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What To Do If You’re Being Sued For Debt

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If you’ve stopped making payments on a debt, and it’s been in collections for a while — and especially if you’ve been avoiding the debt collector’s attempts to contact you — it’s possible that you may get sued for that debt.

Not all unpaid debts will end in a lawsuit. Debt collectors are able to continue collection actions indefinitely, and only in certain cases will a lawsuit ever materialize.

“It’s always going to be a cost-benefit analysis by the creditor,” said Ed Boltz, a consumer debtor’s attorney in North Carolina. “The bigger the debt, the more likely it is that you’ll be sued. And when you owe money to an individual or small business, you are far more likely to be sued because they tend to take that debt personally.”

Being sued for debt can be a scary and intimidating process, but this article will help you understand how it works and what you can do to contest the charges.

What happens when you’re sued for debt

One of the keys to successfully challenging a lawsuit is simply understanding how the process works so that you know what to expect and how to respond.

The bad news is that you’ll have to do some leg work to get up to speed on the particulars for your state, as the specifics vary based on where you live.

“The details depend tremendously on what state you’re in,” said Boltz. “The process in North Carolina is different than the process in South Carolina, which is different than it is in California.”

The good news is that there are a few general steps that apply to most situations.

Timeline: When you’re sued for debt

What happens

What it means

Creditor files a complaint with the court

This officially begins the lawsuit. The complaint explains the charges against you.

You receive a summons and the complaint

The summons provides a deadline for your response.

You file an answer

This begins your defense and avoids a default judgment against you.

There is a trial or the case is dropped

The creditor can either drop the lawsuit or it will go to trial, typically in small claims court.

A judgment is made

The judge makes a decision, which will either relieve your responsibility or allow the creditor to begin collection actions.

Creditor files a complaint with the court

The lawsuit starts when the creditor files a complaint, typically in state court.

“Credit card debt, medical bills, those sorts of debt are sued in state courts,” said Boltz. “People are very rarely sued for debt in federal court.”

The complaint primarily explains who the creditor is suing, what debt they’re suing for, and how much they think you owe.

You receive a summons and the complaint

Once the complaint is filed, you’ll receive both the complaint and a summons that typically requires you to respond within 30 days. According to Boltz, these are usually mailed to you, though they can sometimes be delivered by a law enforcement officer or process server.

Boltz also warned that trying to avoid the delivery of these notices is a bad idea.

“A lot of people, if they’re sent the summons by certified mail, will attempt to ignore it and refuse to accept their mail,” said Boltz. “But all that ends up happening is that they have to get service to you through some other means, whether that means sending someone to your home or work or even putting it in the newspaper, all of which can be even more embarrassing.”

You file an answer

Once you receive the summons, Boltz said, you typically have 30 days to file an answer with the option to request an extension for another 30 days.

You will now have your chance to respond to the creditor’s claims and begin mounting a defense, and it’s at this point that Boltz recommends consulting with an attorney.

“The first thing you should do when you’re sued is go talk to a lawyer,” said Boltz. “That’s the best way to find out what your rights are and whether you have valid defenses against that lawsuit.”

It’s important to understand that even if you don’t have a good defense, it’s still important to file a timely answer. Refusing to answer will typically lead to a default judgment in favor of the creditor, at which point they may be able to garnish your wages, place a lien on your property or freeze your bank account in order to collect on the debt.

“The bottom line is that you can’t hide from the problem,” said Boltz. “The best thing to do is address it.”

There is a trial or the case is dropped

Once you file an answer, there’s a chance that the creditor may simply drop the lawsuit.

“It’s possible that the creditor will dismiss the lawsuit and decide not to proceed,” said Boltz. “They may do the cost-benefit analysis and decide that it’s not worth moving forward.”

Of course, they might not drop the lawsuit, and the case will go to trial. Boltz explained that most suits are handled in small claims court and follow a relatively standard procedure:

  1. The plaintiff (i.e. the creditor) presents their evidence.
  2. You are allowed to cross examine any witnesses they call.
  3. You present your evidence to either show that the debt is not yours, the amount is not correct, the statute of limitations has passed or any other defense.
  4. The plaintiff is allowed to cross examine your witnesses.
  5. Each side presents its closing argument.

A judgement is made

Once each side has made their closing argument, the judge — or, in rare cases, the jury — makes a decision and hands down a judgment.

If you win the judgment, by law you are no longer responsible for that debt. Unfortunately, that doesn’t mean that you’re 100% in the clear in terms of dealing with collection activities.

“The problem with debt collection is that often that debt will be sold to another debt collector who may or may not know that you’ve won that lawsuit,” said Boltz. “They may try to collect on it again, but at that point they’ve clearly violated the law, and you may be able to countersue and get some damages from them.”

If you lose the judgment, the creditor will have the right to begin collection actions against you. Depending on the state in which you live, that could include garnishing your wages, placing a lien on your home or other real property and even garnishing funds or freezing your bank account.

According to Boltz, judgments are good for 10 years and can be extended for another 10 years, and any unpaid amounts will sit there and accrue interest. So even if your home doesn’t currently have enough equity to cover your debt, the creditor can place a lien on your home, wait it out, and eventually either force you to sell once you do have enough equity, or demand repayment when you decide to sell it yourself or refinance your mortgage.

5 steps to take when you’re sued for debt

With that much on the line, what can you do to give yourself the best chance to win the lawsuit and avoid those collection actions?

Here are five steps you should take if you’re sued for debt.

1. Read the summons and complaint

First things first: Accept delivery of the summons and complaint and read them both thoroughly. Ignoring them will only lead to a default judgment against you, while reading and understanding them will help you meet deadlines and mount a convincing defense.

“When you get those papers, make sure you read them,” said Boltz. “Hiding from them doesn’t do you any good and is only likely to make you owe more money later on.”

Here are some important questions to ask as you read them over:

  • Who is suing you?
  • What is the debt they are suing you for?
  • How much are they claiming you owe?
  • Where has the suit been filed?
  • What is your deadline for filing an answer?
  • Where does that answer need to be filed?

2. Review your documentation

Once you know what your creditor’s suing you for, you can review your own documentation about that debt.

You may find that it’s not actually your debt, in which case you have a strong defense. And even if it is your debt, any information you have about when you took it out, payments you made and balances you owed will be helpful.

3. Consult an attorney

According to Boltz, hiring an attorney will give you the best chance to successfully challenge the lawsuit by making sure that you explore all possible angles.

“There are all kinds of valid defenses, from something as basic as ‘This isn’t my debt’ to something more complicated, like an application of the statute of limitations,” said Boltz. “A lawyer may also be able to find out that some of the ways in which the debt collection and the lawsuit were done were wrong, and you may have counterclaims against them.”

The Consumer Financial Protection Bureau suggests trying to find legal aid in your area, so be sure to look into opportunities to obtain free legal advice.

4. File an answer

No matter what, you want to file an answer by the deadline indicated on your summons. This allows you to avoid default judgment and gives you the chance to challenge the lawsuit in front of a judge.

5. Show up to court

Finally, if the lawsuit is brought to court, you need to show up and present your defense, no matter what. Again, showing up is the only chance you have to defend against the lawsuit and avoid a default judgment — so it’s an important step, even if you think your odds are low.

What to do if you’re held responsible for the debt

“If you get a judgment against you, you need to figure out how you’re going to pay it,” said Boltz. “Whether that’s by repaying it, negotiating a settlement, refinancing your home or filing bankruptcy.”

If you find yourself in this situation, check out some of MagnifyMoney’s free resources to help you evaluate your repayment options, including a guide to debt repayment, an overview of debt consolidation options and tips on how to negotiate a settlement on credit card debt.

In some cases, bankruptcy may even be the right move.

“If this is one part of a larger financial problem, bankruptcy may be the better financial option because it wipes the slate clean,” said Boltz.

And just as with the initial lawsuit, it’s important not to ignore the debt or simply refuse to repay it.

“If you don’t pay it, it will sit on your credit report for 10 years, and if they renew it, it counts as another lawsuit for another 10 years,” said Boltz. “You’re taking a beating on your credit report that in many ways is worse than a bankruptcy, because it shows that you have a judgment and you’re not dealing with it.”

Timely action is the key

Getting sued for debt can be nerve-rattling, but the good news is that you can often mount a valid defense as long as you understand the process and know how to respond.

Simply by filing timely and accurate responses, you greatly increase your chances of winning your case and avoiding repayment altogether.

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Matt Becker is a writer at MagnifyMoney. You can email Matt here

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The Truth About Debt Forgiveness

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Despite your best efforts, you sometimes fall behind on debt payments. While you work to steady your finances, there may be options available to forgive, reorganize or reduce your debt load.

Some creditors, such as a mortgage lender or student loan servicer, might work with you to revamp your loan or repayment schedule, or you could qualify for federal relief programs. But, in most cases, it may be difficult to have your entire outstanding debt forgiven, even if you file for bankruptcy.

Since each type of loan or debt has its own circumstances and prospects for debt relief, it is advisable to contact your creditor or lender as soon as possible to discuss options.
In this article, we will discuss the most common types of debt, as well as the possibilities for debt forgiveness.

Credit card debt forgiveness

If you find yourself with a growing credit card balance and interest charges, the stress can be overwhelming. Sometimes making the minimum payments is difficult or impossible. While credit card debt forgiveness can be rare, there are some options to manage or reduce your debt.

If you’ve fallen behind on your credit card payments, a good first step is to seek the advice of a reputable credit counselor. They can help you organize all your outstanding bills and finances. They can also help craft a manageable payment plan. The Federal Trade Commission (FTC) has tips to find a reputable credit counselor.

When your account is more than six months past due, a credit card company may refer the case to a collections agency. Collectors will make repeated attempts to obtain all, or some, repayment from cardholders. If that’s unsuccessful, they may file a lawsuit against the customer and could garnish wages to recoup some funds.

But you have some options if you discover you cannot repay your credit card debt.

Bankruptcy

A potential — but drastic — option to resolve credit card debt is to file for bankruptcy protection. Under federal law, there are two types of bankruptcy for individuals: Chapter 13 and Chapter 7. An individual could discharge some types of outstanding debt, including credit card balances, with either option, subject to court approval. Consumers considering this option should consult with an experienced bankruptcy attorney to review options and eligibility.

Chapter 13 bankruptcy is a court-approved plan to repay outstanding debt. If you complete a repayment program, which runs three to five years, some or all of your remaining debt can be discharged. To qualify, a debtor must follow an established process that includes petitioning the court and developing a plan with a court-appointed trustee and creditors. All debts are paid monthly by a trustee, who distributes funds to creditors.

One of the main benefits of Chapter 13 is that, once a petition is filed, it freezes all collections and foreclosure proceedings, allowing a debtor to retain their home and stop any other debt collections so long as they are included in the plan.

Alternatively, Chapter 7 involves liquidating an individual’s assets, often including a home, and using the proceeds to pay off creditors. Your outstanding debts are either settled by this liquidation or discharged. But since you are not paying your outstanding balances, your ability to secure future loans and re-establish your credit can be damaged, making this a less attractive option for individuals seeking future lending options.

Repayment plan

You may be able to arrange a payment plan with your credit card companies, which would avoid sending your account into collections. Some credit card companies suggest that consumers contact them, outline their difficulties and suggest a plan for repayment.

If you fail to pay your debt for 180 days, a creditor may write that off as a loss. That action could damage your credit score, and you’ll still owe the debt. But debtors may still be willing to negotiate with you, the FTC states on its website.

Using a debt settlement company

Another option is working with a debt settlement company — typically a for-profit firm — that negotiates with the lender and agrees on a lump-sum payment. These services typically come with a fee and may require an individual to deposit a monthly amount into a special account that will be used to pay off debts. The FTC cautions that consumers make careful consideration before contracting a resettlement company. The agency advises that homeowners should make sure they can afford the monthly savings payments. If you fall behind, you’ll be further from your goal of repayment and may accumulate more late fees and interest, along with added damage to your credit. It also advises homeowners to research the settlement company by searching online for complaints or with your state attorney general’s office.

If you work with a debt settlement company, the FTC notes that money that is transferred into a savings or escrow account is your money, should be in your name and is to be used at your discretion, including any interest that accumulates. Also, the FTC says that settlement companies should only collect fees after the repayments are complete.

Pros and cons of credit card debt forgiveness

Pros

You could reduce outstanding debt, negotiate a more manageable repayment plan or agree on debt settlement. By mitigating your outstanding debt, you can decrease the outstanding balance and avoid incurring additional interest. Also, by keeping your accounts from going to collections proceedings, your credit score may take a lighter hit and you can avoid an escalation of collections proceedings.

Cons

In some cases, the collections agency and credit card company may agree to seek a settlement with the debtor and accept a portion of the debt, but there could be ramifications. If the rest of the debt is discharged, the IRS may consider the forgiven amount a gift and require you to pay income taxes on that amount. With both Chapter 13 and Chapter 7 bankruptcy, the filing will appear on your credit report, which could impact the terms and rates for future loans and credit.

Also, costs associated with discharging or settling debt can add up. Bankruptcy involves court and attorney’s fees. Settling debt will require you to pay a potentially large chunk of money. There are typically fees associated with using a settlement agency, too.

Student loan debt forgiveness

Depending on your circumstances and the loan you have, it may be possible to earn forgiveness or discharge on your student loans, but it is difficult. Student loans are typically subject to strict repayment terms, even if you don’t graduate or can’t find a job.

Student loans are available through the federal government and private financial institutions, including banks and credit unions. If you’re having difficulty making payments and are seeking some relief — whether you have public or private loans — you should start by contacting your loan servicer to discuss your circumstances and options.

Even if you file for bankruptcy, it is not guaranteed that your student debt will be discharged.

If you have federal student loans, some circumstances could entitle you to forgiveness or discharge, but the requirements are usually stringent. These situations or programs, subject to eligibility, could include the following.

Death

If a borrower dies or the student who the loan was taken out for dies, a federal student loan will be discharged.

Total and permanent disability (TPD) discharge

This must be documented by a physician, the Department of Veterans Affairs or the Social Security Administration. It must establish that you are “unable to engage in any substantial gainful activity due to a physical or mental impairment,” according to Federal Student Aid’s website. To qualify, individuals must submit a TPD application, which is subject to review and approval.

Bankruptcy

If an individual files for Chapter 7 or Chapter 13 bankruptcy and proves to the court that repayment would be an undue hardship on themselves and their family, they may be eligible to discharge the entire remaining loan balance, a portion or negotiate to a lower interest rate or revised repayment schedule.

School closure

If the school you attend or recently attended (usually within 120 days) closes, you may be able to discharge some or all of your federal student loans. In this instance, contact your loan servicer for help.

Public Service Loan Forgiveness

This highly anticipated federal loan relief program is tied to employment, but it has gotten off to a rocky start. The Department of Education set aside $350 million to provide tax-free debt relief to graduates who work in government or public service jobs, but the program has detailed eligibility requirements.

While the program holds promise, the review process has been slow. Only a handful of claims have been paid out. Since fall 2017, nearly 30,000 applications for forgiveness have been processed, but only 96 borrowers have had debt discharged. The program is so mired in problems that the federal government put in place a temporary initiative to try to correct it.

Loan modification

Another option for borrowers with outstanding federal or private loans could be modified repayment plans, which may allow for fixed or graduated payments over a period. Contact your loan servicer to discuss potential options.

Pros and cons of student loan forgiveness

Pros

If you qualify for some federal programs, including public service work, you could reduce or discharge your remaining student loans. If you face hardships, such as disability or bankruptcy, you may also be able to obtain forgiveness on some or all of your loans.

Cons

Similar to debt forgiveness on credit cards, some types of student loan discharge could impact your ability to obtain future loans. If you’ve missed payments and if your loan has gone into collections, that will impact your credit score. If you do have an outstanding balance discharged, you may have to pay income tax on the forgiven amount. There are a few exceptions to the canceled debt being taxable, including insolvency or bankruptcy. If debt is forgiven, some types of student loan discharges could be subject to taxation.

Mortgage forgiveness

To keep your home and avoid foreclosure, you need to pay your mortgage on schedule. But personal hardships, such as job loss, illness or divorce, can sometimes make it difficult for a homeowner to make payments. If you get behind, it may be possible to negotiate a repayment plan with your lender or obtain some form of federal or state mortgage assistance.

Here’s a look at different ways to manage mortgage debt.

Bankruptcy

In some cases, it may be advisable for a homeowner to file for bankruptcy protection, either by declaring Chapter 13 or Chapter 7 bankruptcy. When you file for either Chapter 13 or Chapter 7, the petition halts collections against most of a debtor’s property, including foreclosure proceedings.

But there are important differences: Under a court-approved Chapter 13 plan, the homeowner is approved to pay back an agreed-upon amount of outstanding mortgage payments and resume a normal schedule. Under Chapter 7, the bank may still opt to foreclose on a home as a way to liquidate assets and repay creditors, including the mortgage lender.

One advantage of Chapter 13 is it gives homeowners an opportunity to avoid foreclosure by catching up on overdue payments with a payment plan, the U.S. Courts website notes.

Mortgage relief programs

Depending on where you live, state or federal programs may exist to provide mortgage assistance and relief. To assess the programs, homeowners should contact a Department of Housing and Urban Development-approved agency in your area. It can help you determine your eligibility for any programs that match your location and circumstances, as well as other foreclosure avoidance options. To assist homeowners, HUD provides a searchable database on its website to refer homeowners to nonprofit agencies by region qualified to provide services.

Some federal programs and options for homeowners include:

Home Affordable Refinance Program (HARP)

This program, set to expire at the end of 2018, allows qualified candidates to refinance with lower rates or more favorable terms. Homeowners must be up to date on their mortgages, have little or no equity in their property and have a loan from Freddie Mae or Fannie Mae that originated on or before May 31, 2009.

Hardest Hit Fund

In 2010, the federal government created the Hardest Hit Fund and allocated money to 18 states and the District of Columbia. The federal government has allocated billions to the program, which is set to expire at the end of 2020. Funds can be used for mortgage repayment assistance, to pay down second mortgages, relocation assistance or to reduce your mortgage balance.

Servicemembers Civil Relief Act

Under this law, the federal government offers some protections and programs for active-duty service members, as well as their dependents, who may experience difficulty paying their mortgages.

Mortgage modification

Homeowners with regular income to consistently service their loan may be able to work with their lenders to revise the terms of their loan. That could result in a modified payment schedule or new terms.

Forbearance

If you don’t qualify for a mortgage assistance program and you’re unable to negotiate a modification with your lender, you may be able to propose a forbearance period, which allows you to take a break from making your regular payments, such as a six-month respite. The difficulty with forbearance can be a homeowner’s ability to catch back up because, when the break is over, they’ll need to repay the outstanding mortgage payments and resume a normal payment schedule.

Pros and cons of mortgage debt forgiveness

Pros

If you modify your mortgage debt, you’ll likely be able to remain in your home. Also, if you qualify for a federal mortgage assistance program, you may receive funds to help pay your mortgage. If you negotiate a modification with your lender or even a reprieve in payments, you may be able to reorganize your finances and get back on solid footing.

Cons

To avoid foreclosure proceedings, you’ll need to stick to whatever terms of your federal relief plan or modification schedule you negotiate with your lender. If you fail to comply, including late or missed payments, you could be subject to foreclosure or financial penalties from your lender.

Tax debt forgiveness

If you owe more in taxes to the IRS than you can afford to pay, you may be eligible for some debt forgiveness or relief.

Individuals should contact the IRS or discuss their situation with a tax professional. They can also contact the Taxpayer Advocate Service, an independent service that works with the IRS to help taxpayers resolve problems. Another option is to contact a low-income taxpayer clinic in your area or consider the IRS’ Fresh Start Program.

Here are some things to consider for your tax debt.

Offer in compromise

The IRS has something called offer in compromise, which is an agreement between a taxpayer and the IRS to settle outstanding taxes for less than the full amount owed. To be considered, you need to submit an offer that the IRS finds realistic given your income and assets. Once you submit your offer, the IRS investigates and determines if it will accept it. Typically, individuals who qualify have very low or no income.

To be considered, taxpayers must have filed all their required tax returns. If you’re in bankruptcy proceedings, you can’t take part in the program. The program requires a $186 application fee.

As part of your offer, you need to propose a repayment schedule, which can be a lump sum or monthly installments. If you don’t have enough cash to make the payments, you’re still required to stick to the plan, and you may have to borrow money or sell assets to stay on schedule. The IRS’ website offers more details on the program and the application process.

Installation agreements

For taxpayers who owe up to $50,000, the IRS offers monthly direct debit payments for up to six years to resolve outstanding debt. To qualify, the IRS will ask for some financial information, and taxpayers must sign up through the IRS’ online payment tool. If you need a longer period to pay off the debt, the IRS will likely ask for more detailed financial information.

If you owe less than $100,000, it may also be possible to arrange a short-term repayment plan. For both options, the IRS offers more information. The application is on its website.

Pros and cons of tax debt forgiveness

Pros

A revised tax payment plan can take pressure off you and help you stay current on your debts. If the IRS accepts your offer in compromise, you may be able to lower your outstanding tax debt. If you have a federal tax lien on your property, you may be able to have the lien discharged or withdrawn once you repay your debts. After the repayment is complete, the IRS removes all liens against you, which can improve your credit score.

Cons

An offer in compromise sounds like a great option, but there is a lot of fine print. The program has stringent eligibility standards, and investigators dig into your finances.

Also, the IRS can only collect taxes for the past 10 years. But if you start an offer in compromise application, the clock stops, possibly dragging out debt that might expire. Also, any collections that started before the application, such as wage garnishment, can continue. The process of investigation and approval can take a year or more. Finally, if you are approved, you must be compliant with all taxes and payments for five years.

Conclusion

If you’re facing mounting debt from any of these loans, it is important to get organized and understand your debts and evaluate your ability to make payments. You should also contact your lender or creditor and alert it to any change in circumstances or hardships. You should inquire about options to modify, reorganize or forgive your outstanding debts.

Financial counselors, including credit counselors, tax advisers and housing counselors, can often offer assistance at no or low costs to help manage debt and come up with management plans. If you’re able to hire a professional, a tax adviser, bankruptcy attorney or tax attorney may also be able to help you sort out your circumstances and options.

The bottom line is that while debt forgiveness may be rare, there are many resources available to consumers looking to manage and restructure their debts.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alli Romano
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Alli Romano is a writer at MagnifyMoney. You can email Alli here

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Debt Avalanche vs. Debt Snowball: Which Payoff Method Is Right for You?

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debt avalanche vs. debt snowball

You have several debts piling up, and you’re starting to worry you’re losing control over them. You have a car loan, student loan debt and two mounting credit card balances that are only getting higher with each passing month.

You’ve heard of two primary methods for paying off debt: the debt avalanche method and the debt snowball method. Both are effective ways to eliminate debt. But which one is right for you? Here’s everything you need to know about the two methods of debt elimination.

Debt avalanche vs. debt snowball: What’s the difference?

Both forms of debt elimination involve paying off debts one at a time. The primary difference between the two forms of debt elimination is which debts are paid off first.

With the debt avalanche method (also referred to as debt stacking), you pay off the debt with the highest interest rate first. With the debt snowball method, which was popularized by Dave Ramsey, author of “The Total Money Makeover” and radio personality, you prioritize the debt with the lowest balance.

Below, we’ve explored the nuances of each method so that you can figure out which one is ideal for you.

How does the debt snowball method work?

The debt snowball method involves taking a look at all your debt balances and paying them off from smallest to largest. You still pay the monthly minimum balance on all your debts, but put an extra, predetermined amount of money each month toward the smallest debt.

“Once you pay off the lowest balance loan, you would take that extra money and move it toward the second lowest balance,” said Forrest Baumhover, a certified financial planner at Westchase Financial Planning in Tampa, Fla. “At some point, you snowball. All of these principal payments that you were paying toward — all of these tiny loans or credit card balances — are now focused on the last remaining one.”

Who is it good for?

People who benefit from regular motivation. Consumers who opt for the debt snowball method tend to see success due to the “little wins” that go with paying off small debts quickly.

“If the difference in interest rates is not that much in terms of the overall savings, I might tell somebody to go with the snowball method just because they get to see progress sooner,” said Luis Rosa, a certified financial planner with Build a Better Financial Future in Henderson, Nev. “They might have smaller balances that they can get rid of in a month or two, and then they continue to be motivated because they can see some progress at the very beginning of the plan.”

The debt snowball method can also be beneficial for people who have a significant amount of debt in various forms. “The way I see it is if you’re starting with a pretty big number, then a lot of little victories will help you along the way,” Baumhover said.

Does it save you money?

Not necessarily. The debt avalanche method typically makes more sense as you save money on interest. But Rosa and Baumhover said people are often better able to stick to the snowball method because of the satisfaction of “little wins.”

Research from Kellogg School of Management at Northwestern University showed that even though the avalanche method typically leads to more savings, consumers who opt for the snowball method are more likely to eliminate all their debt.

Breaking down how it works

Rosa offers this example:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan

$359

$359

$20,000

7.99% APR

Personal loan

$75

$75

$800

5% APR

Credit card No. 1

$100

$100

$5,000

17.99% APR

Credit card No. 2

$50

$50

$3,000

15% APR

If a consumer only made the monthly minimum payments on the above debts, it would take them 112 months to pay them off, Rosa said. Adding an extra $200 each month would cut that to 44 months.

Assuming the consumer puts an additional $200 per month (on top of minimum payments) toward paying off their debts from smallest to largest, they will have paid off the personal loan by December 2018 if the above scenario begins in October 2018. With the debt avalanche method, the personal loan will not be paid off until August 2019.

How does the debt avalanche method work?

If you opt for the debt avalanche method, you will continue making the monthly minimum payments on all your debts, but you will put your extra monthly allotment toward the debt with the highest interest rate, not the debt with the lowest balance.

“The key differentiator between the avalanche and the snowball [is that] the avalanche is going to be based on the highest interest rates first,” Rosa said. This means that you’ll likely focus on higher-interest debts, such as credit cards, before lower-interest debts, such as student loans.

Who is it good for?

People who are intrinsically motivated and who aren’t as concerned with the “little wins” that go with the snowball method.

“The avalanche method is typically known to be the most efficient mathematically,” Rosa said. “But sometimes the thing that’s best mathematically isn’t the best for you, because your card with the higher interest rate might be your higher balance card, and you might not see any progress for quite a bit.”

Does it save you money?

Typically, this debt repayment method saves you money, Rosa said. Because you are paying off the debt with the highest rate first, you will see more savings in interest paid.

Breaking down how it works

The benefits of the avalanche method can be seen using the same example as above:

Debt TypeMinimum PaymentCurrent PaymentBalanceInterest Rate

Car loan

$359

$359

$20,000

7.99% APR

Personal loan

$75

$75

$800

5% APR

Credit card No. 1

$100

$100

$5,000

17.99% APR

Credit card No. 2

$50

$50

$3,000

15% APR

If a consumer puts an extra $200 toward their debt each month and pays it off in 44 months (like the above example), they will not have the quick “win” that accompanies the debt snowball method, but will instead save slightly more on interest. The debt snowball method, in this case, has an overall interest savings of $6,496.82, while the debt avalanche method has an overall interest savings of $6,669.64.

Which debt repayment method is best for you?

Both methods can be beneficial strategies for paying off debt. What it typically boils down to is a person’s mindset and long-term goals.

What does Baumhover typically recommend?

“It depends on the type of client that I’m working with,” he said. “For people that need to tick off little milestones along the way to know that they’re actually making progress, there’s a powerful emotional aspect to [the snowball method]. But when you run the numbers, you do pay a little bit more in interest.”

For people who have intrinsic motivation and don’t need “little wins” to stay on track, the avalanche method might be a better option. “If someone really has a focus on just minimizing the amount of interest, then the debt avalanche would probably be what they would want to do,” Baumhover said.

To figure out which method is ideal for your specific financial situation, you can use this calculator.

5 ways to prioritize and pay off your debt

Now that you know the difference between these two debt payoff methods, it’s time to get started. Here are the first steps you should take once you’ve decided to tackle your debt.

1. Review your debts

Rosa said the first thing people should do is list out every single debt they have by name, APR, balance and minimum payment. Then, he suggests using a free online calculator, which allows you to enter all your debt information and compare different debt elimination methods.

This step is crucial for success. “The debt avalanche vs. the debt snowball, neither of those is going to work for someone who’s not willing to take a look at their whole picture,” Baumhover said.

2. Take a look at your spending habits

Once you’ve identified all your debts, take a look at your spending habits so that you can figure out how much money can go toward your debt elimination plan each month. “[People] should really try to set a realistic expectation of what they’re willing to live on in terms of their budget,” Baumhover said.

The most important thing is to be realistic. Don’t say, “I’ll put an extra $1,000 toward debt each month” without actually taking a hard look at your finances to see if this is possible. You’ll be setting yourself up for failure, Baumhover said.

“It’s kind of like trying to lose 50 pounds,” he said. “It’s not realistic to do it in a month, but if you say, ‘Maybe I need to do it over a year and a half, and I can afford to lose 3 pounds a month,’ then that’s a little bit more sustainable.”

3. Decide which debts you’ll prioritize

This is the point at which you should figure out which debt elimination plan is ideal for you. Are you the type of person who would benefit from small wins each month? Does the idea of eliminating three of your eight debts quickly appeal to you and sound motivating? If so, the debt snowball method is likely the right option for you.

If you have a history of diligence and determination and don’t think the “little wins” would do much for your motivation, then the debt avalanche method might be a better option for you as it’ll lead to more savings.

4. Get advice from an expert

If you’re struggling to prioritize and pay off your debts, consider contacting a financial expert such as a certified financial planner or a nonprofit credit counselor. They can help you take a big-picture look at your finances and offer advice on which strategy is better for you.

5. Stop racking up debt

Rosa said he often sees consumers begin a debt elimination plan and continue racking up credit card debt. This can ruin a debt elimination plan.

“Some people continue to use the cards,” Rosa said. “For example, they might be going after rewards points. The system only works if you no longer use the cards.”

But Rosa added that you shouldn’t necessarily close all your credit cards since this can have an impact on your credit score.

“If you have a credit card from 10 years ago, a major card like MasterCard, Visa or AmEx, you might not want to necessarily close it, even if you paid it off,” he said. “Just continue to use it occasionally, like for gas, [and] pay it off at the end of the month so that you keep that history.”

Another way to pay off your debt: Debt Consolidation

The avalanche and snowball methods aren’t the only ways to manage your debt.

You could take out a personal loan to combine your existing debts. In doing so, you’ll get to make just one monthly payment on a loan with a lower interest rate and different repayment term. This is called debt consolidation, and it’s another repayment strategy that could save you money on interest.

A debt consolidation loan could help you get out of debt faster by reducing the total interest you pay over time. You also get to choose a new repayment term on your debt. So if you want to aggressively pay down your debt and save more money on interest, you could simply choose a shorter repayment period. Compare up to five offers in minutes when clicking “see offers” below. Note: Clicking “see offers” below does not affect your credit.

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Regardless of the repayment strategy you choose, you’re taking a step in the right direction by deciding to take control of your finances and eliminate your debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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When Should You Consider Bankruptcy & How to File

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Updated – November 14, 2018

If you’re drowning in debt and having trouble keeping up with your payments while still handling your living expenses, you may have at least begun to consider filing for bankruptcy.

Filing for bankruptcy is meant to give people in serious financial distress some relief and a chance to start over. By the time most people get to that point, they’ve probably tried many other methods for managing their debt.

Bankruptcy certainly has its benefits, potentially allowing you to wipe the slate clean and start anew.

But there are a lot of things to consider before making a decision, from the negative consequences of filing to whether bankruptcy would even provide relief for your specific situation.

“For most folks that come in, this is the last option,” said John Colwell, a San Diego, Calif.-based bankruptcy attorney and President of National Association of Consumer Bankruptcy. “I know I’m like the dentist. People really don’t want to be sitting in front of me.”

This is a big decision that requires a significant amount of due diligence before moving forward. While it’s important not to take bankruptcy lightly, it may be the best way for people to get back on their feet.

So how do you know if bankruptcy is the right way to relieve your debt? In this post, we’ll go over some of the key points to help you get started.

The basics of filing for bankruptcy

Bankruptcy is a legal procedure to discharge debt built up by someone who either will not be able to repay those debts or does not have the means to repay debts owed currently. There are two notable forms of bankruptcy: Chapter 7 and Chapter 13.

In a Chapter 7 bankruptcy, a debtor’s nonexempt assets are sold and the proceeds are used to pay debts. An individual must pass a means test before they can file a Chapter 7 bankruptcy to ensure that the court would not be abusing the bankruptcy law by granting one. We will talk more about the means test below!

A Chapter 13 bankruptcy is a “wage earner plan.” To qualify, an individual must have a steady income. This allows them to pay back all or part of their debts by developing a repayment plan. The plans last between three and five years.

In most cases, bankruptcy does not protect you from any future debts incurred. It also will have an effect on your credit score and remains on your credit report for 10 years with Chapter 7 and seven years with Chapter 13. In a Chapter 7 bankruptcy, you may lose assets such as your house or your car depending on how much equity, if you’re able to exempt your equity and if you’re current on your payments.

Are You Eligible?

As stated above, there are two types of bankruptcy for individuals: Chapter 7 and Chapter 13.

There are some significant differences between the two programs, but here’s a high-level summary:

  • Chapter 7 allows you to completely discharge your debts, with some exceptions (such as student loans, certain tax obligations, and child support). But you may be obligated to sell some of your property to settle some of your debt obligations.
  • Chapter 13 allows you to create a payment plan to repay some or all of your debts over a 3-5 year period. So your debts are not discharged, but you will also not be obligated to sell any property in order to make your payments.

Either one could be more or less beneficial depending on the specifics of your situation. But the very first question is whether you qualify for either one, and each has its own set of criteria.

Chapter 7 bankruptcy has what’s called the “means test”, which is meant to ensure that only people who truly can’t afford their debt payments are allowed to file. There are two different wants to pass it, and therefore qualify for Chapter 7 bankruptcy:

  1. If your monthly income is less than the median monthly income in your state for your family size, you pass. You can find current median income numbers by family size here.
  2. If you don’t pass #1, you’ll have to go through a complex calculation to see whether your disposable income after subtracting out certain expenses is enough to satisfy your debt obligations. At this stage it would probably be best to talk to a professional who could help you navigate the process.

Eligibility for Chapter 13 bankruptcy is a little more straightforward. Here’s how it works:

  1. As opposed to Chapter 7, you need to prove that your disposable income is high enough to afford a reasonable repayment plan.
  2. Your secured debt (mortgage, auto loan) can’t exceed $1,149,525, and your unsecured debt (credit cards, medical bills, etc.) can’t exceed $383,175.
  3. You must have filed both federal and state income taxes each of the last four years.

There are some other requirements for each, but those are the major ones. Assuming you qualify for at least one of them, there are a few other things to consider.

What Kinds of Assets and Liabilities Do You Have?

Depending on the specifics of your financial situation, one type of bankruptcy may be preferable to the other. Or it may be that neither would actually be particularly helpful.

As an example, neither type of bankruptcy would likely help you all that much if your primary debts are student loans. They wouldn’t be discharged in Chapter 7 bankruptcy. And while your required payments might be reduced over the 3-5 year repayment period in Chapter 13 bankruptcy, once that was over you would have to continue paying them back as usual.

The type of assets you own and their value also matters, particularly if you’re going through Chapter 7 bankruptcy. During that process, your bankruptcy trustee is allowed to sell your property in order to settle your debts, but certain property is protected.

For example, your house and car are protected up to certain limits. Employer retirement accounts like 401(k)s and 403(b)s are fully protected, while IRAs are protected up to about $1 million. But other accounts, such as checking, savings, and regular investment accounts may not have the same protections.

The rules here vary by state, and having a strong understanding of which assets you might be able to keep and which you might end up losing will help you make your decision.

When to file bankruptcy

According to Colwell, filing for bankruptcy needs to be “worth your while,” meaning it should give you relief from your debts to ensure you don’t find yourself in a similar situation in the near future. That means that if you have major expenses that you are about to incur, you should wait to file until after you have incurred them so they can be included in the bankruptcy settlement. This is especially important when it comes to filing bankruptcy due to medical bills.

However, with a Chapter 13 bankruptcy, you can seek court approval to include new debt that you’ve incurred post-filing into your payment plan.

In general, though, there are aspects of your financial situation that signal when it’s time to consider bankruptcy. If you can’t pay your bills (and you don’t see that changing anytime soon) and your debt continues to pile up, bankruptcy is probably worth considering.

Here are other red flags to look out for:

  1. Debt collectors are calling. If you’re behind on your bills to the point that you’re hearing from debt collectors, it may be time to consider bankruptcy. This is especially true if you’re being sued by debt collectors.
  2. You’re in danger of losing your home. If you’re at risk for losing your house to foreclosure, filing bankruptcy can help you get caught up on your payments and keep your home. With Chapter 13, you’re given the chance to keep your home by creating a plan to repay your outstanding debt.
  3. You’re using loans to pay your bills. Using short-term high-interest loans such as payday loans can get you in trouble. With these loans, people borrow against their next paycheck. “People get caught in the trap and it starts rolling over from paycheck to paycheck to paycheck,” said Colwell. Title loans are another form of small loan where a vehicle is used as collateral; these loans can be problematic for someone already in financial distress.
  4. You’re liquidating your retirement assets. Retirement money is exempt in a bankruptcy, meaning trustees can’t use it to repay lenders. So in most cases, it doesn’t make sense to burn through your retirement money to pay debts. “I hate that with a passion,” Colwell said. “It’s your retirement money, what are you doing?!”

How to file for bankruptcy

Most initial consultations with lawyers are free of charge. At these meetings, you’ll walk a bankruptcy attorney through your financial situation and your reasons for wanting to pursue bankruptcy.

There are also ways for individuals to file for bankruptcy on their own, known as filing pro se. Court employees and bankruptcy judges can’t give out legal advice to people in their courts, so if you go that route, you will be on your own. To file yourself, you should be familiar with the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and the local rules of the court.

Unless you have a strong understanding of legal issues and have the time to handle the paperwork, it’s probably best to use a lawyer — that’s because making a mistake can impact your rights, according to the U.S. Courts. You’ll also need the capacity to fill out a lot of paperwork, Colwell also noted.

If you use an attorney, they should be able to provide services including:

  • Advising you on whether to file a bankruptcy petition and under which chapter to file.
  • Telling you whether your debts can be discharged.
  • Advising you on whether or not you will be able to keep your home, car, or other property after you file.
  • Advising you of the tax consequences of filing.
  • Advising you on whether you should continue to pay creditors.
  • Helping you complete and file forms.

How to file Chapter 7 bankruptcy

A Chapter 7 bankruptcy involves the sale of all of your nonexempt assets to pay back your creditors. This is the most common kind of personal bankruptcy, accounting for more than 60 percent of all non-business bankruptcies in 2017. The process usually takes about four to five months.

Filing for Chapter 7 will wipe out your allowable debt (such as as credit card, medical and personal loan debt), but the bankruptcy will remain on your credit report for up to 10 years.

The first step is to take a mandatory credit counseling course from a government-approved organization, within 180 days of your filing date. Upon completion, you can decide if you still feel it appropriate to move forward with a bankruptcy, and move on to the next step.

At this point, you, or your attorney, would file your petition and other additional forms with the court. Along with your filing petition, the forms include a list of your creditors, a summary of your assets and liabilities, lists of property (both exempt and non-exempt) and any documentation needed for your “means test.” There are also companies that will send you a packet of all relevant documents, for a small fee.

At this point, you will be subject to the “means test.” If the debtor’s current monthly income is more than the state median, the means test is applied. Abuse is determined if the debtor’s monthly income over five years is either more than $12,850, or more than 25% of the debtor’s nonpriority unsecured debt of at least $7,700.

A trustee is then appointed to review the paperwork and take nonexempt property; you will also have to submit your most recent tax return to the trustee.

The next step in the process is a meeting of creditors, known as a “341 meeting.” At the meeting, you will answer questions about your finances and bankruptcy forms under oath. Creditors are allowed to attend the proceedings if they choose.

It is now decided if you are eligible to file for Chapter 7. At this stage, secured debts are determined: they can be repossessed by the creditor, you can redeem it by paying back what it’s worth or you can reaffirm the debt, which removes that debt from the bankruptcy filing and allows you to pay it back when the bankruptcy is over.

You will have another course to attend that will include information on developing a budget, using credit and managing money — afterward, your debt will be discharged.

Cost: A Chapter 7 bankruptcy needs to be paid for upfront by the debtor. It is generally a flat rate and may be contingent on the complexity of your debt structure as well as the market in which the attorney is operating.

How to file Chapter 13 bankruptcy

A Chapter 13 bankruptcy will last between three and five years, from start to finish. These processes are long and complex, so it’s strongly recommended that you use a lawyer. If you have a steady income, Chapter 13 bankruptcy allows you to keep property, like a house or car, that you might otherwise lose in Chapter 7. Chapter 13 develops a three-to-five year repayment plan for your debts.

The first step is to take a credit counseling course. Afterward, you or your attorney will prepare and file a bankruptcy petition and paperwork that includes a list of your creditors, a summary of your assets and liabilities and your Chapter 13 repayment plan; you will also need to provide your most recent tax returns.

The court will later appoint a trustee to administer your case and a stay on collections will take effect — this means that certain creditors won’t be able to proceed with lawsuits against you, call you for repayment or garnish your wages. You’ll begin making payments for a month after you file the paperwork. In addition, like Chapter 7, Chapter 13 also requires a 341 meeting.

You or your lawyer must attend a confirmation hearing where objections to your plan either by the trustee or the creditors will be addressed and eventually your plan for repayment will get confirmed.

Your creditors will also file proof of claim so that they can get repaid; it is at this point that you can object to the claim if you feel it is unfair.

The repayment period begins when you start to comply with your plan’s requirements and payments; this is the longest portion of the bankruptcy. If required by your plan, you may also have to submit documents to the court like income and expense statements.

Exactly as in Chapter 7, you’ll have another course to attend that goes over budgeting, using credit and managing money. Afterward, your debts may be discharged and your case closed.

Cost: There are two ways an attorney can charge you for handling your Chapter 13. It may be a “no look” fee, a flat fee set up by the district in your state, or they can bill you hourly. Your payment to your attorney can be worked into your Chapter 13 repayment plan.

Conclusion

Filing for bankruptcy is a big decision, and in the end you’re the only one who will know what’s right for you.

Bankruptcy can be not only a long process, but also a very emotional one for those seeking to discharge debts.

Do your research, evaluate all of your options, and then make the decision that most helps you reach your personal goals.

Looking into your options sooner rather than later may help you shore up your financial future and lose less in the long term.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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What Happens to Debt After Death?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Credit card debt is at an all-time high in the U.S. According to a 2018 study on credit cards by MagnifyMoney, the average American with a credit card has a balance of $6,348. And overall, Americans are carrying $687 billion in credit card debt from one month to the next.

With numbers like those, it’s likely that many people will die with at least some debt in their name. If you have credit cards, a mortgage, student loans, personal loans, medical bills and auto loans, will they just go away when you die? Or will your family be held responsible? That all depends.

What happens to your debt after death?

Untangling exactly what happens to debt after death is a little tricky. It depends on a number of factors, including:

  • The type of debt
  • Whether someone else is a co-signer or has joint ownership of the property securing the debt
  • Whether the deceased lives in a community property state
  • The laws of the state in which the person lived when they died

Despite the potential variations, according to Kristin N.G. Dzialo, an attorney and partner at the estate planning law firm Eckert Byrne LLC in Cambridge, Mass., some general concepts apply across the board.

“Debt is specific to the person and doesn’t die with them,” Dzialo said. “If someone co-signed the loan or was jointly or severally liable for the debt, then that other person may be 100% responsible for the debt when the other person passes away.”

Jointly and severally is a legal term that means two or more people are fully responsible for the debt. For example, if two people are jointly and severally liable for a mortgage and one dies, the other person becomes fully responsible for the mortgage debt; their liability isn’t limited to their half of the mortgage.

However, Dzialo noted, “if the debt is just in the decedent’s name alone, then no one else is technically responsible for the payment of that debt.”

But that doesn’t mean the debt just goes away — instead, it becomes the responsibility of the deceased person’s estate.

“If there are assets in the decedent’s estate to satisfy the debt then it should be paid,” said Dzialo. “However, whoever is handling the estate (a Personal Representative, Executor or Trustee) must verify that the debt was a legitimate debt of the decedent.”

What happens to credit cards, personal loans and medical bills?

Credit cards, personal loans, medical bills and utilities are unsecured debts — this means they’re not backed by an underlying asset. In most cases, if the estate does not have enough money to pay these debts, the creditor is out of luck. However, there are a few exceptions.

Someone else can be responsible for repaying these debts if:

  • They co-signed the loan application
  • They are the deceased person’s spouse in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin)
  • They are the deceased person’s spouse, and state law requires the spouse to pay certain kinds of debts, such as medical bills
  • They were legally responsible for resolving the estate and didn’t comply with the state’s probate laws

“In community property states, this is where it gets dicey,” said Beverly Harzog, a consumer finance analyst and credit card expert at U.S. News and World Report. Different states play by different rules, so it depends on the state and specific wording of the law. In community property states, it’s a good idea to talk to an attorney to make sure everything is handled properly.

What about mortgages, auto loans and student loan debt?

Mortgages and auto loans are of secured debts, meaning they are backed by collateral. Student loans are typically unsecured, but how they’re handled at death is a little different than other forms of unsecured debt.

Mortgages

When someone passes away with an outstanding mortgage, if there are no co-owners who are jointly and severally liable for the mortgage, no co-signers and the property is not located in a community property state, responsibility for paying off the mortgage won’t fall to anyone else. If nobody pays the mortgage, the bank will foreclose on the home.

However, a home is often one of the largest assets in an estate. If the home is worth more than the mortgage balance, the heirs of the deceased may want to work with the lender to resolve estate issues and avoid foreclosure.

Auto loans

Like a mortgage, an auto loan is secured by the vehicle itself. If there is no co-signer and the estate does not have enough money to pay off the auto loan and heirs do not want the vehicle, the lender can repossess the car to satisfy the debt. If heirs wish to keep the vehicle, they will need to pay off the loan balance.

Student loan debt

How student loan debt is handled at death depends on whether it’s a federal or private student loan.

Federal student loans are discharged once the loan servicer receives acceptable proof of death, such as an original death certificate, a certified copy of the death certificate, or a photocopy of one of those documents. This also applies to federal Parent PLUS loans if the parent or student on whose behalf the parent obtained the loan dies.

With private student loans, it’s a little trickier. Many issuers of private student loans will discharge the debt if the student dies; others won’t. If there is a co-signer on the loan, the co-signer may be responsible for the full balance.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155), signed into law on May 24, 2018, provided some protections to student borrowers and co-signers. The law prohibits lenders from demanding the loan be paid in full when a co-signer dies and requires that a co-signer be released from their obligation within a reasonable timeframe after receiving notice of the borrower’s death. However, these rules take effect for new private student loans after Nov. 18, 2018, and do not apply retroactively, according to the National Association of Federally-Insured Credit Unions. So co-signers may still be on the hook for private student loans taken out before that date.

4 cases when someone might have to repay your debt

As we mentioned above, there are some cases in which someone else may have to repay your debt. Let’s look at those in more detail.

1. When you have a cosigner

If anyone has co-signed for a loan, they can be held responsible for the remaining debt when you die. This can include:

  • Private student loans taken out before Nov. 18, 2018
  • Auto loans
  • Mortgages
  • Credit cards
  • Personal loans
  • Line of credit

Note that the responsibility for repayment doesn’t apply to authorized users on a credit card. However, when the account owner dies, an authorized user must stop using the card. If they continue making new purchases after the account owner dies, they can become responsible for the entire balance, not just the amount charged after death.

2. When you live in a community property state

If you’re married and you live in a community property state, your spouse may be responsible for paying off the debt with community assets, like savings accounts, investments and physical assets.

Whether you live in one of the nine community property states or not, it’s a good idea to talk to an attorney if you are worried about leaving your spouse with debts they can’t afford to repay. “Some states aren’t community property states but act like it in certain areas,” said Harzog.

3. State law requires the family members to pay certain kinds of debt

Paying medical bills is typically the responsibility of the deceased person’s estate if the estate has enough assets to cover the debt, but some states have laws that make spouses or adult children responsible for paying their parent’s medical bills if the parent can’t pay and doesn’t qualify for Medicare.

However, these laws aren’t always enforced, and they may take the family member’s ability to pay into account. Again, if you’re concerned about burdening your family with medical debt after you die, talk to an attorney familiar with the laws in your state.

4. When the legally responsible person doesn’t comply with state probate laws

When a family member passes away, responsibility for preserving assets, paying debts and distributing the remaining assets to the heirs falls to a Personal Representative. That Personal Representative may be an executor named in the will or an administrator appointed by the court.

If the Personal Representative doesn’t comply with state law, they may become personally responsible for the estate’s unpaid debts. Examples include failing to pay estate taxes, making bad investments or giving assets away before creditors are paid.

3 ways to prep your finances in case of death

If you are worried about leaving a tangled net of debts to your family members when you die, there are steps you can take to ensure your finances are neatly tied up.

1. Have a will

“It’s important to have a will and have your affairs in order,” said Harzog. “Do this while you’re young. You’ll update throughout your life as things change, you get married and have kids, but stay on top of this.”

2. Minimize the debt you carry

Of course, the best way to ensure you aren’t leaving debts for your heirs to deal with is to stay out of debt in the first place.

“Pay your credit cards in full and on time,” said Harzog. “It’s hard enough on survivors without leaving debt behind.”

3. Organize your finances

If you died today, would anyone know what assets and debts you have? Where you bank or how to access your accounts and safety deposit box? Whether you have life insurance? Too often, family members have to spend hours sorting through paperwork trying to figure these things out.

For that reason, many experts recommend maintaining a financial information binder. This binder might include:

  • Account numbers and contact information for bank, brokerage and retirement accounts
  • Copies of your will, power of attorney or other legal and estate planning documents
  • Contact information for family members
  • Copies of loan statements, tax returns and other financial information
  • Copies of policies for auto, homeowners/renters, health, life, disability and long-term care insurance
  • An inventory of physical assets including jewelry, artwork, antiques and other valuables
  • Copies of birth certificates and other personal records
  • Copies of real estate deeds and titles to vehicles or boats
  • Statements for other retirement assets, such as pension benefits statements

The binder can be kept in a safe deposit box or fireproof box at home. Just make sure someone knows how to locate it in the event of your death.

Debt after death: FAQs

Coping with the death of a loved one is difficult enough without the added pressure of collection calls from creditors. Here are more questions and answers about what happens to debt after someone dies.

Your family may get calls from debt collectors after your death, even if your family has no obligation to pay off the debts you’ve accumulated.

“If the family member is not in a community property state and not a co-signer, they should let the debt collector know the person is deceased and they’re not liable,” Harzog noted. “If they keep calling you, get an attorney. Some people will pay just to make them go away, but you shouldn’t have to do that if you’re not responsible.”

When someone dies, creditors have a certain period of time to make a claim against the estate. That period of time varies from state to state.

In most states, the executor must post a notice to creditors in the newspaper shortly. The executor may also be required to send written notice to any known creditors. After receiving the notice, the creditors have anywhere from a couple months to a couple years to make their claim.

Again, it’s a good idea to talk to an attorney in your state to see how the law applies where you live.

When you pass away, the Personal Representative of your estate is tasked with selling assets to pay off debts before distributing any remaining assets to heirs — but not all assets are up for grabs. Life insurance and money in retirement accounts, such as 401(k)s and IRAs, with named beneficiaries can be transferred to beneficiaries without going through probate.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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How Much Does It Cost to File Bankruptcy?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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There are few mandatory costs of filing for bankruptcy, but they add up. The major expenses you’ll have to budget for are court, attorney and counseling fees.The fees you pay will depend on a host of factors, including where you live, the assets you own and whether you choose to file Chapter 7 or Chapter 13 bankruptcy.

How much does it cost to file bankruptcy?

In Chapter 7 bankruptcy, a trustee sells off nonexempt assets (such as a second home, cars you don’t use for work, etc.) to settle your debts. After this, your remaining unpaid debts are discharged. Chapter 13 organizes your debts into a three- to five-year plan to repay some or all of your debts, and it generally lets you keep assets you could lose in a Chapter 7 filing. Both types of bankruptcy result in most, if not all, of your remaining debts being discharged. You can learn more about the detailed differences here.

Now, to the costs. The fees mentioned in this piece are accurate as the date of publishing.

Court fees

The court fees for Chapter 7 total $335, while filing for Chapter 13 costs $310. The total amount you pay consists of a filing fee, administrative fees and, if you file Chapter 7, a trustee fee. The filing fees are the same nationwide.

 Chapter 7Chapter 13

Filing fee

$245

$235

Administrative fee

$75

$75

Trustee fee

$15

N/A

Total cost

$335

$310

 

Attorney fee

Beyond court fees, you’ll need to pay an attorney, which will make up the bulk of your bankruptcy expenses. The amount you will pay can vary greatly, from hundreds to thousands of dollars. The attorney’s bill will depend on factors such as your local laws, what type of bankruptcy you file and the attorney’s rates.

Local laws

Where you file for bankruptcy in the country may determine your starting point when budgeting for an attorney. For Chapter 13 filings, the court in each jurisdiction generally sets flat-rate attorneys fees referred to as “no-look” fees.

The fee is “presumed to be reasonable no matter what’s involved in the filing,” said Bob Drummond, the Chapter 13 trustee for the district of Montana. Drummond said more than half of U.S. districts have set no-look-fee thresholds, and the fee varies by district. You can check with your district court to find out if they have a no-look threshold.

The court must approve attorney fees in Chapter 13 filings unless they fall below the no-look amount or the district hasn’t set a no-look threshold. If an attorney charges a rate below the district’s no-look threshold, they don’t have to get the court’s approval. But if they want to charge above the threshold — for example, if they want to charge more for a complex case that will take a lot of their time — the attorney must submit a fee application.

Type of filing

The attorney fee will also vary by type of bankruptcy filing. “There is going to be regional variation, but I think it’s fair to say Chapter 7 is inherently cheaper than Chapter 13,” said John Colwell, president of the National Association of Consumer Bankruptcy Attorneys.

“Chapter 7 is quicker, cleaner [and] faster and therefore … less expensive, generally speaking. With Chapter 13, not only is the debtor in there for three years, four years, five years, but so is the lawyer,” Colwell said. Besides time spent, Colwell said the increased responsibility and liability a lawyer takes on in a Chapter 13 filing compared to a Chapter 7 filing contributes to the higher bill.

Experience

As far as an attorney’s experience factors into cost, Colwell recommends you don’t cut corners to save money.

“When you are shopping for a bankruptcy attorney, you want to look for the best you can afford,” Colwell said.

Colwell recommended shopping around and vetting an attorney before you decide on one. Ask about their track record in bankruptcy cases and why they lost cases — if they have lost any. Colwell advised you also check with organizations such as the Better Business Bureau to see the business’ rating and reviews. If you consider a lawyer based on a referral, ask the person who referred you any questions you might have.

When the attorney is paid

Attorneys involved in a Chapter 7 bankruptcy usually require upfront payment. If their pay becomes a debt due after the bankruptcy filing, it may be discharged and they might not get paid.

With Chapter 13 filings, the attorney may require you to pay some of their fee upfront, and they will generally allow you to pay the remaining amount through your monthly payments in the court-approved repayment plan.

Counseling fees

Regardless of what type of bankruptcy you elect, you must complete two rounds of counseling as part of the process.

You must complete pre-bankruptcy credit counseling within the 180 days before filing for bankruptcy, and it ranges from $10 to $50, depending on where you live.

The court also requires you to complete a post-bankruptcy debtor education course after the petition to discharge your debts. The post-bankruptcy debtor education course fee will likely cost between $50 and $100, depending on where you live.

If you are unable to afford the counseling fee, you can ask the counseling organization for a fee waiver before starting the session. You must complete the counseling with an organization approved by the U.S. Trustee program. You can find a list of approved credit counselors here and a list of approved debtor education counselors here.

Other associated costs

Aside from the standard fees mentioned above, other expenses may increase the cost of bankruptcy. Here are some extra costs that Colwell and Drummond said you might encounter:

  • Credit report: Your attorney may charge a fee (about $30 to $60) to pull your complete credit report.
  • Tax transcript: Your attorney may charge a fee ($10 to $20) to pull your tax transcript from the IRS.
  • Credit repair: Some law firms offer post-bankruptcy credit repair services (the fees vary).
  • Conversion fee: If your case is converted from Chapter 13 to Chapter 7, you must pay a $25 fee.
  • Adversary proceedings: An adversary proceeding is a case within bankruptcy court. An adversary proceeding may occur for various reasons, including anytime a creditor, spouse or other affected party challenges your bankruptcy case and requests to be exempted from the discharge. Generally, your lawyer must appear in court to defend you in an adversary proceeding and will bill you for it.
  • Showing up in court: If you have to show up in court and your lawyer has to be there with you, they will likely charge you an additional attorney fee. For example, in a Chapter 13 filing it may take more than one attempt to get your repayment plan confirmed by the court. Each time you try, your lawyer will need to be present.

Reducing the cost of filing for bankruptcy

Filing for bankruptcy can be expensive. On the bright side, there are a few things you can do to help reduce your cost of filing.

Court fee waivers

Those who may not be able to afford the full $335 associated with filing a Chapter 7 bankruptcy may qualify for a fee waiver. You must fill out an application to waive the Chapter 7 fee.

Waivers are generally not available for Chapter 13 cases, Drummond told MagnifyMoney.

“The reason we don’t see [waivers] as much in a Chapter 13 case is because you have to have income and the ability to make a plan payment,” Drummond said. “If they can do that, they probably have enough income to pay the filing fee, too.” Chapter 13 court fees can generally be paid in installments, described below.

Paying court fees in installments

In either a Chapter 7 or Chapter 13 filing, the debtor can file an application with the petition asking to pay the filing fee in installments. The debtor must propose an installment schedule, and the fee may be paid in up to four installments. When you submit the application, the budget included in your bankruptcy petition must justify your need to pay the court fees in installments.

Pro bono

If you don’t have the funds for a bankruptcy attorney, you may consider looking into pro bono services. There may be an organization in your state that offers pro bono legal services. The Montana Legal Services Association, the Consumer Bankruptcy Assistance Project’s Fresh Start Clinic in Philadelphia and the New York City Bankruptcy Assistance Project all offer pro bono help for Chapter 7 filings for eligible clients.

You can find a list of pro bono resources, compiled by the American College of Bankruptcy Foundation, here. You can also search for organizations that provide pro bono legal services on Pro Bono Net.

DIY (pro se)

You could also forgo an attorney and attempt to complete a bankruptcy filing on your own, but the experts told MagnifyMoney they wouldn’t recommend it.

“Sure you can file pro se. Do I advise that you do it? Hell no. Double hell no,” Colwell said. “The paperwork is extremely complex, and there are even attorneys that don’t file bankruptcy because they think they might screw something up.”

Drummond told MagnifyMoney that pro se cases are more likely to get dismissed or run into issues with assets, resulting in the debtor losing assets they wouldn’t have had they consulted with an attorney.

“In the long run, they may end up saving more money if they hired counsel than if they didn’t,” Drummond said.

Judgment proof

If you are elderly, disabled or a retiree, you may not need to file for bankruptcy at all, as you may be considered “judgment proof” or “collection proof.” That means even if your creditors tried to collect and sued you, they wouldn’t be able to collect because your retirement, Social Security or disability income may be exempt from collection. If you have a large asset such as a home, however, the creditor could place a lien on the property, which may pop up if you decide to sell the asset. Consult with an attorney to verify if you are judgment proof.

The bottom line

It will more than likely cost you hundreds to thousands of dollars to complete a bankruptcy filing, but the benefit of getting your debts discharged may make the cost worth it. The court and counseling fees are mandatory and fixed, for the most part, but you may have some flexibility when it comes to the bulk of your cost: budgeting for an attorney. It’s always worth it to do your due diligence — shop around, compare rates and see if you qualify for pro bono options before choosing counsel.

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Is Debt Consolidation a Good or Bad Idea? Here’s What to Consider

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Even though most people try to stay out of debt, sometimes it’s hard to avoid. Over time, you might start to accumulate a number of different loans that served different purposes. This is commonly seen with student loans. In order to afford an education, students may take out debt each year to pay for tuition and other costs.

However, this problem isn’t exclusive to those who owe student loans: in fact, many people run into the frustrating dilemma of having multiple consumer loans in repayment.

To clean up their repayment process — and to possibly get a better interest rate or repayment term — some people turn to debt consolidation. But is debt consolidation a good idea? And if so, when is it right for you?

What is debt consolidation?

Debt consolidation is a process that rolls all of your existing debt into one, convenient loan. This means you could go from having multiple loan payments from different lenders with different repayment terms, to having one payment each month with a single lender.

The debt consolidation loan (often a personal loan) is used to pay off all of your other loans. This can be viewed much like a balance transfer — you’re transferring the balance of all of your loans to one bigger loan.

The lender providing your loan typically provides you with a lump sum payment to repay all of your debt, or it works directly with your other lenders to pay off your loans for you as part of the consolidation process.

You can consolidate a wide range of debt types, including:

Debt consolidation can only really work if you can secure a personal loan with an interest rate that is lower than what you are currently paying on your debts. That way, you’ll save money on interest over time after consolidating.

Finding a lender can be difficult. You may consider local banks and credit unions. But online lenders may have better rates and terms. To help you shop lenders, consider LendingTree’s personal loan tool. Using the tool, you’ll enter some personal information plus what you’re looking for in a loan. Afterward, you’ll receive loan offers, which you can compare to find the best deal for your credit score.

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When is debt consolidation a good idea?

Debt consolidation isn’t for everyone, but there are several scenarios where this course of action would make sense for your unique financial situation.

You have a high credit score that could secure you a lower interest rate.

If you’re considering debt consolidation, you’re looking to get a better deal on your new, consolidated loan than what you already have. If you’re paying high-interest debt (such as credit cards or payday loans), consolidating at a lower interest rate could save you money on interest. (Find out how to view your credit score here.)

You have an isolated reason for getting behind on your debt.

Sometimes life happens, and we end up with debts that are unavoidable in the moment. A medical emergency that your savings couldn’t totally cover is an excellent example of this type of unavoidable debt. If you’re working to put a plan in place to stay out of debt in the future and are looking to simplify your debt repayment, consolidation may be for you.

Your consolidated loan offers additional benefits.

This might mean a shorter repayment term or fewer fees to ensure you’re making the most out of a new loan.

You’re exhausted by tracking all of your different loans.

If you have a number of different loans and are running the risk of missing a payment or overpaying due to high interest, it might make sense to consolidate them all to simplify your financial life and help you pay down your debt more quickly.

When is debt consolidation a bad idea?

Although debt consolidation can be a huge help in many cases, there are certain situations where it doesn’t make sense to consolidate your debt.

You have a spending problem.

Debt consolidation shouldn’t be used as a method to free up more cash flow to continue spending. If you find that your debt is largely consumer debt, and that you have no intention of reevaluating your budget or your lifestyle to support your debt repayment journey, consolidation isn’t going to make things better — it’s just going to act as a short term fix to your lifestyle problem.

You’re digging yourself a deeper hole.

Although it’s commonly the case that a debt consolidation loan will come with better interest rates and repayment terms, this isn’t always true. If consolidating your debt is going to force you to repay your loans at a higher interest rate, you’re better off keeping your multiple loans (even if it’s frustrating to juggle them all simultaneously).

You have an average or below-average credit score.

The interest rate you’re able to secure is largely dependent on your credit score. If your score is less than stellar, you’ll have to pay close attention to what interest rate you’re offered, and whether it’s actually a better solution than simply staying the course and paying down your multiple debts.

You’re stuck with new fees.

Sometimes, debt consolidation services have an origination fee of between 1% to 8%. If your ultimate goal is to save money through debt consolidation, this may not work for you.

Don’t just assume that debt consolidation is the answer you’ve been looking for — do your research first. You might find that sticking with your numerous debts and paying them down at their reasonable interest rates makes the most sense until you’re able to get your spending habits in check, or until you’re able to raise your credit score by consistently paying them down.

What are the risks of debt consolidation?

There are several risks and downsides to debt consolidation that you need to be aware of:

It might damage your credit score.

When you first consolidate your debt, you may see a minor dip in your credit score: this is because the lender you’re applying with will do a hard credit inquiry after you fill out your application. If you apply with multiple lenders, multiple hard credit inquiries will push your credit score down. However, you can avoid this problem by getting pre-qualified with multiple lenders, and only filling out an official application with one of them to reduce the number of hard credit inquiries on your credit report.

You may be unable to continue to use lines of credit you previously had available.

By using a debt consolidation service, like a personal loan, your total credit utilization doesn’t go down. So, even though your credit card is magically paid off by your new consolidated loan, that doesn’t mean you get to start racking up more debt. Doing so will cause your credit score to go down, and you may end up in an even stickier situation than you were in before.

You may pay more interest over time.

You’ve likely been paying back your existing debts at a high interest rate for a given length of time. Sometimes, people pay back multiple debts for years before they consider consolidation. Then, when you apply for consolidation, they might extend your repayment term even further — meaning you’re technically paying “extra” interest for the convenience of consolidation. However, you can fix this problem by working to pay your debt back before your repayment period is up and, in turn, driving down your principal (and the total interest you have to pay).

You may have fees.

Some debt consolidation loans have origination fees to process your new loan. Watch these fees closely to make sure they’re not unreasonably high — if they are, consider looking into another debt consolidation method.

You may get a shortened timeline for repayment.

Debt consolidation isn’t usually intended to be a long-term solution. Instead, debt consolidators shorten your repayment timeline. This can be incredibly helpful if you’re looking to get out of debt quickly, but it also may mean higher monthly payments and an increased likelihood that you’ll default on your loan.

3 alternatives to debt consolidation

If you’ve looked into debt consolidation, and have determined it isn’t the right choice for you, you have several alternatives to consider.

  1. Home equity line of credit (HELOC). A HELOC is where you borrow money against the equity you’ve built up in your home. However, if you’re worried about being unable to repay the loan, you may want to select a different alternative option as your home is technically collateral if you’re unable to pay your HELOC. (Learn more about using home equity to consolidate debt here!)
  1. Balance transfer. A credit card balance transfer is often a great option for people looking to consolidate their credit card debt. Many credit card companies offer 0% interest for a set period of time, which means you could potentially knock down a notable portion of your debt principal before having to pay interest each month. Be sure to read the terms and conditions regarding any fees or deferred interest clauses. (Check out our pick for the best balance transfer credit cards.)
  2. Debt refinancing. If you’re more concerned about getting a lower interest rate on your loans but aren’t worried about managing multiple payments, refinancing might be an option to consider. Through refinancing, you’ll be able to apply for a lower interest rate through your existing lenders, based on your previous repayment history.

Make sure you look at all of your options when trying to consolidate your debt — you never know what you might find, or what’s going to work best for your long-term financial goals. If you do choose to pursue debt consolidation, make sure to shop around with different lenders. Being able to compare different interest rates, fees, and repayment terms, can help you ensure that you’re getting the best loan as you start to move toward debt free living.

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Can You Be Arrested for Debt?

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You’re in significant debt. The collection calls have started coming in, and letters seem to appear in your mailbox every day. Your debt is mounting, and the constant phone calls and letters are starting to make you nervous.

Can I be arrested for my debt? If this question has entered your mind more than once, take a deep breath and relax. Aside from a handful of extenuating circumstances (which we’ll cover below), you cannot be arrested for your debt.

Read on for everything you need to know about whether you can be arrested for debt and what you should do if a lender threatens to arrest you.

Can you be arrested for debt?

In short, the answer is no. You cannot be arrested for the debt you hold, whether it’s credit card debt, a personal loan, a medical bill, student loans, utility bills, a car loan or any other form of debt that is referred to as civil debt. You can be sued for your debt, but you cannot be arrested. It is illegal for lenders and debt collectors to threaten to arrest you for not paying back your debt.

“Debt collectors can’t threaten to arrest someone,” said Barry Coleman, vice president of counseling and education programs for the National Foundation for Credit Counseling. “They can’t make threats to intimidate people.”

There are a handful of situations, Coleman said, in which threatening to arrest someone can be a legal option. This would apply in rare cases in which the arrest would be related to something tangential to the debt — such as fraudulent activity, identity theft or defying a court order — but not the debt itself.

“We always say: If someone gets an order to appear in court, even if they know they legally owe that debt and they can’t pay it right then and there, show up in court,” Coleman said. “Because if you don’t, then you will face other consequences.”

Also, consumers can be arrested if they cheat on their taxes or don’t pay child support debt, according to Coleman. “Those types of debt are a little bit different,” he said.

What should I do if a lender threatens to arrest me?

A lender threatening to arrest a debtor violates the Federal Trade Commission’s Fair Debt Collection Practices Act (FDCPA), according to John Ulzheimer, founder of The Ulzheimer Group and a credit reporting expert who worked for FICO and Equifax.

“You’re not allowed to use abusive tactics to collect debt,” Ulzheimer said. “And certainly indicating or suggesting to somebody that they can go to jail if they don’t pay [their debts] is illegal.”

If a lender threatens to arrest you, there are a few things you can do. You can do nothing and hope the threats stop, Ulzheimer said. (It is wise to document the threats of arrest, however, in case you need to take future legal action against the lender or debt collector.)

You can also leverage your rights under the FDCPA and file a lawsuit against the debt collector for abusive debt collection practices.

Coleman adds that you can report the lender to the Consumer Financial Protection Bureau (CFPB), and someone with the bureau will follow up with you about the complaint.

“Both the [CFPB] and the Federal Trade Commission have authority to pursue action if a debt collector is threatening something that they can’t legally do,” Coleman said.

What can happen if I don’t pay back what I owe?

Consequences for not paying back debt vary by state, but there are some federal regulations on unpaid debt.

Although you cannot be arrested for your debt, there are a handful of other things that can happen. “There are a lot of bad things that can happen when you don’t pay your debt,” Ulzheimer said. “Nothing good comes from not paying your obligations, right?”

If you don’t pay back your debt, it will go into default. Once in default, creditors will typically try to collect the debt themselves, Ulzheimer said. Your credit report and score will be negatively affected, and you will likely receive phone calls and letters.

If you still don’t pay back your debt, the lender will likely sell your debt to a third-party collection agency or debt collector. “They will eventually get sick and tired of attempting to collect the debt and they will either sell the debt or consign the debt to a debt collector,” Ulzheimer said. “If the debt is large enough or if the debt collector chooses to, they can file a lawsuit against you.”

If a debt collector files a lawsuit against you, you should show up to court no matter what. If you don’t show up, the collector can get a default judgment against you.

Coleman said one potential repercussion of not paying back one’s debt is court-ordered wage garnishment. That means the debt collector can legally seize a portion of your paycheck before the money hits your bank account.

“Wage garnishment, I think, is probably the biggest repercussion of not paying a debt,” he said. “It is probably the biggest concern for folks that are behind on the debt and aren’t trying to work with that particular creditor or debt collector.”

How to fix your debts

If you’re struggling to pay back your debts, there are a handful of important steps you can take to get on solid financial footing.

1. Don’t ignore your lenders or debt collectors.

Even if you can’t afford to pay back your debts, one of the worst things you can do is avoid your lender or debt collector. Answer the lender or debt collector’s phone calls, and, of course, any court summons you receive.

“Consumers will want to be proactive and work with their creditors and any debt collectors when they owe debt to work out some sort of an arrangement to avoid it escalating and becoming an even bigger situation,” Coleman said.

2. Negotiate with your lenders.

Some consumers might not be aware of this, but you can negotiate your debts with your lenders. Contact your lender and explain your financial situation. Tell it that although you cannot repay the entire debt, you can pay X amount each month. If you have extenuating circumstances, such as the loss of a job, illness or a death in the family, tell the lender.

“If you don’t have the means to pay, just be honest and state that,” Coleman said. “If you can pay a little bit, offer to do that. If the lender says, ‘OK, I’ll accept this payment arrangement,’ just ask that it be in writing so that you have something to back that up.”

3. Seek help from a nonprofit credit counseling agency.

If you’re struggling to repay a significant amount of debt across multiple channels, consider contacting a nonprofit credit counseling agency. Counselors at these agencies can help you come up with a plan for repaying your debt and can negotiate with lenders on your behalf if necessary.

4. Consider using the debt snowball or debt avalanche method for repaying debt.

These are two common strategies consumers use to repay their debt. The debt snowball method involves paying back debts from smallest to largest, while the debt avalanche method involves paying back higher-interest debts first.

5. Consolidate your debt.

If you have multiple debts and are struggling to stay organized, consider taking out a debt consolidation loan (nonprofit credit counselors can help in this area). This involves consolidating all your debts and making one monthly payment that gets distributed among your various creditors. If you have a fair credit score, you may even be able to snag lower interest rates, which could save you money in the long term.

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Although you cannot be arrested for debt, there are myriad consequences that can result from not paying back what you owe. Ignoring your debts or any court-ordered summons will only make your situation worse. Be as proactive as possible to avoid the repercussions of not repaying your debt.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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Jamie Friedlander is a writer at MagnifyMoney. You can email Jamie here

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Unsecured Debt vs. Secured Debt: What’s the Difference?

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When talking about debt, it’s important to understand the two major forms: unsecured debt and secured debt. Knowing what types of debt you owe, and the differences between secured and unsecured debt, is crucial when it comes to personal finance. This article will define each type of debt, discuss the differences, highlight pros and cons and provide ways to manage it in your budget.

What is unsecured debt?

Unsecured debt is borrowed money that has no collateral — something pledged as security for repayment — attached in case the borrower defaults on the loan. If the borrower defaults on the debt, the bank or lender has nothing to take back as repayment for the debt. Interest rates are usually higher with unsecured loans because they are riskier for the lender.

Common forms of unsecured debt include:

  • Student loans: A student loan is money given by a financial institution or the federal government to a student to pay for advanced education. A student does not have to put down collateral in order to obtain a student loan.
  • Personal loans: Personal loans are another form of unsecured debt. An individual can take out a personal loan for a variety of financial reasons without having to put down collateral — like a home or car — in exchange for the initial loan.
  • Credit cards: Credit cards allow people to borrow money from the bank to make any purchase on credit, with the stipulation that you’ll pay the amount back within a certain period of time. If you pay the bank back in full within the appointed amount of time (no less than 21 days), you will not owe any interest or additional payments on the card. If you fail to pay off your debt during the grace period, you will owe interest money in addition to the original amount owed.

As with all things, there are pros and cons to unsecured debt.

Pros of unsecured debt

1. Unsecured debt is less risky for the borrower
Unsecured debt is less risky for the borrower and more risky for the lender. Because lenders do not have any collateral for your unsecured debt, you cannot lose any of your assets if you cannot make a payment. A lender is not able to take back the purchases you charged on your credit card, but there are other consequences to not repaying unsecured debt.

2. Unsecured debt could improve your credit score if paid in full
If borrowers are diligent about paying their monthly payments on time, this can improve their overall credit score. By regularly paying the debt in full, you’re proving that you are reliable, trustworthy and a safe bet for future loans.

3. Unsecured loans can be used at your discretion
Unsecured loans can be used to pay for a variety of items. Though debt like student loans is limited in its uses, borrowers can use personal loans or credit cards to pay for almost anything, including medical bills, home remodels or debt consolidation. These types of unsecured loans offer borrowers flexibility and more choices on how they use the money borrowed.

Cons of unsecured debt

1. Missed payments can negatively impact your credit
While paying an unsecured debt on time can improve your credit score, missing payments can negatively impact your credit. Lenders can report your failure to pay to a credit bureau, which can lower your credit score and make it more difficult to obtain loans in the future.

2. Unsecured debt can be reported to a debt collector
If you’re unable to pay back your unsecured debt, the lender will likely hire a debt collector to press you to pay back your debt. Debt collectors can aggressively hound you to receive payment for your unsecured debt, and failure to pay it back may also result in legal issues where you can be sued.

What is secured debt?

Secured debt is backed with or guaranteed by collateral and assets. Should a borrower default on a secured loan, the lender has the legal right to take said collateral as payback for the debt owed.

Common forms of secured debt are:

  • Mortgages: A mortgage is a loan from a bank or a mortgage lender that helps you finance the purchase of a home. Borrowers acquire a mortgage knowing that if they default on their monthly payments, the bank can take the house from them as payment for the debt. The house is the collateral that secures the debt.
  • Vehicle loans: Like a mortgage, a loan for a car is a secured form of debt. Vehicle loans are money given to a borrower to put towards a vehicle. Should the borrower not make the required car payment, the lender can repossess the car to satisfy the debt.
  • Car title loans: Once you have paid off your vehicle loan in full, you will own the car outright and receive the car title. A car title can then be used as collateral for future loans. The borrower can give the lender the car title as an asset. Should the borrower default on said loan, they would not receive the car title back until the debt was repaid in full.

Pros of secured debt

1. Secured debt usually has lower interest rates
Secured debts are less risky for lenders because the loan is secured by an asset. If you don’t pay up, the lender can take your collateral to earn back the money it lost on their loan to you. Because the loan is a safer bet, banks and lenders usually offer better interest rates. Lower interest rates allow you to pay more to the principle each month, which in turn, allows you to pay off the loan faster.

For example, the average interest rate on a 30-year mortgage is 4.83% (as of Nov. 1 2018), according to Freddie Mac. In comparison, the interest rate on a personal loan can vary anywhere from 4.99% to 29.99%, according to Lending Tree, which owns Magnify Money.

2. Secured loans can be easier to obtain
Secured loans are a relatively safe option for lenders. By securing your loan with collateral, you’re telling the bank that if you default, they can take said collateral as payment.

Because of this, secured loans are often easier for borrowers to obtain. Unsecured loans are often dependent on your credit score, so not everyone can qualify. While credit score does play a role in obtaining any type of loan, secured loans may have less stringent requirements for borrowers to meet.

3. Secured debt allows you to build credit
When you pay your monthly mortgage or vehicle payment on time, you’re showing lenders that you are a reliable borrower. This in turn boosts your credit score and allows you to improve your credit for future loans.

Cons of secured debt

1. Failure to pay secured debts results in loss of assets
Unlike unsecured debt, failure to pay secured debts results in loss of your collateral. Should you miss payments on your mortgage or vehicle, the lender can foreclose on your home or repossess your car.

2. Default on secured loans can damage your credit
While paying your secured debt on time can build your credit and improve your credit score, failure to pay your secured debt can result in major damage to your credit and affect your ability to get a loan in the future. In addition to losing physical assets with a secured loan, you can also damage your credit score, which can have serious financial repercussions.

Which form of debt is better?

All debt — secured and unsecured — should be taken seriously. Mismanaged debt can negatively impact your credit score, affect your ability to get any kind of future loan and wreck your budget and personal finances.

Secured debt is necessary for obtaining a mortgage or a vehicle loan. You’ll often receive a lower interest rate and higher loan amount, but will have larger consequences — like losing your assets — for missing a payment or defaulting on the debt. Unsecured debt requires no up-front collateral, but failure to pay can result in battles with debt collectors and the courts, and can also damage your credit score and financial history.

Whether you’re paying off secured or unsecured debt, it’s important to ensure you’re making your monthly payments and paying them on time. Failure to pay off debt can result in unnecessary interest payments, loss of assets, damage to your credit score, financial stress and serious legal issues.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Sage Evans
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Sage Evans is a writer at MagnifyMoney. You can email Sage here

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Are Balance Transfers the Best Way to Pay Off Debt?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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When you’re buried under a pile of debt, you’ll need to go beyond making the minimum payments if you hope to get debt-free as quickly as possible. And with interest rates on an upward swing, it may not be something you can afford to ignore.

This is where balance transfer credit cards come into play. Once you understand how they work, they can be a powerful tool that lets you temporarily pause your interest payments — and chip away at your principal balances faster.

MagnifyMoney tapped the experts to unpack everything you need to know about balance transfers. Here’s how to master the ins and outs of one of the most effective debt repayment options available.

What is a balance transfer?

It’s all in the name. A balance transfer involves taking one or more credit card balances and transferring them to a different card that has a lower interest rate. The ideal situation is to roll everything over to a card that has a 0% APR promotional period. This essentially eliminates the interest for a set period, giving you a chance to catch your breath and, if all goes according to plan, pay off the balance before the interest kicks in.

To pull off a balance transfer, you can either open a new low- or no-interest credit card, or look to your existing cards that you’ve already paid off to see if there are any deals to be had. According to David Metzger, a Chicago-based certified financial planner and founder of Onyx Wealth Management, it isn’t uncommon to find 0% interest rate promotions on your existing cards.

“If you’ve got multiple cards, chances are you get offers like that all the time,” he said.

If not, don’t be afraid to reach out to your credit card companies to see if they have any deals up for grabs. If they don’t, or you don’t have the credit capacity on your existing cards, you can shop online for a balance transfer card.

As for the promotional introductory period, it varies from offer to offer, with the best rates and terms generally going to those who’ve got excellent credit. Those with a minimum credit score of 680 can expect transfer periods that last anywhere from 12 to 21 months. Keep in mind that some offers tack on a balance transfer fee to the tune of 0% to 4%, so it pays to read the fine print.

How balance transfers can save you money

Temporarily eliminating your interest rate can translate to pretty significant savings. Let’s say you have the following open balances, and you pay $100 per month on each:

  • $1,000 with 18.00% APR
  • $2,000 with 16.00% APR
  • $800 with 20.00% APR

If you stay on this path, you’ll shell out $500 in interest and get out of debt in 24 months. But a balance transfer with 0% APR for 15 months will keep that $500 in your pocket. Your monthly payment won’t change, and you’ll also pay off the balance nine months faster. From a numbers-and-sense perspective, it’s a no-brainer.

“You can save a ridiculous amount in interest payments, but the name of the game is to more or less come close to paying the balance off completely before that transition over to that higher interest rate,” Lucas Casarez, a Fort Collins, Colo.-based certified financial planner and founder of Level Up Financial Planning, told MagnifyMoney.

Applying for a balance transfer credit card

As Metzger mentioned, turn first to any existing credit cards that can absorb some new debt. Are there any balance transfer offers available? If not, the best place to search and compare balance transfer offers is online. According to Casarez, the following factors play the biggest role in the kinds of deals for which you’ll be eligible:

  • A good credit score: You won’t qualify for much if your credit score is below 680. At the time of this writing, the longest promo periods with 0% interest were reserved for this bunch. Why? A lower credit score is a red flag to credit card companies that you may be a risky borrower.
  • Reliable income: Your credit score doesn’t stand alone. “You could have the best credit score in the world, but lenders still want to know that you have the ability to pay your bill,” Casarez said.

He adds that folks in retirement, for example, may have a tougher time qualifying for a worthwhile balance transfer since their money may come more from retirement accounts rather than Social Security or pensions. Casarez does clarify, however, that credit card companies typically want to approve you.

“These banks make a lot of money the longer that your current balance is at a higher interest rate,” he said.

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Regular APR
13.99% - 24.99% Variable
Intro Purchase APR
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Intro BT APR
0% for 18 Months
Annual fee
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Balance Transfer Fee
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Credit required
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3 questions to ask before transferring your debt

If you’re looking to save money and get out of debt faster, balance transfers are a powerful weapon to have in your arsenal — if you know how to use them wisely. Here’s what to consider before giving it a go.

1. Do you understand why you’re in debt?

This strategy won’t work if you don’t get to the root of why you’re in debt to begin with. What kinds of purchases make up the bulk of your existing credit card statements? Whether they’re living expenses, splurges or surprise pop-up bills, it’s time to revisit your budget to prevent falling into the same patterns again. After your balance transfer is complete, seeing $0 balances on your old credit cards can create serious temptation.

“If you don’t have a plan, balance transfers may be something that allow you to spend even more money, so it could put you further into the hole,” Casarez said. “It’s like a hot potato you’re passing around, but there’s going to come a day when you have to pay up.”

Having emergency savings on hand provides an additional safety net because you won’t need a credit card to see you through your next unexpected bill. Our insiders recommend building a $1,000 mini-emergency fund while you’re paying off debt.

2. Can you pay off your debt before the introductory period ends?

Once your budget and emergency fund are in shape, it’s time to shop around online for balance transfer offers. Ones with the lowest transfer fees and longest 0% introductory periods are the best, but here’s the catch: This strategy only makes sense if you can pay off the balance before that period ends, at which point you’ll be slammed with interest charges on the remaining balance.

Standard interest rates after the introductory promo period ends are generally higher than other credit cards. And if you miss a payment, the credit card company may cancel your promo period.

3. Are you OK with taking a short-term credit hit?

Opening a new balance transfer card requires a hard credit inquiry, which will result in a short-term dip in your credit score. Your score may also take a small hit if the transfer itself uses up more than 30% of your new credit line. (How much you owe accounts for 30% of your FICO score.) But Metzger said it may be worth it if you’re ultimately eliminating high-interest debt faster.

“Your score will improve much faster than it would have had you not engaged in the strategy,” he said. “You take a small step backward for a huge step forward, if you’ve got the discipline to do it.”

Metzger does suggest using caution with balance transfers if you plan on financing a big purchase, such as a mortgage or car, within the next month or two. Depending on your financial health, slight fluctuations in your credit score could prevent you from getting the best interest rates on these purchases.

3 alternatives to a balance transfer

If a balance transfer isn’t in the cards for you right now, there are still plenty of viable ways to get out of debt as quickly as possible. Here are a few tried-and-true debt repayment methods you can put to use today.

1. Debt snowball method

The debt snowball approach prioritizes your lowest balance first, regardless of your interest rates. You make the minimum payments on all your debts while hitting the lowest balance the hardest with any extra income you can spare. Once it’s paid off, you take whatever you were spending there and roll it over to the next lowest balance. Keep on chugging along until all your balances are paid off.

“The nice thing about the debt snowball, and the reason that it tends to be the most effective way, is that you start to have those wins a lot faster when you’re focusing on those smaller balances,” Casarez said.

“You start to build up some momentum and confidence,” he added. “As you do that, you start to get a little bit more swagger and feel like you’re actually making progress and have more control over your financial situation than you thought.”

2. Debt avalanche method

This strategy puts your highest-interest balance above all others. When you compare it to the debt snowball method, it’s the fastest and cheapest way to get the job done, which is why Metzger said it makes the most sense.

“With that being said, people are quirky,” he added. “If paying down the lowest balance and snowballing it that way works for you, then by all means do it. The outcome is far more important than the path you take to get there.”

3. Debt Consolidation loan

Another way to tackle your debt is to consolidate it using a personal loan. Once you receive the loan amount, you use the funds to pay off all your debt, at which point you’ll have one new balance and monthly payment. This strategy is ideal for those who can lock down a lower interest rate. What’s more, personal loans often have fixed rates, monthly payments and repayment timelines, so it makes budgeting a whole lot easier.

And since it’s a lump-sum installment loan — not a revolving credit line in which you can charge and pay off as you go — using it to eliminate credit card debt should boost your credit score because you’re effectively using less available credit. Some personal loans do come with an origination fee, typically between 0% and 6%, so do the math to see if it’s the right debt consolidation method for you.

When shopping for a debt consolidation loan, it’s best to compare your option to make sure you get the one with the lowest interest rate. LendingTree, the parent company to MagnifyMoney, allows you to compare up to five lenders without affecting your credit score. Use our table below to get the best results!



Compare Debt Consolidation Loan Options

Which is the best way to pay off debt?

It all depends on your situation. If you’ve got a solid credit score and qualify for attractive balance transfer offers, it’s worth exploring — as long as you don’t charge new debt and you’ve got a plan in place for paying off the balance before the introductory period ends. When done right, balance transfers are great shortcuts that could save you a significant amount of time and money in the long run.

The debt snowball and avalanche methods are worthwhile alternatives for those who prefer to get out of debt the old-fashioned way. Meanwhile, a debt consolidation loan could pave the way for a locked-in lower interest rate. The main takeaway here is that you have multiple debt repayment options at your fingertips. They’re all, as the old saying goes, “Different paths up the same mountain.”

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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