How Bad is your Debt Vulnerability?

by : Michael Killian



The American consumer is looking at a very scary environment! He/she is also becoming more and more vulnerable to serious debt collection issues. The new bankruptcy law, increased minimum credit card payment, tightening of debt counseling options, exceptionally easy access to very high credit limits and even skyrocketing fuel costs are bringing together a very volatile collection of issues. Couple all of this with massive marketing tactics to get you further and further into debt, and it does not take but minor mishaps to create a major financial disaster.

When that debt mishap occurs a very normal and common reaction is to seek debt consolidation. But debt consolidation can have some very negative consequences. For example, using equity in a home to pay off unsecured debt simply makes unsecured debt a secured debt... a very unhealthy financial maneuver. Similarly, debt consolidation may appear to be relief but all it is doing is prolonging the agony and not correcting the situation. Meanwhile, it is adding interest to a very bad situation. Of course creditors love it.

The fact is, however, the key to debt consolidation relief may be early debt management counseling. But waiting until "things get better" before talking to a debt counselor may be very dangerous.

Are you using 30-50% of your available credit? Have you missed a single payment due to a tight budget? One payment was always a danger sign. But now one payment late is absolute jeopardy.



Things are different today.

In former days the internal collectors from the original creditors worked accounts for 6 months before they charged them off and farmed them out to outside collectors. Now it is 2-3 months.

In the past almost every creditor would give any cardholder 2 chances at credit counseling and the client had to miss payments for 60 days before they were dropped from the program. That is all over at many banks now.

Before, if the client missed 2 payments and then called a debt counselor, new proposals could be set up and all the accounts could be back on track. They could miss one payment and nothing happened except for late charges. Now for example, Bank One drops a consumer at 45 days and they will not accept another proposal. Similarly Direct Merchants, which offers an excellent rate of 5.9% for the program drops them at 45 days, raises the interest rate to 29.9% and the client has to wait a year before they will accept a new proposal. There are other examples but hopefully the above will sound enough alarms to take action early.

The bottom line is action must be taken before the consumer is maxed out on everything and the Debt Management Program (DMP) client has to be told that their monthly payment is going to be far more than they can afford.

What consumers learn is that in some cases their payment is actually going to go up in a debt management program. They can not afford the payment at this stage and if they don't pay, they are going to show up for work one day and get called in by the boss who is going to hand them a court order for a garnishment of 25% of their net pay.

Why The Procrastination

Over and above a natural tendency to "wait until things get better", sleazy advertising is misleading folks into thinking they can max out their accounts and then just call a credit counseling firm and get an affordable monthly payment. Still worse, such ads as "Cut your payment and half"... "Get out of debt in six months" can devastate a consumer. The consumer is never told their credit will be destroyed and that they may well be in worse condition than before. I know. I do pre-bankruptcy counseling for a living and the stories I hear are merciless.

A while back the Feds asked all major creditors to tailor a program that would structure a consumer Debt Management Program (DMP) to repay a debt within 4 to 5 years. Accelerated Debt Consolidation has a Calculator to show you how the payment structure works for many major creditors. There is no secret or mystery to repayment. If you seek any debt counselor, this is the formula that must be applied... by law. The page reflects major creditors, what their minimum payment is and what their credit consolidation interest rate is. Below that chart is the calculator.



Get Out of Denial

American credit consumers need to know that this is not a joke anymore. They need to take action sooner. They need to be calling a debt counselor early in their debt accumulation cycles. If a counselor can be called before the situation gets out of hand, a far better service can be provided.

If counselors could talk to clients a year before they actually call, the client could probably get them set up for half of what their monthly payments ends up being when they actually do call.



Guidelines

The following table is courtesy of the Institute for Financial Wellness. It offers national guidelines for spending and is based upon data from Bureau of Labor.



Spending Percentage Guide (gross income)

Housing 25-30 %

Savings 5-15 %

Utilities 5-10 %

Food 5-15 %

Transportation 10-15 %

Clothing 2-7 %

Medical/health 5-10 %

Personal 5-10 %

Recreation 5-10 %

Miscellaneous 2-5 %

Unsecured Debt 5-10 %



If the above formula (especially the last item, "Unsecured Debt") is very far out of perspective, call a counselor. If you are you using 30-50% of your available credit, call a counselor? If you have missed a single payment due to a tight budget, call a counselor.

Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at .