Is a 401k loan better than other loans?

401k loans are a very difficult personal decision.

As many as 20% of participants in your average 401k plan have taken out a loan.

I almost took out a 401k loan back in 2007 when I was scraping together a down payment on our first home.

Ultimately though, I think too many people borrow from their 401k and other things should be done first before resorting to the 401k loan. Here’s a recent question I received from a reader on the subject:

Is it more cost effective to take loans from your 401k and then pay yourself back? Or should other forms of loans be considered, eg. debt consolidation, to condense debt and ultimately be debt free?

First, debt consolidation does not “condense” debt. You have the same amount of debt before and after debt consolidation. All that changes is the number of loans you have and the total in monthly payments that you have to make.

Consolidation is not a solution to get rid of debt. It only changes the form of the debt. To be clear, I do support some forms of consolidation (mainly credit card balance transfers) as a smart strategy as part of your overall plan to get out of debt. But make no mistake, consolidation isn’t a solution in and of itself.

Risk and the 401k Loan Interest Rate

As to whether it’s more cost effective to do a 401k loan, yes, it may be more cost effective. The interest you pay back on your 401k loan is paid back into your 401k account. You are paying yourself the interest. With other loans, the interest is going to the lender.

So, the 401k loan will almost always beat any other type of loan when it comes to being cost-effective.

But I see the 401k loan as much more risky than other loan types. There are many reasons not to borrow from your 401k. But one of the biggest reasons not to borrow is what happens when you lose your job.

Most employers are going to require you to pay back your 401k loan within 60 days. Chances are, if you’re taking out a 401k loan, you aren’t going to be able to pay it off in 60 days. What will happen then is you will default and the money you owe will be considered an early withdrawal.

An early withdrawal from a 401k means you’ll have to pay taxes and a 10% penalty for not keeping your funds in your 401k until you retire. It’s just not worth the risk to borrow from your 401k.

So What’s Better than a 401k Loan?

When it comes to getting rid of debt, nothing compares to an actual plan to be debt free. Do you have a plan in place? Meaning, have you listed all of your debts and established a schedule to aggressively repay them? Have you made your plan ultra aggressive by reducing your expenses to the minimums?

Another loan isn’t a solution to the problem. No matter the type of loan. So unless you have a plan in place first, you aren’t going to get anywhere with another loan, regardless of the type.

If you do have that plan in place, and you see yourself as being a year or two away from completely debt free, then a strategy to supplement your debt reduction plan could be to shift some of your debt over to a lower interest payment.

Right now you should be able to get a promotional 0% interest rate from a credit card company or a low interest rate from a peer lending company. That’s about the only two places I would say to go if you’re on your way out of debt and just want a little kicker to help you get there faster.

If your intention for taking out a 401k loan isn’t debt reduction, but a house down payment, then I would also advise against it. Take an extra few months to save up the money. Prove it to yourself that you’re ready for that home.

What’s your opinion of the 401k loan? Better than other forms of borrowing?

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Reader Question: 401k Loan vs Personal Loan or Debt Consolidation is a post from: PT Money: Personal Finance by PT.
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What should you do with that balance?

Just the other day someone searched for the following phrase in Google and found my site: “is it best to pay off my credit card balance in full or make minimum payments?”

Hopefully this searcher found some good information here. But I doubt he/she was able to find a quick answer to this question. 

In an effort to appease this reader I thought I’d answer this question best I can in a quick post. I’m going to take some liberties with this question and assume the person was asking whether they should pay off the full balance on their card or make minimum payments. 

Here are the factors to consider when answering this question as every situation is different.

1. The Interest Rate on the Card

The first thing you should do is find out what type of interest charges you will be incurring if you do not pay off the credit card balance by the end of the billing term. You can find this amount on your credit card bill. 

Keep in mind there are usually different interest rates associated with different types of balances. Be sure and pay attention to what type of balance you have. In other words, if you simply purchased something with this card (i.e. food, clothes) then look for the interest rate that applies to purchases. 

If it’s a transferred balance, then it’s going to have a different rate. The same goes for cash advances.

If the interest rate is above 10% then you should try and pay off the complete balance. You will be paying a great deal in interest charges to keep this balance. 

Another way to think about it: that new outfit or flat screen tv you bought will end up costing you well over the purchase price, likely double, if you pay off the card with minimum payments.

If you’re card’s interest rate is 0-1% due to some special promotion, then it’s probably okay to make the minimums as long as you are fully aware of the promotional rate terms (i.e. when it ends, promotional balance vs regular balance). 

The reason the minimum is acceptable in this situation is because the money you would use to pay off the full balance is better used elsewhere. For instance, it could be in an online savings account and be earning interest, or you could invest it in a Roth IRA.

Lastly, if the interest rate is somewhere in between, 2-10% (a rarity), then you should let the following other factors influence your decision, as interest rate is somewhat of a non-factor at these levels.

2. Total Balance of the Card vs. Your Short-Term Savings

The second factor I would consider is the balance on the card compared to your short-term savings balance. Again, look at your statement and find your total balance of your credit card debt. 

Assuming this is your only debt, compare that number to your short-term savings balance. Your short-term savings will be any savings you have not earmarked for retirement or your kid’s education. 

These funds are normally tax sheltered and are therefore, off limits when it comes to using for debt payoff.

As a general rule, if you have a decent amount of savings, say $500-$1,000, and your credit card balance is less than half that amount, $250-$500, then you should pay off the credit card in full. 

If your short-term savings is smaller than $500, then I would consider getting it to that level prior to making any extra debt payments. My advice would be to make the minimum payment on your debt until you build up a decent level of savings. Then, every dollar over that amount would be put towards paying off the debt.

As an extra step, if you find yourself unable to pay off the full amount of credit card debt due to a low savings balance, consider transferring your debt to one of the best 0% balance transfer credit cards available today.

3. Your Risk Tolerance

Lastly, let’s look at your level of risk tolerance. The numbers above do have some meaning for your decision, but they aren’t everything. And they can be trumped by how you feel about your debt. 

For example, let’s say you have a credit card balance of $500, but it’s at a special promotion interest rate of 0%. Also, you have $2,000 in savings. It would then make sense, strictly from a numbers standpoint, to make the minimum payments on your credit card balance and continue funding your savings account. 

However, if that $500 balance is keeping you up at night or making you feel uneasy about your financial situation or if you don’t trust yourself to remember to make the minimums (you’re scared of missing a payment), then it would probably be best to just wipe it out and pay it all off.

A Few Examples

I’ve put together a few examples in graphical format to serve as an easy guide for making this decision.

Final Thoughts

Keep in mind these are just a few simple scenarios. Each situation is unique and should be analyzed separately. Please use the above information only as a guide or framework for deciding how best to pay off your debt. 

I know some could probably do a better job of breaking down all the numbers in more detail and include tax and time value of money implications, but this is just my take on how to handle credit card balance decisions. Best of luck getting out of debt.

Do you have some thoughts on this question? Please use the comment box below to share your thoughts.

Credit Card Balance: Make Payments or Pay in Full? is a post from: PT Money: Personal Finance by PT.
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This is a guest post from Ryan Stubblefield, who runs SingleRoots.com, where they review the best Christian dating sites.

Have debt to pay off before you get married?

There are lots of reasons I’m madly in love with my future bride, and there are lots of reasons I’m crazy about our relationship.

One really cool thing I’m excited about is that we’re both coming into the marriage debt free.

Now this may not sound really romantic, but in this day and age (when studies show most people marry with debt), I think it’s dang sexy. But we’ll get to that later.

We met a little over a year ago, and thankfully, both of us were already debt free. Do you know how much it reduces your relationship stress when you’re both on the same page financially?

Right now, maybe you haven’t even met your future spouse, and you sure don’t have influence over their finances, but you are in a season where you have total control over your own.

So what should you do about it? I challenge you to be debt free before you get married.

Here are the 4 best reasons I’ve found to be debt free before you get married:

It Will Teach You Commitment

Once you decide to start getting out of debt, your commitment muscle starts to get worked out. You’ll soon discover if you can keep a commitment to yourself. This starts you down the road of a new level of maturity that your future spouse will certainly be appreciative of.

Can you commit to sitting down and putting together a spending plan? Debt doesn’t begin to disappear until you have the commitment to get a calculator and a piece of paper out.

Once you stick to your plan for a while, not only will your debt start disappearing, but also your commitment muscle will start strengthening. And where’s the worst place to have a weak commitment muscle? Your marriage. So start working on it now.

It Will Teach You Sacrifice

When you are single, you are usually at your peak “selfishness.” Typically, you serve you and you alone. Starting a budget is the beginning of sacrifice. Can you start saying “no” to yourself?

Beginning the process of digging out of your financial hole, while you are still single, shows that you have the ability for short-term sacrifice for a long-term vision. And where else in life do you need this ability? Again, marriage.

Making some short-term sacrifices for your long-term financial health is a great way to prepare for a happy, debt-free future with your family.

Being Debt Free is the New Sexy

You want to stand out from the sea of options the opposite sex has to choose from? Be one of the few “debt-free options.” Being debt free says a lot about a person. It communicates to the opposite sex that you are sacrificial, self-disciplined, committed, and hard working. Who doesn’t think that’s sexy?

Every bride wants to know their groom can provide for their family. Showing her that you were a good steward before you met her will confirm your likelihood of being a good steward once married.

Being Debt Free is One of the Best Wedding Gifts Ever

Again, this may not sound like a romantic gift, but I promise you it is. Romance is strongly tied to trust. What builds trust more? Marrying someone who has no self-control and a history of careless spending while they were single, or marrying someone who has a track record of wisdom, discipline, and commitment?

Start your marriage with financial options. Start your marriage where you can actually start to build a life together. Don’t start your marriage tethered to Visa and MasterCard.

If you are single right now, you are in the unique position to be in total control of your finances.

Will you display to your future spouse that you were careless and he/she will need to keep an eye on you in the future? Or will you offer your future spouse one of the best gifts ever – a person with their finances in order, plus some nicely-developed character traits they can trust?

Ryan Stubblefield has been an entrepreneur since age 9 when he sold custom Christmas cards to practically every family in his church. His childhood dream to own his own business was realized at the age of 22, while he was in graduate school. Ryan recently began SingleRoots, a site that encourages singles to be intentional with their lives.

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4 Reasons to Be Debt Free Before You Get Married is a post from: PT Money: Personal Finance by PT.
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What Should Graduates Do About Student Loans?

I’ll try to provide some information to help answer these questions, but as usual I welcome your suggestions in the comments. Here’s the first question:

What is the best way to manage all of your student loans once you have finished and would you suggest a consolidation or would that ruin my credit?

The best way to manage your student loans after graduation is to pay them off as soon as you can. Take note of every loan you have. Pull your credit report to make sure you’ve accounted for all of them. Keep meticulous records of what you owe, who you owe it to, and evidence that you are paying.

I used to be in the “keep your student loan debt forever” camp, but we ultimately decided to pay off our student loan debt early. Student loan debt can’t be forgiven in bankruptcy like other debts. It’s never going away. So pay it off as soon as you can.

As for the consolidation, as long as you are referring to a federal student loan consolidation (provided by the Department of Education), then you should not have anything to worry about. Gerri Detweiler, consumer advocate, reinforces this by noting that you are essentially trading installment debt for other installment debt, and your total debt load isn’t increasing.

To consolidate, either go to that website or talk directly with your current lender about a consolidation solution. Don’t pay anyone to do it for you (i.e. origination fees). Also, watch out for pre-payment penalties. Don’t sign up for a new loan unless you’ve read, understood, and agreed to the terms. Have a family member review it with you.

Lastly, be sure to review the many loan forgiveness programs available (i.e. for teachers) as well as the federal “Pay As You Earn” income-based repayment plan.

Alright, now for question two:

I have some credit card debt and student loan debts. Should I work toward paying off my student loans early to get them out of the way? Is it good to consolidate several different student loans?

In most cases credit card debt should take priority over student loan debt. But there are some rare instances where it wouldn’t, so weigh the factors: interest rates, total balance, personal factors, etc.

Yes, you should definitely try to pay off your student loan debt early. There are tax breaks and the increased career marketability that come with having student loans, leading to the thought that it is a “good” debt. But I’ve come to believe that it’s best to try to get rid of all debt as soon as possible. Just kill it off.

Again, as for consolidation, as long as you are referring to federal student loan consolidation then you are okay. In most cases student loan consolidation will not result in a lower interest rate. But it will give you only one loan, one bill, and one payment to worry about. Which, makes life a lot easier and probably decreases the likelihood that you’ll miss a payment.

Some people still disagree, but the general consensus is that student loan debt should be consolidated to simplify your life.

Did you consolidate your loans after college? Can you share your experience? Was it a good move for you?

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Should I Consolidate My Student Loans? is a post from: PT Money: Personal Finance by PT.
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Are you relying too much on "future you"?

Your future self just called. They want their money back.

We all have to rely on others from time to time. What are friends and family for, right?

So, is relying on your future self the same as asking for a handout from someone else?

I say there’s nothing wrong with doing that occasionally. But when you do it over and over again, you sort of wear out your welcome, don’t you?

The “future you” I’m referring to is of course your future earning capacity. When you go into debt, you are relying on future earnings to pay for things that you want now. And, because of the associated interest payments, you’re asking your future self to pay more than they should.

For things like a home, a car, an education, asking the “future you” for a little help isn’t that bad of an idea. After all, they will all either increase / maintain value or provide some other source of income over time.

Where you get into trouble is when you go into debt to pay for things that don’t maintain value or help produce income. The future you ends up paying money (in the form of high interest) for something that isn’t there anymore, or is outdated and long replaced.

Action step for today: Write your “future self” an email. Say that you’ve started a debt reduction plan and you’ll quit relying on his or her earnings so much.

Relying Too Much on “Future You” is a post from: PT Money: Personal Finance by PT.
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How do you reduce debt after a set back?

We all know that carrying a balance on a credit card is a personal finance no-no.

But what do you do if you find yourself in that situation and then have a major financial setback?

Knowing that you should have handled your finances differently before you were fired or hospital stay won’t help you in the moment. Here are three concrete steps you can take to help tame the credit beast:

Note that these aren’t final solutions. You aren’t fully paying off your credit card debt by doing one of these. You are simply making the debt reduction process a bit easier and certainly less expensive. To get out of debt for good you need to bring up your income, live within your means, and build up emergency savings.

1. Transfer your Balance

If you simply need a little breathing room with your credit card bill but don’t want to rack up exorbitant interest, consider transferring your balance to a balance transfer credit card.

The benefit of this strategy is that it can buy you a little time to be able to pay off your balance without having to worry about the interest eating a hole in your budget. However, this will only work if you are able to pay off the balance before the end of the 0% promotional period.

2. Haggle

Negotiating with your credit card company may seem rather daunting, but it’s important to remember that credit card debt is unsecured. That means that there is nothing the company can come repossess should you default—unlike with a mortgage or a car loan. So that means credit companies are generally willing to work with you as long as you are honest and open with them about your financial strain.

Before you place the call, make a detailed budget showing your income, your necessary expenses and whatever cash is left over. Then take a look at your calendar and figure out how long it will take you to dig yourself out of your current financial crisis.

With your budget and calendar in hand, call and ask to speak to a supervisor. Explain the problems you’ve been facing, and point out your positive payment history (should that be true!). Then ask for a specific change to your minimum payment. You can also ask to knock 1% off your interest rate. By calling with a specific plan and an end-date in mind, you are much more likely to get a yes from your credit card company.

3. Consolidate

If you do find yourself in a situation where you have more debt than you can handle and you cannot haggle with the company—either because you do not have the greatest payment history with them or because you can’t even swing a modified minimum payment—then you will want to contact a reputable credit counselor.

Start with your state or local consumer protection office to find someone to help you to consolidate your debt. (The ads for these services may sound tempting, but unless your credit counselor is a member of the Association of Independent Consumer Credit Counseling Agencies, you may be making yourself vulnerable to a scam).

Your counselor will work out a debt management plan with you and will negotiate with your creditors on your behalf. Once your plan is in place, you will mail your monthly check to the counselor who will pass it along to your creditors.

Unfortunately, taking this step means that your credit report will show you as “in payment” for those creditors, which will negatively affect your score. However, it is much better to be making those payments than to be delinquent.

Just because we all know what we should be doing doesn’t mean we do it. Luckily, there are always steps we can take should we find ourselves in debt and in financial trouble at the same time.

Photo by The Consumerist

How to Manage Your Credit Card Bill After a Setback is a post from: PT Money: Personal Finance by PT.
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Did you pass your bankruptcy means test?

In particular, the goal was to push more filers into Chapter 13 bankruptcy as opposed to Chapter 7 bankruptcy.

The main difference, of course, is the five-year repayment plan that’s required in virtually all Chapter 13 cases, while most Chapter 7 filers eliminate the majority of their debts in as little as four months.

In order to reach the goal of more Chapter 13 cases, one of the most significant changes in the Bankruptcy Abuse Prevention and Consumer Protection Act was the Means Test.

The test established, for the first time, an income requirement of sorts for Chapter 7 cases. Consumers who didn’t meet the income requirement would have no recourse but to file for a Chapter 13 repayment plan.

Targeting Higher Income Filers with the Means Test

There are two different ways to qualify for a Chapter 7 bankruptcy under the revised bankruptcy provisions. If your income is at or below the average median income for a family your size in your state, you qualify for to file a Chapter 7 case.

If you made more during the last full calendar year, there is a “presumption of abuse” according to the language of the federal tax law. However, you have the chance to rebut that presumption that you are abusing the Chapter 7 income guidelines.

That’s where the Means Test comes into play. In effect, the Means Test gives a consumer the chance to show they don’t have enough discretionary income, after all income and expenses are considered, to make any significant payments to creditors.

“Income” is not Really Income Under the Means Test

Critics of the Means Test say it is overly complex, benefitting perhaps, only bankruptcy attorneys, since it’s very difficult for a layman to correctly fill out the forms required for the Means Test. Critics also point to the arbitrary calculation required as part of the test.

For example, a debtor’s current or projected income isn’t part of the Means Test. Instead, the test requires paycheck stubs and other information covering the six months prior to the bankruptcy filing. An average monthly income from that period of time is used.

The expenses under the Means Test also don’t involve a consumer’s actual expenses. Instead, many of the expenses are based on IRS standards that vary slightly in different parts of the country. So, instead of a test that subtracts expenses from income to see how much discretionary income is left, the Means Test doesn’t include current income and doesn’t take into account actual expenses.

The Means Test and Bad Faith

Even if a debtor qualifies for a Chapter 7 case because the result of the Means Test shows insufficient discretionary income to pay out in a Chapter 13 plan, that Chapter 7 status is still not guaranteed. Trustees have the power, and in fact have been given the mandate, to look for any instances of bad faith that would disqualify a debtor from a Chapter 7 case.

Case law is still refining exactly what bad faith means. So far, bad faith has been defined as a situation in which the “totality of the circumstances” points to a rotten debtor. For example, courts have upheld cases in which income deductions for college expenses for kids were thrown out, creating more money to be paid to creditors.

In other cases, judges have decided that debtors in extravagant homes – and what often are exorbitant monthly payments – should instead be required to reduce those monthly living expenses so that some of the money that had been going to a mortgage for a huge house instead is paid to creditors in a Chapter 13 plan.

Has the Means Test Worked?

A five-year analysis of bankruptcy statistics suggests that the goals of the Means Test and the reorganization of federal bankruptcy laws have not been met. Initially, it seemed that the revision of the law would be successful.

In the first year, personal bankruptcies dropped by more than 50 percent, dropped to under 900,000 filers, compared to nearly 2,000,000 filers in 2005. However, the number of bankruptcy cases steadily increased and the number of Chapter 7 filings jumped as well.

By 2010, bankruptcy filings were estimated to come close to 2,000,000 for the year. While Chapter 7 filings dropped to about 50 percent of total individual filings in 2006, that figure was expected to reach 70 percent in 2010.

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The Bankruptcy Means Test – What does it Mean? is a post from: PT Money: Personal Finance by PT.
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Should you always pay your mortgage payment first?

Many homeowners also have credit card debt. When times are tough and the budget is stretched thin, sometimes it seems as though you need to make a choice between making a mortgage payment or making your credit card payments.

When push comes to shove, and you have to choose one or the other, what you decide depends on your circumstance.

Do You Want to Keep Your House?

The biggest thing you have to consider when making the choice between making a mortgage payment or a credit card payment is whether you are trying to keep your home. If you want to remain in your home, retaining ownership, you have to make your mortgage payments.

Missed mortgage payments can lead to foreclosure, resulting in the loss of your home.

Credit card debt, on the other hand, is not secured by an asset. It is unsecured debt. While creditors can sue for payment, they cannot repossess your home, and if you declare bankruptcy, you might even be able to have the amount you repay reduced.

While I am not advocating bankruptcy, this is something to consider. In most states, as long as you are up on your housing payments, you are unlikely to lose your home in bankruptcy, and credit card issuers can’t force you to sell your home to repay your unsecured debt.

If you aren’t concerned about your keeping your house (or a good credit score), you might want to concentrate on the credit card debt, with its higher interest. You will eventually lose your home, though, and you might have trouble getting another place to live.

What About Your Credit Score?

The exact formula used for credit scoring isn’t released to the likes of you and me, but we do know that missed payments can have a big impact on your credit score. A missed credit card payment can bring your credit score down by quite a bit — especially if you are more than 90 days late in paying.

However, if you have gone through a foreclosure, your credit score can be dropped by more than 200 points. You might want to consider the impact of your decision on your credit score, especially if you think you want to get a major loan in the next year or so.

Trying Your Best to Avoid the Situation

Of course, it’s always best if you can avoid having to make the choice altogether. Living within your means and having an emergency fund to help you pay for unexpected expenses can help you avoid having to make this decision.

Also, if you can cut spending in order to have more money to put toward your obligations, this is also helpful.

There are times that you might not be able to avoid this decision. Job loss or some other situation may arise, forcing you to skip the payment of some bills. If you know that you are going to have trouble making payments, you should contact your lenders to let them know of your situation and perhaps get a deferral, or work out some sort of a new payment plan.

In the end, it is important to carefully consider your options, and understand your goals and preferences. Only then can you make a decision that will provide the best possible outcome in your situation.

photo by nikcname

Debt Dilemma: Mortgage Payment or Credit Card Payment? is a post from: PT Money: Personal Finance by PT.
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In today’s episode, I interview Jeff Kosola from deliverawaydebt.com. I love Jeff’s story. I think you will too. Especially if you are struggling with a lot of debt to pay off. Have you ever wondered how much pizza delivery drivers make? Apparently, it’s enough!

Jeff took on the classic part-time job of delivering pizzas on the weekends so he and his wife could get out from over $100,000 in debt. Since he started working his part-time job, he’s been able to pay down over $45,000 of the debt from his earnings. Jeff also took to the personal finance blog-o-sphere with this story. Look for his new online video venture: Minute Money Tips

Listen to the Podcast

Here are a few of the questions I ask Jeff:

Motivation for Part-Time Money

What led you want to make part-time money?
What lead you into that much debt?
What was the catalyst to finally wanting to get rid of debt?

About Pizza Delivery

What was it about delivering pizzas that worked out for you?
What was the appeal of the job?
What was the job application process like? What skills did you need?
How many hours a week did you work?

Family and Dealing with Debt

How did you wife feel about this?
What allowed you and your wife to come together under that common goal?
Why did you need a financial coach?
What did the financial coach teach you?
How long did it take to pay down your debts?
Did you do anything extra to pay off your debt?
What is it about your debts that allows you to press pause and focus on the down payment?

Making Money in Pizza Delivery

What kind of money were you making an hour at delivering pizza?
How did you stick with it?
How do you make the most of your efforts at a pizza delivery job?
What mistakes did you make early on?
Are you sick of pizza yet?

Blogging About Debt Reduction

Why did you start deliverawaydebt.com?
Do you make money from your blog to help you more with debt reduction?
What’s next for you?

To see the full transcript, click show

PTM 011: Making Extra Money as a Pizza Delivery Guy to Payoff $45,000 in Debt with Jeff Kosola from DeliverAwayDebt.com is a post from: PT Money: Personal Finance by PT.
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Editor’s Note: I recently had a friend and reader email with a troubling story about debt collection. Joe [fake name] recently turned a car, in which he was the second borrower, back into the financing company [Capital One] using what is called a voluntary repossession. The balance on the loan was 10,000.

Shortly after, the financing company sold the car at auction, and sold the debt to a collection agency. The collection agency [NCO Financial] is now contacting Joe and Joe’s employer threatening legal action like garnishment if Joe doesn’t pay 7,000 immediately.

I thought this would be an appropriate time to share a post I have from Odysseas Papadimitriou, CEO and Founder of CardHub.com, an online marketplace for credit card applications and gift card exchange. The article is about credit card debt, but the same advice should apply to Joe’s situation above.

Things You Experience During Debt Collection

The letters started coming in the mail after your first missed payment, and as you sank further into credit card default, their tone became harsher and the typeface used, much larger. Then the phone began ringing at all hours of the day and the debt collectors darkened your doorstep looking to recoup the money you owed.

You heard threats of lawsuit, talk of ruined credit and the insinuation that paying some of what you owe will get creditors off your back, at least for the time being. You don’t know what to believe or where to turn for help.

Doesn’t sound like too much fun, does it? No, but considering the fact that credit card debt continues to rise in the United States, this likely serves as foreshadowing for many of us, if we haven’t experienced something similar already. However, your experience with debt need not be marked by uncertainty and confusion.

If you make sure to learn the basics of credit card debt and your legal rights in approaching it, you will garner a measure of control over your situation and will be able confront your debt as strategically as possible.

Debt Collection Statute of Limitations

The first thing you must realize is that creditors have two main weapons at their disposal when attempting to recoup money owed to them: the courts and their ability to ruin your credit. Both are contingent on the payments you make toward your debt. Only one depends on debt’s statute of limitations.

Think of the statute of limitations for debt as you would the statute of limitations for a crime. If someone commits a crime, that person can be prosecuted for doing so until a certain number of years elapse and the incident becomes too old to try in court.

If you incur debt, you’re legally responsible for its payment until a state-specific time period expires as well. After this occurs, lawsuits can still be brought in an attempt to recover the debt, but they will be dismissed as long as you make it clear that the debt in question is “time-barred,” or older than the statute of limitations.

The statute of limitations clock starts at the time of last payment. Therefore, each time you make a payment, you reset the clock and increase the amount of time you’re vulnerable to a lawsuit. Depending on your state, merely signing a document in which you promise to pay your debt or admit to owing money at all will reset the statute of limitations as well.

Your Best Action With Debt Collectors

Thus, should you find yourself with charged-off credit card debt, the best course of action would be to work with your credit card company to establish an affordable payment plan or settlement agreement. This debt settlement or payment plan would not only remove the possibility of a lawsuit but would also provide you with a definitive plan to free yourself from the burden of debt.

However, if you are unable to reach such an agreement you should refrain from making payments because the payments you are able to make will not appease your debt collector and will reset the statute of limitations.

Waiting out the statute of limitations should only be viewed as a last resort, however, because reaching a reasonable payment agreement with your creditor will also benefit your credit score by enabling the reclassification of your debt from “not paid” to “paid” or “settled.”

Though negative information about your credit card debt will stay on your credit reports for seven years from the time of first delinquency no matter what, successful completion of a payment plan will mitigate the credit score damage you incur.

You ultimately have options in approaching your credit card debt, so don’t believe everything debt collectors say and don’t allow nerves or pressure to influence your decision making process. Consider the choices and rights at your disposal and make the decision that’s best for you.

Do you hear that? It might seem a bit foreign, but it’s silence. No phones ringing or doors being knocked upon with debt collectors on the other end. Just silence. And it’s right around the corner.

(photo by graymalkn)

When is a Lawsuit Merely a Debt Collector’s Empty Threat? Answer: Statute of Limitations is a post from: PT Money: Personal Finance by PT.
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