What to do if you have too much debt?

Hopefully by the time you read this text Corona Virus pandemic is over and we are back to our normal lives. You have amassed few debts and now are struggling with making payments. Or you are making payments and are not making a dent in your dent. Whatever your background and reasons, whether it’s because of Coronavirus or not, it does not matter. Life happens and not all of us have millions stashed away in Swiss Banks. 

First you are not alone. Second you have a lot of options. Third with a right decision and discipline you will put your financial worries behind you. 

I will outline your options and cover those in great details in this post and suggest few products you can use in achieving your goal. 

Here are your options: 

  1. Use credit cards to roll over your debt
  2. Look into your existing credit cards
  3. Take out personal loan
  4. Borrow from your 401K
  5. Negotiate your debt with banks & credit union
    1. Payment Program
    1. Settlement
  6. Home Equity Loan
  7. File Bankruptcy (I really don’t want you to use this one)

Ok, now that we know our options there are two things, I want you to remember and do: 

  1. Always try to pay off most expensive debt first – the reasoning behind it is that this is the most costly debt for you and most likely if keep on making minimal effort on paying this off not only will it cost you money and you will still have a debt after certain period of time, but also it will demotivate you and derail from your pay off path in case you don’t see results. So, save money and keep motivated. 
  2. Don’t hurt your credit score – whatever you do try to avoid hurting your credit score due to the late payments, even if It means borrowing money from your least favorite relative. Remember timely payments make up 35% of your credit score, so you are jeopardizing your future by not keeping up with the payments. Remember you have options; we will cover this in this post. 

Balance Transfer

That’s a great option if you can be disciplined and committed to paying down your debt. If you have a credit card debt, the interest rates usually fluctuate between 16%-28%, so even though you are making your payments, chances are you are not seeing any results. 

Balance transfer allow you to take advantage of promotional offers of some banks that want to lure new customers in hopes that once you use the promotional period allowing you to pay 0% for usually 12 months, you will still have a balance and be paying interest, now to a new bank. 

Here is how it works. You can apply for one of the credit cards that offer 0% for balance transfers for 12-18 months. Once you have a credit card use their online banking or call customer care and complete the balance transfer. Then, just make a plan on how you will pay all or most of your balance while you carry 0% interest rate. 

Now there are few things you need to remember. You need a card with 0% interest for long period of time, if you can find 15-18-month card. 

Also, you need to make sure that they don’t have a balance transfer fee, usually 3% that’s the fee you pay to transfer you balance. Once you get the card make sure you make a move quickly, some of the cards have a promotional balance transfer fee 0% for up to 60 days. If you miss this timeframe it will cost you 3% on average. 

Last but not the least, let’s make sure you that the credit card you chose does not have an annual fee. 

As a reminder, conditions of financial products change frequently, make sure you 

Some of the credit cards with 0% APR and 0% transfer fees: 

  1. American Express Everyday Credit Card – 0% APR for 15 months; 0% Transfer fee (first 60 days); no annual fees. 
  2. Wells Fargo Platinum Card – 0% APR for 18 months, 0% Transfer fee (first 120 days); no annual fees. 

Check your existing Credit Cards

One of the good sources for balance transfer can be your existing credit cards. Based on my personal experience, even your existing credit cards will offer you good conditions for balance transfer. But obviously, if banks are willing to forego some of the fees, your credit cards will offer you good APR on transfers but might charge you on balance transfer fees. 

For example, Discover IT credit card that I have frequently run a promotion and they offer two options for you:

Option 1: no APR for a period of time but you pay Balance Transfer Fee

Option 2: you pay low APR and no Balance Transfer Fee for a period of time. 

I have included a current offer they have, the terms and conditions are constantly changing. If you have Discover IT card go to menu: Manage -> Credit Options -> Balance Transfer.

Same goes with Citi Cards they have usually offers. You go to Payments & Transfers menu then choose Balance Transfer. 

Please always make sure you read the terms and conditions as they are changing constantly before you sign up for anything. 

Personal Loans

Until recently getting unsecured personal loan was almost impossible. These products were not popular in the US and were quite rare to come by. However recently there has been emergence of companies and banks that offer unsecured personal loans. 

Now, this is definitely not a free money, but compared to Credit Card APRs the unsecured personal loans offer much better / lower APRs. In majority of cases these companies don’t charge any fees either, but still be attentive when reading terms and make sure you wont pay unnecessary rates. 

Because of the competition, I suggest that you shop around. You can do it without impacting your credit score (please pay attention to the website, they usually say that checking rate will not impact your credit score – the inquiry is soft vs traditional hard inquiry). If you like the offer from the company, once you make up your mind, you can apply for the loan. At this point your company will have a hard inquiry on your credit score. 

I will include few companies where you check your rate without impacting credit score. 

My personal experience, I needed a loan due to my recent move to cover my credit card balances. I shopped around and my credit score at that moment was 780. Marcus offered a 3-year loan for 24%, Discover offered 3-year loan for 9.99% and SoFi offered 3-year loan for 5.99% (it’s not an ad for SoFi, they just happen to offer better rates). This was before Fed rate was reduced to almost zero. This just underscores the fact that you need to shop around. 

I used Discover personal loans twice, I took out small amounts for duration of one or two years. Both times they offered me 9.99% and back then it was a good rate. 

You can check some of the companies that offer unsecured personal loans, please remember to shop around. I have included the links of some of the companies where I checked my rate for my personal loan, now you can find much more simply by googling unsecured personal loans or personal loans. The only thing you need to remember is check the rate and make sure you credit score is not impacted by this. 

Some of the companies that offer personal loans: 

  1. Rocket Loans
  2. Best Egg
  3. Marcus by Goldman Sachs
  4. Discover Personal Loans
  5. SoFi (I ended up using this service because they offered best rate based on my profile, if you end up using their loan through my link you will get $100. Even better once you become their customer you will get your own which will allow you to earn a bit if you refer your friends to it).  

There are numerous banks, credit unions and companies that offer personal loans, you can check with your institutions where you bank to see what they offer or rely on google. Whatever you do please remember to shop around and compare rates and fees.

Borrow from your 401K

If you have 401K with your employer, depending on your 401K account administrator, you might be able to borrow from your 401K account. 

The rate and terms vary, as well as the other fees. I would suggest not to do it, because you are borrowing from your future retirement and will forego the return you could have gotten on the money you borrowed. Another point is that you put pretax money in your 401K and after you take out your loan, your payments will be with post tax money. So, you are losing on fees, interest, future pension returns and taxes. 

If you have no other options than this take it, still better than damaging credit score. If you have other options, please consider those. But please, please, please don’t take out money, remember you will need to pay taxes and penalty (10%), in the end of the day if you need $5,000 you will need to take out much more…

Negotiate your debt with Banks & Credit union

Let’s assume you tried everything that is mentioned above and nothing worked. You can still negotiate with your financial institution and get on a payment program or agree on settlement. 

You should know that financial institutions report your delinquency (late payment) in most cases 30 days after your payment due date. To avoid this, as soon as you start experiencing financial hardship please reach out to your financial institution. There is nothing wrong in doing it, it costs more for a bank to service your delinquent account and trust me banks rather have a healthy customer account. Call your financial company and try to negotiate delayed payments, new payment terms etc. One this you can ask is to be included on their hardship program or payment program. 

Different banks have different payment programs on different terms, its impossible to predict what they will offer you. Whatever they offer ask them couple of questions: 

  1. What additional fees or interest you will need to pay?
  2. Will it have a negative impact on your credit score? 
  3. What are the negatives and positives of the offer?

Before you make a decision, please make sure you obtain information on fees and your credit score impact. Also, please note once you agree to a payment plan and if you miss a payment or violate the terms you are back to square one and are risking even more, because in some instance the banks won’t give you a second chance since you missed yours already. You will be provided options .e.g. make 12 payments over 12 months or 60 payments over 60 months etc. Or any custom terms. 

Some people prefer to use credit counseling agencies, which negotiate your payment plan on your behalf. The get paid by banks, commission based on your debt. I’d rather you talk to the financial institution yourself and get better terms. But if you prefer to do it through credit counseling agencies because you don’t like negotiation process or are not comfortable its ok as well. 

Let’s say you were not able to do the payment program, another option for you is to do settlement. At this point your delinquency has already been reported to credit bureau and you have a delinquency mark and sometimes your debt has been charged off. Charged off debt is usually a debt that the company gave up on collecting from you. What happens at this point is that you have a delinquency and charge off marks on your credit which will stay there for 7 years. This will limit significantly your abilities to obtain credit products in future, nothing to say about the best possible terms (interest). 

Ok, you are facing it, your credit score is damaged at this point so how does settlement work? You call the bank and offer to settle with them for a percentage of your debt. E.g. lets say you owe $10,000 on your credit card and you can pay only $6,000. The bank can accept your offer and ask you to make a single time payment of $6,000 or make couple of payments for the amount of $6,000. Now, you think it’s a good deal right? I owed $10,000 and paid only $6,000, I saved $4,000. Wrong. Settlement has tax implications, what will happen is that you will receive a 1099 form for $4,000 and this means that you will need to make a tax payment on $4,000. Everyone’s tax situation is different so please consider this implication. 

Please try to take care of your debts before they get reported to credit bureau. You will salvage your financial health!

Home Equity Loan

Home Equity Loan allows you to borrow the equity that you own in your house (current house value – mortgage). The benefits of the Home Equity Loan is that you can use it for any purpose it will have a fixed rate (mostly), and in some cases its tax deductible and you can include it on your itemized tax application. 

The negative to this is that its costly, you need to pay closing fees, so unless you have a lot of debt, worth of few thousands in closing costs I would not use this option. 

File Bankruptcy

This is the least favorable option, think of this very carefully before you step on this path. Filing bankruptcy will help you, but will limit your life for some time. 

When you file bankruptcy, it allows you to start your life from fresh start, clean sheet of paper. Financial institutions will stop collection activities. Your wage will not be garnished. But, your credit score will drop, it will be reported on your credit score that you filed a bankruptcy and this entry will stay on your credit score for 10 years, it will significantly limit your ability to borrow (significantly, almost impossible). 

You can file it yourself or hire an attorney, anyways you will need money to do it and it will be expensive. 

Life is unpredictable, everybody’s situation is unique, everybody’s needs are unique, so if you have no other options, maybe this might be a ticket to a new life, but please weigh all the pros and cons to this option. 

Conclusion

As I have noted above you have a lot of options. You don’t need to worry because of your debt, you just need to have a sober look and make decisions quickly. Remember you are not alone, and just because you are experiencing temporary financial difficulties this does not make you a second-class citizen. We all go through these difficulties, what makes us different is how we react to this. 

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