EFFECTS ON: •Credit score •Taxes •Cost •Time •Exposure to legal action
  35. 35. Give yourself the gift of being debt free. Get started today!
  36. 36. We hope you enjoyed your Special Report! Curtis Roese is an experienced professional with extensive experience in personal finance and small business matters. Curtis writes and publishes articles, courses, guides and special reports on his personal finance blog. Common Cents Wisdom is a website with hundreds of informative articles, special reports, resources to assist you with all of your financial concerns and a free monthly newsletter. Sign up to receive your free eBook "Common Cents" and get started today on the road to financial freedom!
  37. 37. This Free Course Includes:  A Complete 80+ Page, 16-Module Home Study Course in PDF format  Companion Worksheets and Cheat Sheets  Budget Helpers, Worksheets, and Trackers  Bonus Audio Interviews with Financial Experts  My Secret Resource List of Helpful Money Sites, Tools, and Calculators  Bonus #1: Boosting Your Value Without a Formal Education  Bonus #2: Building a Wealth and Prosperity Mindset  Bonus #3: 25 Ways To Protect Your Identity Don’t Delay! Get Your Free Course Now!
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