The Center For Debt Management
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Your Alternatives When Faced With Financial Hardship

—Article by Daniel Gelinas

All too often, individuals facing financial hardship simply continue the status quo, rather than meet the problem head on. Unfortunately, this seldom solves anything. Usually the situation worsens and continues to spiral downward. Debts continue to mount, making payments become more and more difficult and eventually creditors initiate collection activity and may take legal action.

It is always to the debtor's advantage to initiate positive steps to amicably resolve his or her financial hardship. Often, however, debtors are not aware of their alternatives. Or, led by false promises or a lack of knowledge, choose the wrong course of action. Failure to act, or choosing the wrong path could ultimately lead to financial disaster.

This article was prepared to highlight the most common alternatives available to debtors, in particular, those individuals experiencing serious financial hardship. It also warns against the dangers of some of these alternatives. While this document only lightly touches upon the subject, the information contained herein should assist you in exploring your options and to help you avoid some of the pitfalls associated with them.

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Increase Income and/or Lower Debt Service

The ideal method of resolving one's financial troubles is to increase one's income. Depending on the individual's circumstances, there may be numerous opportunities to so do. Change of employment, a part time job, a pay increase, moonlighting, or starting a home-based business are all viable options.

Oftentimes, just having a frank and honest discussion with your employer about your current financial situation could make a world of difference. Such a discussion could lead to additional work hours, suggestions on ways in which you may increase your salary, or the realization that a pay increase is in order. If you are a valued employee, your employer should appreciate your honesty and, at the very least, be sympathetic to your needs and be vigilant of opportunities that may arise which could assist you financially.

Additionally, reducing one's monthly debt service and expenses is not only smart for those facing financial hardship, it's absolutely essential. This means eliminating or cutting back on all non-essential goods and/or services, such as eliminating premium channels on cable TV, reducing long distance phone calls; substituting franks and beans for steak and lobster, buying second-hand rather than new, participating in low cost forms of recreation and entertainment. Expenses that are extravagant and non-essential should be eliminated.

Increasing one's income and lowering one's monthly debt service, however, is often easier said than done. Nonetheless, for those debtor's able to do so, it could prove to be the turning point in their life. Regardless of whatever options one chooses in resolving their financial hardship, one should always be vigilant of ways to increase their income and to reduce their monthly debt service and expenses. In order to provide assistance in this regard, we have established the Income Resource Center where you will find employment and career resources, as well as numerous business and income opportunities. We also established another sector designed to help you lower your living expenses at Expenses Reduction.

The Center For Debt Management highly suggest that all consumers learn money management and to become financially literate. Managing finances is a long-life venture. You owe it to yourself and to your family to eliminate debt and to become an expert in managing your money. Realizing that this requires ongoing self-study, in an effort to assist you we have spent countless hours developing the Library For Money Management and the Bookstore For Money Management, as well as 30 other related sectors on our website. Those who are wise and who truly desire to become debt free and financially literate, would be well advised to avail themselves of all of these resources!

Debt Consolidation Loan

While a debt consolidation loan sounds appealing, the truth is — often it does not resolve the debtor's problem. In fact, the end result may compound the debtor's financial hardship. The reality is, it's very difficult to get a low rate debt consolidation loan unless the debtor has excellent credit (which is seldom the case) and/or very good collateral, typically one's equity in a home or automobile. Lenders that accept lower standards, and therefore increase their risk, charge high interest rates, 18% or higher being common.

In the right circumstances, however, a debt consolidation loan may prove beneficial. For example, when used for a Debt Reduction Settlement, or in situations where the debtor is "reasonably assured" of greater future earnings and/or a return to financial stability. It must be understood, however, that a debt consolidation loan simply "transfers" the debt to a new lender — usually with greater consequences if the borrower defaults.

A major point to consider in obtaining a debt consolidation loan is that the debtor often consolidates "unsecured" debt in exchange for a "secured" debt. Should the borrower default, legal action often comes swiftly. Such action almost always result in foreclosure or a judgement. Lenders who make debt consolidation loans understand full well their legal recourse and many will stop at nothing until a judgment is satisfied. While "unsecured" creditors can take legal action, they are typically slower to do so, and more willing to negotiate a settlement.

In addition, by consolidating, the borrower is faced with "one large payment to one creditor" rather than "many smaller payments to many creditors." While this can be very beneficial in the right circumstances, the problem is — one large payment is, to use a cliche, a harder nut to crack. If the debtor is even one dollar short, the account is considered in default. While being a little short may not in itself result in foreclosure or legal action, usually late fees and/or penalty charges kick in and warning alarms sound off. These additional fees often make it more and more difficult for the borrower to catch-up, and with each successive payment the debtor falls further and further behind. Before long, the borrower is considerably past due and legal action may soon follow.

In the above scenario the perceived benefit of having only one payment becomes a nightmare. Had the borrower dismissed obtaining a consolidation loan and elected to continue making smaller payments to many creditors, running short of funds would allow for greater options. The debtor, for instance, could then be selective and direct available funds to critical creditors, and perhaps allow an account with an "unsecured" creditor with a small balance and/or one who typically does not access late fees become delinquent. As noted above, unsecured creditors, especially those with small balances, are least likely to take legal action. Lenders making large debt consolidation loans, however, are prone to do so and some are downright ruthless.

Important Notice: Do not confuse a "debt consolidation loan" with consolidating debt through a credit counseling or debt management agency. For example, when clients consolidate their debt through a nonprofit credit counseling agency, the agency does not then become the creditor. In this regard, the agency is, in essence, a conduit for disbursing payments to their client's creditors. In a Debt Management Program should a client be unable to make the full amount of their consolidated payment, the agency typically accepts and encourages clients to make a partial payment. The agency then disburse these funds to critical creditors on behalf of the client. While being late with payments, in any circumstances, can present problems, consolidating debt through this program allows for a greater number of options should the client run into difficult times.

Another concern with debt consolidation loans is that borrowers are usually allowed to keep their credit cards. Having access to these cards, debtors often fall into the same trap — charging many of their purchases and/or expenses. Before they realize it, these charges mount beyond their ability to pay. In addition to having to make their consolidated loan payment, now they must again make a credit card payment. Short of funds, eventually they take cash advances to make their payment, thus only increasing their debt. It becomes a vicious cycle, until finally bankruptcy is the only alternative.

Please Note: Debtors taking cash advances to make monthly payments are one of the most common trends we see with applicants for the Debt Management Program. Many of these consumers will even boast how they have a "perfect" credit rating. However, they are only fooling themselves, and perhaps their creditors — but only for a while. No one has unlimited credit and the day of reckoning will soon arrive. When that day comes, sadly, for many, it will be too late. They may be beyond help ! Their only recourse may be bankruptcy — and recent large cash advances may not be dismissed in bankruptcy.

If you are following this trend, we strongly urge you to act at once by either enrolling in a Debt Management Program or seeking a Debt Reduction Settlement. Taking cash advances to make monthly payments is a "red alert" signaling danger! It's like cancer; if you catch it early enough, there's hope; if you prolong seeking help, death is imminent.

To get immediate help, call 1800 DEBT.COM (that's 1800-332-8266) for a FREE debt consultation. There is absolutely no obligation and the conversation is confidential. A certified debt counselor can answer all of your questions and if you so desire, can place you in a debt relief program that is appropriate to your needs.

Beware: Newspapers, magazines, junk mail, online services and the internet are replete with ads offering debt consolidation or other types of loans. These ads often claim:

Guaranteed Loans — Bad Credit, No Problem!
Loans Even If You Filed Bankruptcy

Poor Credit Accepted — Nobody Ever Refused!
Easy Approval — Borrow By Mail

Borrow As Much As You Need!
No Interest Loans! Below Prime Rate!

These "so-called" companies typically require up-front money and will tell you whatever it takes to get you to apply. They will offer you the world, promise satisfaction guaranteed, and after you send in your required fee, you can bet your family jewels you'll never see a dime!

For consumers interested in a debt consolidation loan The Center For Debt Management highly suggest that you check with your local banking institutions. But, we also believe that it is extremely important that you shop around for the best rate. To assist you with your online search, Go To Credit and Financing.

It is important to understand, however, that lenders providing Debt Consolidation Loans will not use the funds to "settle" your debts for less than the amount owed. They will want to pay off your creditors "in full." If your intention is to use the equity in your home to pay off your debt through a Debt Reduction Settlement, you will need to do so through a Home Equity Loan, a Home Equity Line of Credit, or by Refinancing Your Home and pulling out some of your equity. In these cases, you can request to use your available equity as YOU so desire. In other word, the cash is given to you directly to use as you please.

Notice: Using funds from a debt consolidation loan, second mortgage, home equity loan or line of credit to pay off unsecured debt should ONLY be done when it results in significant savings, and the effect of it resolves your financial hardship. You should be reasonably certain that you will never default on the obligation. Otherwise, it is not practical and financially sound to convert unsecured debt to secure debt and risk losing your home!

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