Millions of Americans are struggling with debt. Falling house prices and the adjustment of mortgages are not helping the case, making it increasingly difficult for the average holding of debt securities to pay more than the minimum credit card debt. So what to do if you are on your head in debt?
Consolidating debt can attract bids. The aim is that all debts, and combining them with a single payment. Rather than pay 10 creditors, 10 interest rates, which received only the payment of a fixed rate. Sounds like a miracle to avoid the stigma of bankruptcy fix, but there are things to watch.
FEES. If you have an offer to consolidate your debt onto one credit card, be sure to read the fine print. Most of these offers carry fees of 3% - 6% of the total balance transferred. So if you are looking to put $10,000 from various cards onto one at a low rate, the fees alone would cost $300 - $600. If you are looking to work with a Credit Counselor investigate exactly how they will be paid. It might not be an “out of pocket” expense, but often the fees are rolled into the consolidation loan. The debt consolidation company can also take it’s fees off the top of your new monthly payment, leaving less each month to go to the actual debt. Know the costs before committing.
INTEREST RATES. Are you actually paying a lower rate on the consolidation? List out the fees and interest rates on all your existing accounts to determine the total payments you now make. Compare that amount with a potential consolidation payment and interest rate to ensure actual savings.
TAXES. The biggest hidden cost in a debt consolidation is taxes. Most people are unaware that the difference between the amount you owe and any amount forgiven by a creditor is taxable as ordinary income. For example, if you owe $10,000 and have that amount negotiated down to $6,000, you would be liable for taxes on the forgiven amount of $4,000. The IRS refers to this amount as the “Discharge of Indebtedness” (DOI) and you are likely to receive a 1099 from the debtor for that difference.
Credit Counselors and debt consolidation loans can offer to lower your monthly payments for you, but it is worth your time (and bottom line) to see if you can do this yourself. The goal is lower payments and interest rates, so call each and every one of your creditors and explain your specific income situation.
Consolidating debt can attract bids. The aim is that all debts, and combining them with a single payment. Rather than pay 10 creditors, 10 interest rates, which received only the payment of a fixed rate. Sounds like a miracle to avoid the stigma of bankruptcy fix, but there are things to watch.
FEES. If you have an offer to consolidate your debt onto one credit card, be sure to read the fine print. Most of these offers carry fees of 3% - 6% of the total balance transferred. So if you are looking to put $10,000 from various cards onto one at a low rate, the fees alone would cost $300 - $600. If you are looking to work with a Credit Counselor investigate exactly how they will be paid. It might not be an “out of pocket” expense, but often the fees are rolled into the consolidation loan. The debt consolidation company can also take it’s fees off the top of your new monthly payment, leaving less each month to go to the actual debt. Know the costs before committing.
INTEREST RATES. Are you actually paying a lower rate on the consolidation? List out the fees and interest rates on all your existing accounts to determine the total payments you now make. Compare that amount with a potential consolidation payment and interest rate to ensure actual savings.
TAXES. The biggest hidden cost in a debt consolidation is taxes. Most people are unaware that the difference between the amount you owe and any amount forgiven by a creditor is taxable as ordinary income. For example, if you owe $10,000 and have that amount negotiated down to $6,000, you would be liable for taxes on the forgiven amount of $4,000. The IRS refers to this amount as the “Discharge of Indebtedness” (DOI) and you are likely to receive a 1099 from the debtor for that difference.
Credit Counselors and debt consolidation loans can offer to lower your monthly payments for you, but it is worth your time (and bottom line) to see if you can do this yourself. The goal is lower payments and interest rates, so call each and every one of your creditors and explain your specific income situation.