Struggling with credit card debt is a common but stressful experience for many. If you’re looking for ways to avoid filing for bankruptcy protection due to credit card debt, you’re not alone. By exploring various strategies and understanding the alternatives available, you can find solutions that may prevent the need for bankruptcy and keep your credit intact.
Why Should You Consider Alternatives to Bankruptcy?
Bankruptcy might seem like a quick fix for overwhelming debt, but it carries significant long-term consequences, including a major impact on your credit score and long waiting periods before you can get competitive mortgages and consumer loans again. By considering alternatives, you can potentially save your credit score and avoid the complexities of a bankruptcy case.
What Are the Most Effective Ways to Manage Excess Credit Card Debt?
Effectively managing your debt involves a combination of strategies tailored to your financial situation. We discuss six somewhat well-known solutions below, but what is potentially the best solution is discussed at the bottom of this blog.
1. Budgeting and Expense Reduction
This probably seems obvious, but we need to mention it because so many people fail to do this: thoroughly review every item in your budget. Identify non-essential expenses you can cut and apply the extra funds to your credit card payments. This can slow the growth of debt and begin to reduce the principal balance, lowering interest charges over time.
2. Debt Consolidation
Debt consolidation is a popular strategy for managing high credit card debt. This involves taking out a new loan to pay off multiple credit card balances, ideally at a lower interest rate. Consolidation simplifies your payments and can reduce the amount of interest you pay. These loans can be difficult to obtain though if you are already in financial distress and your credit scores are impaired.
3. Credit Counseling
Seeking help from a nonprofit credit counseling agency can provide valuable guidance. Credit counselors can assess your financial situation and help you set up a debt management plan. These plans often involve the counselor negotiating with your creditors to lower your interest rates and monthly payments. Beware though that credit counseling can impair your credit, as many creditors will report late payments when you make partial payments – even if the creditors previously agreed to accept the partial payments.
4. Debt Settlement
Another option is debt settlement, where you or a representative negotiates with your creditors to allow you to pay a lump sum that’s less than the full amount you owe. While this can reduce your debt load significantly, it too is likely to adversely impact your credit and credit score – with an effect that can last for years.
5. Increase Your Income
While this can also seem obvious, it needs to be mentioned to ensure this is a complete list. If feasible, try to increase your income through additional jobs or side hustles. Side hustles are more readily available with today’s gig and internet economy. Extra income of course can go directly toward paying down your debt more quickly and making your payments more manageable.
6. Sell Unneeded Assets
Selling items you no longer need can provide a quick influx of cash to help reduce your debt. Consider online marketplaces, yard sales, or consignment shops to turn your clutter into cash.
How Can You Negotiate with Credit Card Companies?
Don’t underestimate the power of negotiation. Contact your credit card companies to discuss your financial difficulties.
They may offer temporary hardship programs that lower your interest rate, reduce your monthly payment, or even pause your payments without accruing additional interest. But it is extremely important to ask about the potential impact to your credit if a credit card provider offers relief of any type. If your credit will be adversely impacted, you should consider tapping into your home equity instead, if that is an option.
How Can Using Your Mortgage for Debt Consolidation Be a Solution?
If you own a home and are grappling with high-interest credit card debt, tapping into your home equity for debt consolidation is often the best and most viable solution. This approach involves pulling cash out of your home in order to pay off consumer debts like car loans and credit cards.
While this approach requires that you have sufficient equity in your home, it can significantly reduce your monthly payments, save your credit, and put you back on sound financial footing. This approach can also work even if your credit score is already impaired. Here’s how it works and why it can be a very smart financial move:
Understanding Home Equity
As you probably know, home equity is the current market value of your home minus any outstanding mortgage balances. As you pay down your mortgage and as your home value increases, your equity grows. This equity can be accessed through various lending options to consolidate debt.
Types of Debt Consolidation Using Your Mortgage
Home Equity Loan
A home equity loan provides you with a lump sum of cash based on your home equity. It’s a second mortgage with its own fixed interest rate and monthly payment schedule. You can use this loan to pay off your credit card debts, and then you’ll only have the home equity loan to repay. These loans reduce your overall payments by often reducing your interest rate and extending your repayment term (typically to twenty years).
Home Equity Line of Credit (HELOC)
A HELOC works like a credit card secured against your home. It offers a revolving credit line that you can draw from as needed. The interest rates are typically lower than those of credit cards, making it a cost-effective way to manage debt. Payments can also be “interest only,” offering additional payment relief.
Cash-Out Refinance
A cash-out refinance involves refinancing your current mortgage for a higher amount than you owe and taking out the difference in cash. This cash can then be used to pay off credit card debt. This option sometimes comes with the added benefit of a lower interest rate compared to your original mortgage. This option also extends the repayment period of your consumer debt to 30 years, offering substantial relief from high monthly payments.
Benefits of Using Mortgage for Debt Consolidation
- Lower Interest Rates: Mortgage loans generally offer lower interest rates than credit cards. Consolidating your debt under a lower rate can significantly reduce the amount of interest you pay, saving you money in the long run.
- Longer Repayment Periods: Mortgage loans typically have much longer repayment periods than consumer loans, which makes the monthly payments much more manageable.
- Interest-Only Payments: As mentioned above, Home Equity Lines of Credit (HELOCs) offer interest-only payments, which can also provide significant payment relief.
- Saving Your Credit: This is an enormous benefit of using your mortgage to pay off debt in lieu of credit counseling or bankruptcy; it not only saves your credit, but it can significantly improve it by paying down all of your credit card balances.
- Simplified Finances: Paying off multiple credit card debts means juggling various payments each month. Consolidating these into a single mortgage payment can simplify your monthly budgeting.
- Potential Tax Advantages: Interest paid on mortgage debt, including home equity loans and HELOCs, can sometimes be tax-deductible. However, it’s important to consult with a tax advisor to understand the current IRS guidelines and how they apply to your situation.
Considerations Before Using Your Mortgage for Debt Consolidation
Required Credit Score
In many cases, you will need a credit score of 680 or higher to get a Home Equity Loan or a Home Equity Line of Credit. However, you can get an FHA cash-out mortgage with a credit score as low as 580. This is very important, as many people reading this blog will already have impaired credit.
Necessary Income
Unless you have substantial equity in your home, you will likely need to verify sufficient income to qualify for a mortgage. The good news is that many mortgage lenders will allow you to “pay off debt” to qualify for your mortgage, meaning that your mortgage loan will be underwritten with the assumption that the cash derived from your new mortgage will be used to pay off your consumer debts. In addition, there are also mortgage loans that accept alternative types of income documentation, such as a twelve-month average of your bank statement deposits.
Necessary Equity Levels
If your credit score is high enough, Home Equity Loans and Home Equity Lines of Credit will lend up to a 95% combined loan-to-value in some cases, meaning that you will only need to have a 5% equity cushion. These loans, however, are more often capped at 90% combined loan-to-value. If your credit is impaired though, you can still get an FHA cash-out mortgage up to 80% loan-to-value, meaning that you only need a 20% equity cushion after your loan funds.
Closing Costs
The drawback to mortgage refinances relative to other solutions for excess credit card debt is that refinances involve closing costs – typically in the $3,000 to $4,000 range. These costs, however, can often be rolled into the loan and/or covered by a lender credit (in exchange for a slightly higher rate). In addition, the savings that result from a cash-out refinance can often offset the closing costs in a short period of time.
How to Proceed with Mortgage Debt Consolidation
If you’re considering using your mortgage to consolidate debt, start by:
- Estimate Total Debts: You will need to know what your debt is in total – including mortgages, car loans and credit cards – before you can do an accurate analysis.
- Estimate Your Equity Level: This is simply the estimated value of your home less the estimated balance of your mortgage or mortgages.
- Check Your Credit: You can use online services for this, but they often provide inaccurate scores for mortgage purposes – so we recommend consulting a mortgage professional.
- Consult With A Mortgage Professional: A mortgage professional with substantial experience helping borrowers with high debt loads will be able to (1) help you estimate your equity level; (2) run an accurate credit report; (3) access every type of mortgage loan to ensure no opportunity is missed; and (4) help you evaluate all of your options.
Using a cash-out mortgage to consolidate debt can be a lifesaver, especially if your back is against the wall when it comes to overwhelming consumer debts. A strategic cash-out mortgage can save your credit, cut thousands from your monthly payment obligations, and save you from the perils of bankruptcy altogether.
However, despite all of their potential benefits, these mortgages require careful consideration and planning to ensure they are the right option for you. For tailored advice and optimal strategies for using your home equity effectively, consulting with experts like those at JVM Lending can make a critical difference.
What Should You Do If You’re Overwhelmed by Debt?
Here are some additional basic tips, if you have substantial debt – but your back is not yet against the wall.
- Prioritize Your Debts: Prioritize your debts by focusing on those with the highest interest rates first. Paying these off quicker can reduce the overall amount you’ll pay in the long run.
- Use Financial Tools and Apps: Numerous financial apps can help you manage your debts more effectively. These tools can provide insights into your spending habits, track your debt repayment progress, and even automate savings and payments.
- Stay Informed About Your Rights: Understanding your rights when dealing with debt collectors can prevent harassment and ensure you’re treated fairly. Familiarize yourself with the Fair Debt Collection Practices Act (FDCPA), which outlines what debt collectors can and cannot do.
Frequently Asked Questions
Can credit card debt be negotiated down by creditors?
Yes, many creditors are willing to negotiate debt settlements, especially if they believe the alternative is not receiving any payment at all. But, you should be aware of the potential adverse impact on your credit.
Will credit counseling hurt my credit?
Yes, it often can. Even though credit card providers agree to accept payments below the minimum required, they nonetheless report late payments on your credit report when you do not make full payments. These ongoing late payments can be as bad as bankruptcy in some cases if they continue for months or even years.
Will debt settlements hurt my credit?
Debt settlements can also adversely affect your credit, as creditors will report that an account was settled for less than the full balance owed.
What if my credit is already impaired?
If your credit is already impaired because your balances are maxed out or because you have missed payments, you can still explore all of the options discussed in this blog – including a mortgage refinance. The more equity you have in your home, the more likely it is that a refinance will be feasible. Many mortgage loan programs are very flexible when it comes to credit and credit scores.
What does my credit score have to be to tap into my home equity?
If you want to obtain a second mortgage, such as a home equity loan or a home equity line, your credit score must be 680 or higher. FHA first mortgages, however, allow for credit scores as low as 580.
How much home equity do I need to get cash out?
Second mortgage options require equity cushions at the time of funding as small as 5%, but 10% cushions are more common requirements. Cash-out first mortgage options require 20% equity cushions at the time of funding.
What if I don’t have home equity and my debt feels unmanageable?
If your debt feels unmanageable, consider speaking with a bankruptcy attorney for a consultation. Bankruptcy attorneys can offer insights into whether bankruptcy or another debt relief option is best for your situation. Sometimes, bankruptcy is a better option than credit counseling or debt settlements because it is a one-time event that does not foster lingering late payments. It can provide tremendous relief despite the impact on your credit.
Why Consider JVM Lending for Financial Guidance?
While avoiding bankruptcy, it’s essential to have expert financial guidance. JVM Lending offers personalized advice to help you navigate your debt relief options effectively – particularly when it comes to mortgage financing. With their expertise, you can explore all available alternatives to bankruptcy and develop a plan that suits your financial needs without the drastic step of filing for bankruptcy. Helping borrowers in distressed situations has always been a specialty of JVM Lending’s.
In conclusion, there are many strategies to consider before resorting to bankruptcy for credit card debt. By taking proactive steps, seeking professional advice, and exploring all available options, you can work towards resolving your financial issues and maintaining your financial stability. Remember, the path to a well-managed debt portfolio requires patience, discipline, and the right guidance, all of which JVM Lending can provide.
If you need more information about how to manage or consolidate your credit card debt, contact JVM Lending at (855) 855-4491 or email [email protected].
