A clear idea about myths and truths are necessary to manage your debts efficiently. You might take the wrong steps if you believe in debt myths. Therefore, clear your confusion and handle your debts like a pro. Let us discuss myths and truths of debt settlement, debt consolidation, credit counseling, bankruptcy, and so on.
Debt Myths and truths
We often don't have clear idea about debts and debt relief options. Knowing the truths behind the debt myths can help you handle debts in a better way and manage them efficiently.
Truth: You are wrong if you think that after marriage, you'll be responsible for your spouse's debt. It is true that many couples want to repay the debt together. But, no one is legally obligated to repay old debt of his/her partner. That is, the debt which was incurred before marriage. You become obligated to repay the loan only if you sign on a loan's promissory note. For example, suppose your spouse refinances a mortgage loan after marriage. Then, you'll be legally obligated to repay if you sign on the promissory note. Similarly, if your spouse takes out a new loan, you may be responsible for it, even if your name is not there in the account.
Truth: Even if you repay an old debt, you won't be able to remove it from your credit report. It will still reflect with the status of either "Paid" or "Settled"
However, a negative item remains on your report for 7 years. So, only if your debt is more than 7 years old, it'll not appear in your credit report any more.
Truth: You may think that it's much easier to borrow money in order to make the down payment on a home. However, this strategy may not help you always. Nowadays, the banks need to evaluate where from the money for down payment is coming. This is because of the tighter lending standards of the bank. The bank will also ask for documentation. You will have to provide details about how long the money has been in your bank account. So, before you apply, organize the required paperwork.
Truth: Even if a "debt" is good, you need to manage it efficiently. Experts say that every "debt" is ultimately a kind of debt, which is difficult to pay off. Moreover, every kind of debt basically affects you financially in terms of interest rate. Nowadays, the term "good debt" has been replaced by "better debt" and "worse debt".
A better debt is one with a relatively low interest rate and which will add value. Whereas, a worse debt is what you use as a substitute for cash.
Truth: Store credit cards are good when they offer rewards and interest-free financing. However, you'd have to pay much higher interest on the remaining amount if you cannot repay the dues, every month. It may be much higher than the interest rate on a normal credit card.
Truth: You may plan a yearly budget deducting the interest on your mortgage loan. It may be applicable for home equity too. However, if the mortgage loan is too big, then you won't be able to deduct all of the interest paid. There's a cap on how much you can usually deduct interest on a mortgage loan. The limit is even lower on a home equity loan.
Truth: It is definitely good for your credit score if you make on-time payments. However, your credit score will not go higher much if you make timely payments. This is because as per FICO credit scoring model, missed payments lower your score. It might lower more than what you gain from making on-time payments.
Debt settlement - Myths and truths
Debt settlement gives you a chance to clear your unpaid bills by paying less than what you owe to your creditors. In this process, either the debtor or a settlement company, on the debtor’s behalf, negotiates with the creditors and/or collection agencies to settle the accounts through reduced payoffs.
However, it’s quite necessary to be aware of the truths against the myths regarding debt settlement. That’ll help you make the decision knowing fully well about the pros and cons of settling debts.
Let’s discuss some popular myths and truths of debt settlement.
Truth: When you, the debtor, aren’t able to repay the outstanding balance on any of your accounts, then settlement is a smart financial move. Doing so, you can get rid of the debt and focus on managing your other accounts in a better way. Settling debt is definitely a better alternative than ignoring the collection efforts. If you ignore the collection efforts, a judgment can be filed against you. So, settling the debt can protect you, the consumer, from the “legal” collection attempts, annoying collection calls, and you can save a significant amount of money, too.
Truth: Debt negotiators work for the settlement company. It goes without saying that these companies profit from consumers’ money. So, there's a possibility of scam. Therefore, a debtor should check the monthly statements of the accounts to know whether or not the accounts are being settled, or to know the current statuses of the accounts. Also, make sure you choose a settlement company that is a reliable one.
Truth: Millions of people are trying to cut down their outstanding balance through debt settlement. Creditors are tired of hearing the pleas of the debtors. Often they get almost the same requests of settling debts. Therefore, unless you can prove your financial hardship, you can very well forget about debt settlement.
You have to demonstrate that you're going through financial problems due to pay cuts, unemployment, marital separation, etc. If the creditor finds out that you're trying to reduce the outstanding balance despite having enough money, then he/she will reject your settlement offer immediately.
Moreover, you need proper negotiation skills to convince your creditors to reduce the payoff amount. They need to understand that if they don’t agree, you might have to file bankruptcy wherein most likely the creditors won’t get anything.
Truth: Debt settlement can drop your credit score between 70 and 125 points. When you opt for debt settlement, most likely you’ve already been delinquent on that account(s). So, it’ll have an adverse effect on your credit score. Moreover, when you settle your debts, the account statuses get updated as “Paid as Settled”, which isn’t favorable for your score.
However, a debt negotiator can convince your creditors not to report it to the credit bureaus since the accounts can be settled with a lump sum. But, it’s rarely possible. And, once you settle the debts, you can manage your other accounts efficiently and add positive information in your credit reports. After a certain time, you’ll be able to increase your score.
Truth: This is one of the most common myths of debt settlement. Any negative item is supposed to remain in the credit reports until it’s required to be removed under federal law. Usually, a negative item remains in the reports for about 7 years. As per FCRA (Fair Credit Reporting Act), an account isn’t supposed to be removed from reports even after it has been paid.
However, often consumers opt for “Pay for delete” arrangements with collection agencies. Though it’s not illegal under the FCRA, yet it actually violates the service agreements between the credit bureaus and the collection agencies. There are chances of a collection agency losing its ability to report accounts if it’s caught granting “Pay for delete” settlements to the consumers. Therefore, it’s better to not pay heed to such suggestions.
Instead, as already mentioned, after settling your debts, manage your accounts well, and gradually you’ll be able to repair the negative effects of paying late and settling your debts.
Truth: Not all the settlement companies are genuine. Some scam companies can ask you to pay advance fees for settlement services. They will ask you to save money in the trust account every month. They won't allow you to access or manage your trust account. A fraudulent settlement company won't negotiate with the creditors even after you have saved enough money in the account. Rather, they will ask you to pay more.
Therefore, you need to choose a good and reliable settlement company for debt settlement help. Also, as per the CARD Act of 2009, you’re not supposed to pay any upfront fee until the settlement company provides you with any service or settles a debt.
Truth: It is not true. When you negotiate for a settlement amount and you pay it off, the credit report is updated showing zero balance against the account. When an account is settled, the debtor owes no money to the creditor unless he/she has foolishly agreed to pay the deficiency balance. In reality, the credit report is updated showing zero balance against the account with a notation “settled for less than full balance”.
Truth: No, you cannot settle every debt you owe. For example, you won’t be able to settle taxes you owe, student loans, child support, and alimony. Also, usually, you can’t settle secured debts like vehicle loans and mortgages.
Truth: As per the agreement, you have to pay the required amount and settle the debt. You will have to pay the reduced payoff amount in a lump sum or with not more than 3-4 installments, which depends on the agreement. Then only, you’ll be able to get rid of the debts.
Truth: It is not completely a myth of debt settlement. However, the truth of debt settlement is that you’d have to pay a tax on the forgiven amount since it’s considered to be the debtor’s profit and the creditor’s loss.
As per IRS, once a debt is forgiven, canceled, or discharged, the debtor has to include the canceled amount in the gross income. So, you’ll have to pay a tax if you don’t qualify for an exception. The creditors, who forgive $600 or more, have to file Form 1099-C with the IRS.
Truth: It is not necessary to get professional help to settle your debts. You can do it on your own and save the money that you otherwise would have to give to the settlement company. However, make sure you know the right negotiation skills to settle debts with creditors and collection agencies.
The primary reason for opting for a settlement program is that you can be tension free as everything is handled by the settlement company. You can be stress-free about the legal matters if you take help from a settlement law firm. All you have to do is pay the required amount to the settlement company or the law firm every month.
Knowing the truths of debt settlement will help you decide whether or not it’s the best debt relief option for your financial situation.
Lastly, a lot of people believe that debt settlement or bankruptcy can only help them to get out of credit card debt, but this is not true. You can get rid of credit card and other unsecured debts through credit card debt consolidation or management too. You can compare and choose the most suitable debt relief option for you.
Check out: Debt settlement FAQ
Payday loan - Myths and truths
Most of the people have a wrong notion or myth about short-term loans (read: payday loans) that is a brainchild of widespread negative press as well as misleading information. However, here are some fundamental facts about payday loans (pdls) as corroborated by reliable sources.
Truth: Actually, payday loans have a maturity period of two weeks and so, they are not annual loans. As a result, they do not carry a 390% annual percentage rate (APR) or anything similar on them, as quoted by their critics.
In general, these payday loans have a fee of $15 for every $100 borrowed or a 15% rate for a loan with a repayment period of two weeks. However, the 390% APR will only be possible, if you roll over your payday loans with a two-week repayment deadline a few times.
The Community Financial Services Association (CFSA) Best Practices puts a cap on the number of times a payday loan can be rolled over and that is a maximum of four times or as set by the concerned state, whichever is less.
However, if it’s a legal payday loan, you’re supposed to repay as per the agreement.
Truth: For a lot of people like you, payday loans can be a great way to get instant cash to meet any kind of sudden, short-term need and cost-effective too, when compared to various other sources of funds.
However, as per the government's market study, the average APR on any typical two-week checking overdraft is said to be somewhere at 1,067%, i.e. well over double the rate on a traditional payday loan.
Truth: According to a 2008 government survey (FDIC Study of Bank Overdraft Programs), it has been found that a good percentage of the financial institutions deliberately increase the frequency of consumer overdrafts. This refers to the display of account balances on ATM screens that are shown only after an overdraft has occurred. Moreover, they increase the number of insufficient fund checks cleared by them ahead of the small ones.
In addition, these financial institutions sign up customers for overdraft protection automatically without sending them any sort of alert or notification. Comparing such unscrupulous overdraft practices, payday lenders run their businesses with greater transparency since they are liable to originate loans that clearly specify all the fees and the APRs associated with them.
However, there are some illegal payday loan lenders too. Beware of such lenders. Also, you have to pay only the principal amount in case of an illegal pdl.
Truth: In a study, it was revealed that post the outlawing of payday loans in Georgia in the year 2004, there was a sudden spike in the number of checks that bounced in the state. Moreover, people in that state filed increasingly more complaints with the Federal Trade Commission (FTC) against the lenders and debt collectors.
These people were more likely to seek payday loan consolidation or even file bankruptcy to relieve themselves from the never-ending cycle of payday debt.