Debt Consolidation
Debt consolidation loans consolidate debts. Small debts are collected under the aegis of one larger loan. To use one particularly loathsome metaphor (though not, as it happens, necessarily inappropriate), think about your own family’s trash consolidation schedule – or, as most households think of the practice, trash day. Various waste baskets of limited capacity are together thrown into one sizable garbage can. Simple, yes, but is that really the extent of the duty? There are other details to consider. For towns with recycling programs, glass must be separated from plastic and placed in separate bins. Paper and cardboard have their own special container, or, perhaps, depending on the family, best utilized as kindling for the hearth. These details do matter.
Gruesomely poetic, but this is relevant to debt consolidation for two reasons. With cash strapped households, it often makes more sense for them to spend the time returning bottles to stores or recycling centers that return money for the privilege. Also – and, perhaps more importantly – after a particularly long or wasteful period, many families find that their main garbage can would overflow with the entirety of their detritus and must make choices. This is the essence of debt consolidation. In order to convince the borrowers to pay the (often extravagant) sums involved, loan officers must reduce interest rates, but there is such a thing as good debt and bad debt. Car loans, for one example, rarely boast rates much worse than what would be offered by debt consolidation. The consumer’s overall payments would drop, of course, due to the artificially extended terms. Decreasing one percent of said consumer’s interest rates while lengthening the time spent paying back the loan by ten or twenty or however many years does not, however, make the slightest bit of financial sense. Regardless of the momentary (although admitted) allure of freed cash flow, debtors shall find compound interest a harsh mistress.
Of course, for some individuals expecting a sudden windfall of funds, the debt consolidation approach may actually be of benefit regardless of the outlined terms. With the proper credit, borrowers may be brought debt consolidation loans essentially without interest for the first year or two. Debtors utilizing such a strategy would nonetheless be surprised to see their credit scores actually fall once all lenders (save one, should go without saying) have been satisfied. Almost nobody understands the mathematics behind the Fair Isaac Corporation’s scoring system utilized by the three primary credit bureaus Equifax, Experian and TransUnion. The inventor of the scores Earl Isaac – the first man to have ever crashed a computer, as legend has it – implemented a series of ever more complicated logarithms more than fifty years ago that not only discern an individual’s payment history but also their current credit availability. Instantly paying back each and every creditor (aside, again, whomever holds the consolidation loan) spooks the super computers that currently rate the credit of all the western world. Moreover, much as professional analysts outside the FICO compounds comprehend their practices, too many open credit accounts absent balances – irrational as this may sound – also makes the logarithms nervous.
Once again, for borrowers that have maintained such sparkling credit scores as to receive debt consolidation loans for negligible interest, they should soon be able to restore their credit rating once the initial debt consolidation has been paid. It should be underlined, though, that such offers only apply to the slightest minority of borrowers needing such a loan. While so-called signature loans (essentially, another unsecured debt) do exist for members of the moneyed elite down on their luck, most every other consolidation loan comes only through the pledging of collateral – homes, traditionally. One of the reasons that the debt consolidation alternative has spiraled in popularity the last decade has been the similar rise of predatory mortgage loan officers.
In the past, when mortgage loans first began to be made available to common Americans without much in the way of down payments, loan officers were little more than junior professionals in the larger banks or managers in community savings and loans. To this day, they generally do not have any training similar to what consumers expect from, say, their realtors, and, until recently, needed no licensing or certification at all. Following the lapse of governmental regulation, many lenders sprung up with shambling salesmen promising funds to homeowners that, in previous years, would never have been permitted. This trend in the industry toward sub-prime scavengers drew a number of unfortunate sorts toward a momentary explosion of easy funds which exploited their supposed clients’ greed and naivete. This sub-prime lending crisis has, arguably, been one of the leading causes of our current economic woes, and, without a doubt, the failure of so many mortgage companies and the accompanying foreclosure boom has led to the free fall of home values nationwide.
The preceding paragraphs have been intended not only to provide some explanation as to why borrowers of modest credit scores may find debt consolidation loans far more difficult to obtain under current circumstances but also as a caution about so flippantly trading away their home equity for a temporary peace of mind. With the national economy at a turning point and so many regions of the country witnessing property values fall drastically by the month, homeowners should be very, very careful about touching the safety net of what will most likely be their greatest lifetime investment. More to the point, anyone should be concerned about borrowing upon their shelter to pay back yesterday’s addled spending. Debt consolidation loans, for a teensy percentage of suddenly aggrieved debtors, can be a saving grace. It is easy, the consequences as to credit are relatively small, there are potential IRS write-offs for those with determined tax accountants, but, for most homeowners bothered by telemarketers or hounded by mailings from their own bank, it is an option best left alone.
Debt Settlement
Compared to the relative obviousness of debt consolidation loans once borrowers are aware they exist, debt settlement programs are far more difficult to explain within the space limitations of this essay. Debt settlement is, as you have probably guessed, a very new industry. Settlement negotiation originally began as a plaything for industrialists unable to pay their minimum bills after the late 1980s stock market crash but yet unwilling to surrender their assets to government mandated disposition. Bankruptcy was still then fully available to most every borrower, and a few financiers realized they could use this threat to their advantage. By repeatedly boasting about their decision to undergo government protected debt elimination, they managed to have lenders cut the balances owed by more than fifty percent in exchange for an agreed upon payment schedule promising to pay back the remainder due in less than five years.
As you would assume, our current situation – national economy beholden to foreign powers, manufacturing jobs (or most any offering a living wage) vanishing every second, scarcities among gas and food and household necessities approaching critical levels – has created a small boom within the debt relief field. Consumer Credit Counselors ply their ever more suspicious trade (beholden, as they are, to their true masters Visa and Mastercard) for minimal advantage and maximum advertisements to the ultimate regret of the ever diminishing adherents to CCC ‘assistance’. The consumers, at least, are realizing the problems of depending upon credit counseling authorities better paid by the banks they are supposed to fight against; the credit card companies continue to fund better and brighter commercials.
Much as the Fair Isaac Corporation credit scoring sys
tem seems both ineffable and wholly unfair, that plan realized before anyone else just how little the Consumer Credit Counseling programs should be trusted, and FICO scores judged the CCC clients accordingly. Not only, within the CCC system, does the debtor have absolutely no chance for initial debt reduction, entry toward their program actively worsens credit ratings more effectively than Chapter 7 debt elimination. At least, with the Chapter 7 protection (rare as it may now be to achieve), lenders know that the prospective borrower cannot again file for bankruptcy for a number of years. The interest rates shall tickle usury, home ownership must wait a decade, but there are companies out there who will at least offer loans. For those borrowers who have mistakenly suffered Consumer Credit Counseling, every debt analyst that pulls up a credit report will instantly know that the borrower attempted to get out of their obligations. Even worse than that, debt analysts will recognize that the borrower did so stupidly, and that, considering there are no actual strictures to the plan similar to bankruptcy guidelines, the borrower may try again to artificially resolve financial burdens at any point.
It may seem a small distinction – even the most experienced and trustworthy debt settlement firms will charge their ounce of flesh from their debtor clients; indeed, if one company promises to charge nothing, that should be a warning sign – but certified debt negotiators do not accept funds from their adversaries. They work only for the borrowers whose debts they assume, and successful negotiators maintain a certain love for their work. Whether wheedling or threatening, any debt settlement professional who has managed to maintain a respected career (even this young field) does whatever necessary to slash his or her client’s balances to the bone. Within days of application, the appropriate borrowers might find sixty percent of their debts suddenly washed away with the glowing approval of their creditors.
There will be credit repercussions. There would have to be. Debts satisfied are not the same as debts paid in full. Through the convoluted science of the FICO score, nothing is nearly so pretty as minimum balances paid every month without fail for the entirety of a loan – even if revolving debts boasting negative amortization would mean such an obligation should never end. It’s not hard to imagine a future American society where an individual’s credit score depends upon maintaining his family’s unending burden – a new feudalism, borne upon the rigors of debt management and the unending struggle to raise one’s score. Still and all, compared to the torrential downpour washing credit scores down the gutter after borrowers file for Chapter 7 or Chapter 13 bankruptcy (or, again, purposelessly, the Consumer Credit Counseling approach), debt settlement negotiation should seem a slight drizzle. Every borrower would still want to investigate each different option possible, of course, but, set against the practical alternatives, there is a reason that debt settlement has so quickly become a part of American lives.
If this has not been sufficiently overstated, though your authors do dearly recommend the debt settlement solution, the program is not going to be for everyone. By this, we do not simply mean that some of our readers may have such sterling credit and heaping cash reserves and imminent largesse as to avoid the entire notion of debt relief as vaunting necessity. Many borrowers simply do not qualify. There’s a point toward income, of course. Since the debt settlement company acts as proxy, they do need to believe that whomever signs up as their client will truly pay back the sums as promised. And, as with any of modern financial dealings, credit scores simply cannot be discounted. Those borrowers who have willfully dismissed past lenders without attempts toward repayment must suffer far more scrutiny toward past actions.
There is, however, yet another element to be discussed. If we may return (please bear with) to the trash day metaphor, the recycling does not, truly, matter. No official will come to your door with a summons just because cardboard was thrown upon the refuse heap. If there has been illness or simply an absence of time available, everyone would understand that good households must sometimes do as they must. There are, still, exceptions. Pets should be buried or require municipal assistance for their destruction. In order to properly dispose of a computer monitor, someone must cart the beast to a reclamation center and actually pay for its disappearance. And, at the end of the day, that broken couch shall sit in the basement still just because nobody can lift the damned thing.
In the same fashion, debt settlement has very specific exceptions to the reach of its negotiators’ powers. Only unsecured debts, those not in any way or shape tied to physical collateral, could hope to be affected. Had their client borrowed money to purchase a house or boat or even, on installment plans, that broken couch, lenders will try every means necessary not to waste the man hours and money that repossession or foreclosure entails. Make no mistake, though, they will take their assets before ever haggling over the sums that they are legally entitled to collect. (in the case of the couch, this may be a good thing; in the case of the house, not so much) As well, any criminal penalties, any tax liens, any child support or alimony payments long past due … anything that would involve the debt settlement negotiator to dispute an authoritative court ruling should find the same success as nasty notes written to the Internal Revenue Service. Once the federal government has deemed something to be owed, it shall be, in all but the most unlikely of circumstances, inevitably repaid. If compound interest shall be thought a harsh mistress, imagine the financial branch of our judiciary to be an especially aggressive cell mate.
There are other odd exceptions. Past utility bills that have gone to collection generally do not garner much wiggle room during debt negotiations. Collection agencies typically have so little working capital once they have acquired debts and so much success tracking down past defaulters that they can afford to take the occasional tax break should their targets successfully declare Chapter 7 bankruptcy protection. At this point, as the economy changes and the Internal Revenue Service tries to make sense of the new forms of debt relief, as our government and the ever expanding multinational corporations that (to a large degree) influence our legislature and bureaucracy collude in efficiency and naked greed, those collection firms that discharge past debts still receive an inappropriate reward for simply letting these debts go unchallenged..
Student loans, in a bizarre twist, though they should symbolize the noblest elements of unsecured loans, are similarly immune to the pressures of debt settlement professionals. Though one cannot repossess an education – were there a way, be sure that the Stafford folks would be clamoring for the technology – the US Congress did slip another change to the Bankruptcy Code fifteen some years ago. At the time, once again, nobody paid much attention as other topics filled the news. A few columnists chortled at the hypocrisy of a legislature staffed to a large degree by Senators and Representatives that had failed to pay back their own law school obligations, but most people blithely ignored the consequences until they themselves attempted masters degrees or found their own children struggling with sudden debt loads. In any event, as we have outlined, governmental protection once taken away is rarely given back under current political practicalities, and student loans are no different. Since almost all student loans fall outside the boundaries of current Chapter 7 debt elimination programs, the folks holding the notes simply have no reason to even talk to debt settlement negotiators; better to garnish the unfortunate debtors’ wages for eternity.
Excepti
ons do still abound throughout the debt settlement process. Even among workaday negotiations with credit card companies that ordinarily would be leaping at the opportunity to reclaim some of their long awaited debt loads, certain corporations yet resist. US Bank and Chase are notorious for their calcified approach toward reclamation, but this sort of opposition crumbles by the day. It is impossible to imagine the next generation of creditors blinking twice about the notion of debt settlement negotiation – unless, of course, the legislature further weakens the bankruptcy protections available – but, as for now, some clients will be turned away from experienced debt settlement companies purely because they have unwittingly signed on to credit accounts with the wrong firms. There are other problems, other exceptions, but – much as we have reported upon the debt settlement field – there is a limit to any understanding for those interested parties that have not successfully negotiated debts for a number of years.
