In bankruptcy law, an automatic stay prevents creditors from collecting fees from their debtors. It is an injunction against the creditor that occurs after the debtor has declared bankruptcy. The automatic stay begins as soon as the debtor initially files for bankruptcy status.
Bankruptcy is the ultimate form of debt relief. It is the discharging of debt that a debtor just simply cannot pay. Note that is a complicated process that involves assessing the debtor’s assets and then selling those (such as a home or a car) that can help the lender recoup lost money.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is used by individuals, small businesses and large corporations to discharge large quantities of debt. In the case of businesses, it always comes with the complete ceasing of any and all business activities. The company’s remaining assets are usually sold to help pay back any remaining liabilities.
Chapter 11 Bankruptcy
Chapter 11 bankruptcy can be used by individuals and businesses. The debt is restructured instead of discharged. The means the individual or business must still pay the money back. However, businesses and corporations that utilize chapter 11 bankruptcy get to maintain all of their assets.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is somewhat similar to chapter 11 bankruptcy, except that it applies to individuals. Again, the debt is not discharged. Instead, the individual is given the option to pay back all of his or her debts within a period not to exceed five years. Its main benefit is that it permits the person to avoid foreclosure or repossession.
A credit score is the base measurement that financial institutions use to judge an individual’s credit-worthiness. It basically tells the institution what the likelihood is that the individual they’re dealing with will actually pay off his or her debts. One major benefit of pursuing debt relief is that it helps increase a low score.
The amount of credit you are given on a personal loan or credit card agreement is your credit limit. It is the maximum amount you can spend using the credit available to you on that particular agreement. When you reach your credit limit, you can no longer use that line of credit or card to make purchases.
A cosigner to a loan is someone who agrees to pay off any debts incurred if the main party fails to make payments or defaults. Often used in cases where an applicant for a loan has a bad credit score, the co-signer vouches for the debtor and assumes liability if they fail to pay off their debts.
Collateral refers to property owned by the debtor that can be used to secure repayment of a loan. If the debtor fails to make payments on a loan, or can no longer make payments, the item used as collateral can be forfeited to the creditor.
Court judgments are very important in the case of debt relief. The final ruling in a bankruptcy case is a court judgment. Also, if a company sues an individual for unpaid liabilities, the final ruling of that would also be a court judgment. It is essentially any judgment wherein a court orders one party to pay another.
Credit repair refers to the several ways that one can begin the process of improving their credit score. To repair your credit usually requires making payments on outstanding debts, creating and managing new lines of credit, and sometimes even disputing credit reports that may have erred in computing your credit score.
Debt relief refers simply to the reorganization of any debt for the sole purpose of providing some relief to the lendee. There are numerous forms of debt relief:
- Reduced interest rates
- Extended due dates
- Reduced principal
- Debt settlement
- Debt consolidation
- Debt counseling
Debt relief is not something automatically offered from the get-go. It is only brought up as an option once the situation has reached a certain level of severity.
Debt counseling is like financial therapy. It’s the act of receiving financial advice and support from trained professionals. They do a variety of things. They piece together debt management plans. They help the debtor negotiate with lenders. And they teach the individual the skills needed to avoid accumulating more debt.
Debt management refers to the usage of strategies and techniques by a debtor for the purpose of better managing and repaying his debt. It’s a broad term that encompasses any strategies used to deal with debt: ordering less takeout, spending less on clothes, making more debt payments, etc.
Debt Management Plan
A debt management plan is a customized template designed to help an individual manage his debt. It is in most cases designed by a third-party agency hired for the purpose of helping the individual, who more often than not feels completely overwhelmed by the whole situation.
Debt consolidation refers to the process of combining multiple liabilities or debts into a single one. For instance, an individual with four separate credit card debts might seek debt consolidation for the purposes of streamlining his payments and also reducing his interest rates.
Debt Consolidation Loans
Debt consolidation loans are the backbone of debt consolidation. To pay off multiple debts, an individual might seek a debt consolidation loan from a bank. This is beneficial because it means he needs to only pay one lender. Furthermore, people can usually procure better interest rates like this.
Debt settlement involves a lender providing an individual with the opportunity to clear his debt by making a reduced payment. The lender essentially forgives a portion of the debt based on the stipulation that the individual immediately pays off the remaining portion of it.
Debt negotiation is a process wherein a lender and lendee negotiate a more fair deal. It always precedes debt settlement, but it doesn’t necessarily always lead to the same results. Sometimes, the lender waives some of the debt and then sets the lendee up with a new payment scheme.
Debt To Income Ratio
Debt-to-income ratio measures the percentage of an individual’s income that he funnels toward his debts. It is calculated by divided debt spending by income and then multiplying by 100. It’s an important calculation used in regards to loans. Lenders typically perceive a ratio that is too high negatively
A default is the worst consequence of failing to meet debt obligations. It means that a debtor has failed to comply with the terms of a financial agreement. It also often means that the debtor is getting ready to take repossession of lost property and/or money by some legal measure.
Dischargeable debt refers to debt that can be wiped away during a bankruptcy hearing. Note that certain forms of debt cannot be discharged. These include student loans, child support, alimony, taxes and criminal restitution. There are also certain debts that can be discharged, but only in a Chapter 13 case.
A dormancy fee (sometimes called inactivity fee) occurs when a credit card isn’t used for some time. Many credit card companies used dormancy fees for their customers’ accounts in the past decade, but in 2010 federal regulations banned their usage. They are still somewhat common on gift cards.
Credit cardholders who need temporary relief from payment schedules are sometimes granted a forbearance by companies for a set amount of time. Forbearance isn’t forgiveness of debt, but rather a hold on requiring the cardholder to make payments for an agreed upon period. An example might be a credit card company allowing a consumer to withhold payments for six months, resuming the payments after that time has passed.
The period of time a debtor has to make a scheduled payment on a loan without penalty is known as the grace period. It is an allowance on time, typically less than a week, that allows the debtor to make a payment after an agreed upon scheduled date. For instance, if you owe a creditor $50 on the 15th of every month, the grace period might allow you five days’ time to make a payment — that is, until the 20th — without a late fee penalty.
A hard inquiry or hard pull is when a lender checks a potential consumer’s credit report. Each time this happens, it creates a small but negative effect on an individual’s credit score. Several hard inquiries during a short span of time doesn’t cause too big of a negative impact; however, several hard inquiries repeated over a long period of time can tarnish an otherwise reputable score.
Insolvency refers to the state of being unable to pay one’s debt. It basically means that the individual or business’s liabilities far exceed his or its assets. It is the immediate precursor to bankruptcy. However, it should not be confused with bankruptcy. It is merely a state, not an action.
When two or more people share a single line of credit, it is called a joint credit. This can be done for several reasons. A person with a bad credit score can enter a joint credit opportunity with someone who has a good score, for example. In a joint credit situation, all parties are responsible for paying off debt.
Late Payment Fee
A debtor who fails to make a loan payment on time is often subjected to a late payment fee. Failure to make payments on an agreed upon time format (or within the grace period) will result in paying this extra fee. Too many late payments can affect your credit score in a negative way.
Liquidation refers to the process by which an individual or business entity sells all of his or its assets so as to raise money to pay off debts. With an individual, it usually refers to the sale of properties and cars. With a business, it can be anything, from office equipment to office buildings.
Debt that cannot be dischargeable (in other words, cannot be eliminated through bankruptcy) is called non-dischargeable debt. This type of debt has to be paid at some point, even after an individual has filed for bankruptcy. Examples include student loans, child support, and federal/state/local taxes.
The amount of time it will take for an investor to receive back its investment is called the payback period. Typically this can be calculated by taking the original loan amount and dividing it by the expected annual payment. For example, if a lender grants $10,000, and they expect $2,500 per year in loan payments, the payback period is four years.
Reaffirmation of Debt
A reaffirmation of old debt means that the debtor agrees to re-start payments of an old loan that they once failed to make. Most experts are skeptical of reaffirmation plans, as it re-opens the statute of limitations and places the start-date of the loan to when the reaffirmation began, rather than the original date the loan agreement was made.
Regulation Z is a federal regulation that requires credit card companies to disclose certain information to consumers. These disclosures must be made at the point of opening a card as well as at frequent intervals thereafter. These include disclosures of any fees associated with the card, late payment penalties, interest rate changes, and so on.
Secured Credit Card
Individuals with poor credit scores can qualify for a secured credit card. These cards are specially designed to help repair bad credit. Typically, these cards require collateral in the form of bank deposits with the issuing institution, and may have higher fees than regular credit cards.
Semi-Secured Credit Card
Debtors who previously had low credit scores but who have recently begun repairing their credit can qualify for a semi-secured credit card. After a certain amount of time using a secured credit card, a credit limit can shift to above what the borrower has deposited in themselves.
An unsecured debt is a type of debt structure that doesn’t involve collateral. These can include student loans, credit cards, rent, or other forms of basic debt. Creditors cannot use any property or assets you own to repay your debt to them in a situation involving unsecured debt.
Wage garnishment begins when creditors have exhausted all options for settlement of debt and the debtor refuses to comply or acknowledge what they owe. Garnishments are granted by courts, and require the employer to pay directly to creditors a portion of the consumer’s debts. It can often become an embarrassing situation for debt holders because, once garnishment begins, their employers become aware of their financial obligations.
Debt that has exceeded the statute of limitations for collection is called zombie debt. There are no legal avenues for collectors to attain this type of debt. Lenders can still, however, ask consumers themselves to resume paying the old debt, a process that is called reaffirmation.