How Much Does it Really Cost to Get Out of Debt?
Many people will confuse the difference between the Price and the Cost of a particular debt resolution option. You can only make a fair comparison of the various options after you fully understand what makes up the Price and what makes up the Cost of something. You may be thinking, But arent they the same thing? hey are actually very different and once you understand the difference, you are on your way to saving thousands of dollars when resolving and paying off your debt. he Price of something is only a figure, or a number, to establish relative worth. his is like the sticker Price of a car. he Cost is the actual amount of money you have to take out of your pocket to actually own the product or pay for the service. his is like the total of monthly payments on a car loan versus the purchase Price of the vehicle. !or e"ample, lets say that the sticker Price of a particular new car is #$%,%%%. &fter discounts and rebates, the final Price the customer pays is, say #'(,%%%. &dd sales ta", license, dealer fees, etc. and the final Price is now #'),%%%. he customer puts #*,%%% down, finances the remaining #'+,%%% at ,- for +% months, and drives away thinking he .ust bought a car for a Price of #'),%%% /at least that is what he tells his friends01 2e now know the actual final Price 3 #'),%%% 4 but what was the Cost? he #*,%%% down plus +% payments at #(5% /#'+,%%% principal balance at ,- for +% payments1, e6uals a total Real Cost of #$$,5%%. he difference between the #'),%%% Price and the amount paid of #$$,5%% is the difference between the Price and the Cost. 7n other words, the Cost was actually '%- higher than the Price0 !rom that illustration you can see that if you have to pay for something over time, with any sort of interest or charges added, the total amount you have to take out of your pocket to pay for it will always e"ceed the initial purchase Price. he higher the interest, or the longer the time you have to make payments, the more the Cost will e"ceed the Price. 8ow that you better understand the difference between the Price and the Cost of something, we can evaluate the true cost of various debt resolution options. 9emember, people want the lowest Cost option, but usually buy what they think is the lowest Price option. &s demonstrated earlier, Price should not be the determining factor in making a buying decision 4 it should instead be the total Real Cost. The Bankruptcy Option Bankruptcy may seem like the only way out of some situations, but you should consider what it will cost you. :ometimes, these costs will lead you to look for another solution. You will need to consider more than .ust the costs for filing the bankruptcy. You will pay the filing fees and most likely need a lawyer. hese filing fees have gone up as part of the ;eficit 9eduction &ct. he filing fees were #'%% for a <hapter ) and #*=( for a <hapter *$ filing, and have now gone up to #',, and #')$ respectively.
7f you make changes to your case or proposals for added actions, you will pay more. &nd you will have to avoid missing records and writing bad checks to keep from adding to the bill. 7n general, .ust filing for bankruptcy can cost you in nine ways> *. &ttorney fees '. <redit counseling $. ?etition fees 5. &mendment fees (. 9eopening fees +. <onversion from a <hapter ) to a <hapter *$ ). :plitting fees =. &bandonment of property costs ,. 2ithdrawing the reference fees But you will pay much more than .ust for those items. !or the ne"t decade you will pay higher interest rates on any loans you are able to secure. 7f you want to buy a home, you will probably have to shop the subprime market, which automatically means higher interest rates. You will also pay higher insurance premiums as insurance companies look to your credit history for the potential of claims by you. he worse your credit, the more likely you are to have a claim and the higher your premiums. You may have to sell your e"isting home, cars and belongings to settle your debts. You may find that even after your debt obligations are fulfilled and your credit history is on the way to repair, you will still be unable to secure credit from your previous lenders. hey keep the information on file for ten years from the time the bankruptcy is discharged, not from when it is filed. Bankruptcy isn@t something to be taken lightly. 7t will cost you a lot of money and lost sleep. 7f you are able to find a way to avoid it, you should. Ander the new law, you will have to attend credit counseling to be able to file for bankruptcy. You will have to pay for this, usually #(% a session. You are not re6uired to have an attorney represent you, but the paperwork can be overwhelming if you are not familiar with all the legal terms and re6uirements. here can
be a broad range of fees for attorney services, but you can e"pect to spend at least #(%% for competent legal counsel. Benerally, the total fees for the filing itself, credit counseling, and attorney fees can run anywhere from #)%% to #',%%%. 7f you shop around, you should be able to cover all the costs for about #*,%%%. But of course .ust paying the costs does not get you out of debt 4 not by a long shot. 7f you are forced into a <hapter *$ filing, you will also have to pay your creditors back for somewhere between 5% and +% cents on the dollar typically, plus rustee fees. Bankruptcy is something that is hard to recover from, both emotionally and financially. :o look at bankruptcy not as a way to start over, but a long pause in your life. Cverything will change. You should try to avoid it. he total Cost of bankruptcy is .ust too much to be a temporary fi" for your problems. The Debt ettle!ent Option he debt settlement industry is one of the hottest and fastest growing industries in the country right now. :o many people are over e"tended on credit card and other unsecured debt that any solution can seem attractive. But what does it really cost to get out of debt using this option? Dirtually all of the ads for this type of service tout savings of 5%3+%off your current balance, with most 6uotes being for (%- plus the fees to the debt settlement company. <hough there is some variation on the costs associated with this option, we will use the most common pricing model being sold nationwide. he most typical program calculates repaying the debt for (%- of the original amount, plus a fee of *(- of the total debt. Asing this as a starting point, we can do some calculations to determine the true Cost of this option. !or e"ample, if you had total credit card debt of #5%,%%%, you would be e"pected to pay #'%,%%% to your creditors and #+,%%% to the debt settlement company, for a total of #'+,%%% paid over four years with a monthly payment of about #(5%. Eowever, there are more fees associated with this option. he first is the monthly account maintenance fee that debt settlement companies charge. he typical fee is #5% per month, which would total another #*,,'% in cost over the 5= months of the program. here is one more cost that the debt settlement companies rarely mention, and that is the imputed income ta" we discussed earlier. ;ebt settlement companies negotiate with the primary creditor and they are re6uired to file a *%,,3< for any forgiven debt. 7f you are in the *(- ta" bracket, you would owe income ta"es on the #'%,%%% in forgiven debt, or #$,%%%. 8ow we can add up the total cost of getting out of debt using this option. he amount to the creditors plus the fees is #'+,%%%, plus the monthly fees of another #*,,'%, and the
ta"es of #$,%%% totals #$%,,'%, or ))- of the original debt and would re6uire payments for the ne"t four years. The Debt Consoli"ation Option ;ue to dropping real estate values, this option has lost popularity in recent years but is still available as an option to some people. <hough the low monthly payments available under this option can appear attractive, dont be fooled by this one 4 it is by far the most e"pensive option to get out of debt. :ince this is a one hundred cents on the dollar option, you would have to borrow #5%,%%% plus pay closing costs of about #*,'%%, for a total loan of #5*,'%% to be paid back at ,.(interest over the ne"t *( years. his option would have a monthly payment of about #5$*, but it would last for a full *( years, or *=% payments. he total amount paid back would be the #5*,'%% principal plus interest of #$+,'5% for a total amount of #)),55%, or *,5- of the original debt0 But wait. 2hat about the interest deduction on the home e6uity loan? Based on a total interest payment of #$+,'5% and again assuming a *(- federal ta" bracket, you would save a total of about #(,5$+ in ta"es over the *( years. Cven if we subtract this amount from the total paid you would still end up paying #)',%%5 back on #5%,%%% in credit card debt 4 not a very good deal at all. The Cre"it Counseling Option his is another popular, and e"pensive, option to get out of debt. Basically there is no attempt made to reduce the principal balance, only to negotiate more favorable interest rates and perhaps lower minimum payments. he typical program takes +% months to get out of debt and you will end up paying back more than the total current debt. Asing our earlier figure of #5%,%%% in credit card debt paying *=- interest and making payments of #*,'%% a month we can see how the costs come out under a credit counseling program. You could possibly get the interest rate reduced to an average of *%- and set up a payment plan for +% months. Asing a credit card debt calculator we can determine that you would now be paying #=(% a month and a total interest of #*%,,,$. he total of payments and interest then would be #(%,,,$ to be debt free in five years. #sset Protection an" Debt Resolution he final option we will review when considering the true <ost to get out of debt is asset protection and debt resolution. here are variables that determine the actual cost of this option but we will use the following assumptions> You are current on your credit card debtF have some available credit left on your cardsF can afford to make small monthly paymentsF and live in a state where wages can be garnished. Asing the same #5%,%%% in current debt from our earlier e"amples, we can determine that this is by far the lowest cost option, and the 6uickest, to get out of debt. 7t will also have
the least long3term impact on your credit scores. &t this debt level, the total cost to get out of debt, including the fee for the program, for a couple is less than 5% cents on the dollar. &nd the best part is, the entire program can be completed in about *= months 4 faster than any other option available. Because of the leverage this type of program provides, you can e"pect to negotiate and pay off your debts for around '% cents on the dollar and the balance will be in program fees. &sset ?rotection and ;ebt 9esolution would allow you to hold your creditors at bay while you accumulate enough funds to pay your creditors off at a substantial discount. You should e"pect to spend a total of around #*(,%%% to become debt free using this process 4 a fraction of the cost of any other option we have discussed.
