Pay Day Loan Confession: I've fallen and I can't get up!

…have you (or someone you know) "fallen" into the Pay Day Loan bottomless pit of debt and feel like you can't "get up" out of it? I have.

When you’re in a bind and you need a few hundred bucks to bridge you over a few days until your next pay day, a pay day loan may look very appealing. In my opinion ... Pay Day Loans are like an addictive drug. The first experience may seem helpful and pleasurable but it eventually becomes something that you believe you can’t live without.  And just like a drug addiction, getting out of Pay Day Loan debt can be scary, daunting and financially painful. But … there is a cure for this Financial Dis-Ease. 

   

Let’s first discuss how Pay Day Loans causes Financial STDs (Substantially Tremendous Debt).  Ok … (true story) … a family member of mine needed $200 to pay the electric company to keep the lights on. A so-called friend referred them to a local pay day lender. The pay day lender charged $20 per $100 borrowed. The process was so pleasant and easy that they decided to borrow an extra $100 for a total of $300.  They paid their past due electric bill for $200 and had $100 for food and gas until their next pay day. On their next pay day, they made the fateful decision to renew the pay day loan. So, this time the loan was for $360 (to pay off the original loan amount of $300 loan and the $60 fee). The new fee was another $72, which totaled $432 for the new loan. My family member renewed this pay day loan at least 5 or more times and quickly began to sink into debt.

   

Getting “up” out of pay day loan debt is not as easy as falling “down” into it, but it is possible. Here are 3 tips to get out of Pay Day Loan Debt.

   

COLD TURKEY

   

If at all possible, the best method is to stop taking out pay day loans immediately and sacrifice for the pay period. This will reset your financial situation and give you your full pay check during your next pay check.  It is important to plan for this pay check deficiency. To help you through this financial deficiency,

• Ask your family members if they some money to spare or borrow,

• Contact your bank or credit union to see if you qualify for a payment deferment on your loan payment due to financial hardship,

• Cut out eating out during this pay period to save a few bucks, or

• Carpool with a co-worker or take public transportation to save on gas.

DEBT TREATMENT

   

Another option is to apply for a loan with a reasonable interest rate and short period of time (term) to pay off the pay day loan. So instead of having a pay a lump sum every month, you can paythe new loan off in more reasonable and smaller weekly, biweekly or monthly payments.  If you go this route, make sure you keep the term at 12 months or less and make sure that the interest rate does not exceed 18%. Some credit unions may offer loan programs designed to help people get out of pay day loan debt.  One of the advantages of getting a loan from credit unions is that they must comply with a “usury law,” which means that they cannot exceed a specific interest rate, usually 18%.  If you have a great relationship with your bank, ask them if they have a loan consolidation program that can assist you with refinancing your pay day loan.

   

  

TERMINATION

  

A last resort to get out of pay day loan debt may be bankruptcy. The two chapters available to file under for bankruptcy are Chapter 13 or Chapter 7.

   

Chapter 13 bankruptcy is considered “reorganization” and is appropriate if you have significant collateral that you want to keep like a home or vehicle. Chapter 13 establishes a payment plan up to 5 years to pay on your debt based on your financial capacity.  Once you have completed all of the payments ordered in the bankruptcy plan, the debt is considered “discharged” and the remaining debt is not collectible by the creditor.

   

Chapter 7 bankruptcy is considered “liquidation” and is appropriate if you have significant unsecured debt and minimum or no collateralize debt.  Chapter 7 liquidates or “terminates” qualified unsecured debt. Should you have collateralized debt, you can “reaffirm” with the bank and continue to make payments according to your credit agreement or you can “surrender” the collateral to the bank or trustee so it can be sold to pay on the debt to liquidate.

   

This option again should be a last resort consideration but can assist you in resetting your financial situation with a fresh start.  There are pros and cons to filing for bankruptcy so make sure that you consult with a knowledgeable and consumer focused bankruptcy attorney.  Click here to listen to my interview with Bankruptcy Trustee & Attorney, Angelyn Wright, Esq., as she talks about the “Truth About Bankruptcy.”

   

   

Sinking in Pay Day Loan debt can feel helpless and hopeless, but there is financial resurrection. The great thing is that you hold the power in stopping this type of financial abuse by making the decision to stop using pay day loans.  Make the decision today.

   

Of course, the best way to avoid "falling" into this bottomless pit of debt is to avoid using it at all costs. Seek alternative short term loans through your bank or credit union.

  

  

Financially True,

  

Tarra Jackson ... Making Money Sexy

   

  

P.S.  The 3 tips above is a start to help you get up from falling down into this type of debt, but there are other ways as well.  What are some other tips to "get up" from falling into pay day loan debt bottomless pit?

What you need to know about Debt Cancellation during Tax Time

Question: Madam Money, I settled a debt with a creditor and they sent me a 1099-C. What is a 1099-C and how does this affect my credit?

Answer:  Good question.  A settlement is the acceptance of a partial payment of the amount of debt owed. The remaining amount of the debt is known as the deficiency balance.  The deficiency balance, not collected, is essentially forgiven. Debt cancellation is the forgiveness of the entire amount owed. 

The creditor can file a 1099-C, which is a cancellation of debt form, with the IRS if the creditor has either 1) reached a settlement with a debtor for less than was originally owed, or has 2) forgiven the entire debt, concluding it will never be able to collect the debt.  If the creditor files a 1099-C for the amount forgiven to the IRS, that amount will have to be claimed as income on the person's personal tax return.

If and when a creditor issues a 1099-C in your name to the IRS, the amount included on the form is considered income that you must claim and pay taxes on.

Creditors must file a 1099-C with both the IRS and with the debtor for all debts of $600 or more under the following circumstances:

1. Cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.
   
   
2. Cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.
   
   
3. Cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt.
   
   
4. Discharge of indebtedness by agreement between the creditor and the debtor to cancel the debt at less than full consideration.
   
   
5. Discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.
   
   
6. The expiration of nonpayment testing period. This event occurs when the creditor has not received a payment on the debt for a 36 month period beginning on December 31st. (this 36 month period is rebuttable by creditor based on facts and circumstances)

 
If you settle with a creditor or if they agree to forgive the debt, be sure to ask the credit if they file a 1099-C with the IRS.  A settlement or cancellation of debt may help you with your budget and credit on the front end but it may cost you during tax time if you have to claim that amount on your taxes as income.

Some creditors may settle a debt with the debtor without filing a 1099-C and just report the debt as a debt "settled for lessor amount" on the credit report. The affect on the credit report will relatively both be the same. These accounts will eventually have less of a negative affect on the credit report the older they get. Time heals all credit report wounds.

If you received a 1099-C, make sure to give this to our tax accountant for further guidance and assistance.

Tarra Jackson
Madam Money
www.MadamMoney.com
FB.com/tarrajacksonenterprises
Twitter: @MsMadamMoney

When Can I Get a Home Loan After Foreclosure or Bankruptcy?