Financial help with credit counseling
Managing personal finance requires considerable discipline and understanding of finances. In addition there are some aspects of personal finance that cannot be generalized. Over the years priorities have changed drastically. There was a time when food, clothing, and shelter came as the first requirements. Nowadays people consider owning a vehicle also a necessity. Medication, and education are two other expenses that have crawled into the necessity categories. Television, refrigerators, and telephones were once considered comforts, but they have become necessities. All these have led to terrific strain on monthly income. It is not possible to purchase all these immediately with meager sums that a person earns every month.
One way to go about it is to take loans. There are ample loan products that make these things affordable. People therefore borrow from their future earnings to meet their immediate requirements.
There is nothing wrong with such borrowings when economies are robust, and growing. Problems surface when there are job losses, as in recent times. Loans do not freeze till the individual can resume earning. But problem with economy is not the only way to get into credit problems. At times it may be hurricanes, tornados, cyclones, tsunamis, earthquakes, or other natural calamities that may completely turn the world upside down. For some, loss of a loved one may be so disturbing that the effects spill on the job, eventually leading to loss of job.
Clearly, there are things that are beyond an individual's hands but there are some aspects of credit and finances that are certainly with in human control. Of these, one is budgeting. Planning finances and purchases properly ensures that a person is able to serve the debts at all times.
Most financial advisors suggest that when 20 percent of the monthly income of a household has to leave towards installments of various debts and monthly payments, then it is time for some debt consolidation and management.
However, the thumb rule is for households in median income bracket. For households with lower incomes, the percentage comes down more because bulk of the income is to be used for basic necessities such as food, clothing, and shelter. Which means there is no scope for squeezing further. Quite often the lower income group has to be satisfied with rented accommodation, and use public transport.
But even otherwise, the 20 percent rule may be reviewed a bit so that many headaches may be avoided. A safe way of going about it is to plan a saving scheme concurrently with a new debt. Therefore, a person intending to contract a debt that requires him to shell down 1000 per month, should ensure that he is depositing an equivalent amount in some government security every month, with out fail. If this becomes the policy of the household, things simply cannot go wrong, as there will always be sum emergency fund available to clear the debt or give a respite from installments.
For those who have already got into soup, such suggestions are likely to be of little help. The financial help and credit counseling for such people entails a more thorough check. Quite often people are not aware of various sources of finance available in the market. They tend to buy things to keep up with Joneses and then find themselves in a mess. The first thing credit counselor does is examine whether the debt is contracted for necessity or for social prestige. If it is for later category, clearing it instantaneously, may be suggested, even if the debt is not very expensive, or if disposing the purchased item may translate into some loss.
The next thing the credit counselor does is to list the total debts of the person, and total assets of the person. The debts are further shuffled based on installments and interest rates, with debts that have highest installments being ranked on top. If two debts are almost similar in installments, then the debt that carries higher interest rate is ranked above the other.
Once this ranking is done, the assets are reviewed. The value of assets is determined. If there is any real estate property that has some equity built up over the years, then the task becomes easier, as the debtor can approach a bank or a lender to give a mortgage loan or a refinance loan on this asset such that the amounts will be utilized for clearing costlier debts, and making it easier for the debtor to manage the debts.
If this option doesn't exist then the credit counselor examines the other options such as raising loans on some government securities, or on used cars for the same purpose. If these options are also not available, then the credit counselor suggests a plan through which the debtor can bring down the monthly outflows. For this, the debtor has to negotiate terms with all lenders, requesting either for lowering interest rates on the loans given by them, or extending the term of repayment. At the time of such meeting with the lenders, the debtor must disclose the facts and figures being as honest as possible, and present a plan of clearing the debts as fairly as possible.
Lenders tend to be agreeable, especially unsecured loans providers. This is because the amounts they lend to individuals may not be significant enough for them to run to courts, and waste manpower and cash resources. Secondly, the bankruptcy court may come up with a scheme that may anyway eat way their profits. This is certain because the borrower has to pay charges for the liquidator, which means a further reduction of money available for distribution. Moreover, the entire indebtedness of the borrower may not be known. There may be some debts that may come up as surprise at the time of bankruptcy proceedings. So lenders often prefer to scale down their profits. At times, the lenders may even absorb losses.
If all these measures fail, then the credit counselor has no choice but to ask the debtor to approach bankruptcy court.
Other Articles
