Understanding Debt S..

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Friday, April 7, 2023Friday, April 7, 2023 Copyright Copyright ©© DebtGuard Management System DebtGuard Management System®® 22

American Consumer Credit CounselingAmerican Consumer Credit Counseling is a is a leading provider of consumer financial education leading provider of consumer financial education and debt management services. It is our mission and debt management services. It is our mission to provide individuals with the necessary to provide individuals with the necessary information to make informed financial decisions.information to make informed financial decisions.

About UsAbout Us

This This Understanding DebtUnderstanding Debt study course has been study course has been developed specifically to educate individuals on developed specifically to educate individuals on how to:how to:

Achieve Financial WellnessAchieve Financial Wellness

Maintain IndependenceMaintain Independence

Change Financial BehaviorChange Financial Behavior


Seminar FormatSeminar FormatToday we are going to cover and review three Today we are going to cover and review three chapters within this chapters within this Understanding DebtUnderstanding Debt study study course:course:

Study Chapter 4:Study Chapter 4:

Focus on DebtFocus on Debt


Understanding DebtUnderstanding Debt


Getting Out of DebtGetting Out of Debt


Dealing with Unpaid DebtsDealing with Unpaid Debts


Seminar FormatSeminar Format

Your time is valuable…so is ours. Regular Your time is valuable…so is ours. Regular breaks are scheduled. Please make every effort breaks are scheduled. Please make every effort to return from breaks on time.to return from breaks on time.

House Rules (I): BreaksHouse Rules (I): Breaks

Your questions are welcome and encouraged. Your questions are welcome and encouraged. DO NOT wait until breaks to ask questions, as DO NOT wait until breaks to ask questions, as we intend this seminar to be as informative as we intend this seminar to be as informative as possible…besides, we need breaks too!possible…besides, we need breaks too!

House Rules (II): QuestionsHouse Rules (II): Questions


Understanding DebtUnderstanding DebtCourse 2Course 2


Almost every consumer in America today owes Almost every consumer in America today owes some money to someone else on an “extended some money to someone else on an “extended credit program.”credit program.”

Extended credit makes it possible for consumers to Extended credit makes it possible for consumers to start businesses as well as purchase items from start businesses as well as purchase items from people, merchants or companies with no money out of people, merchants or companies with no money out of pocket. pocket.

There are two basic types of consumer debt, There are two basic types of consumer debt, securedsecured debt and debt and unsecuredunsecured debt. debt.

Focus on DebtFocus on DebtChapter 4Chapter 4

Q.Q. Why is it important to get organized?Why is it important to get organized?


Q. Q. What is secured debt?What is secured debt?

Secured consumer debt is debt that Secured consumer debt is debt that isis tied to a tied to a specific piece of real property. specific piece of real property.

The most common secured debts are “houses The most common secured debts are “houses and automobiles.” and automobiles.”

A house or car is considered the property that you will A house or car is considered the property that you will put up for collateral to the lender for the amount of put up for collateral to the lender for the amount of money you plan to borrow which guarantees repayment money you plan to borrow which guarantees repayment of the debt. of the debt.



Q. Q. How does secured debt work?How does secured debt work?

Let’s say that you are applying for a line-of-credit Let’s say that you are applying for a line-of-credit at your local bank for $20,000. As part of your at your local bank for $20,000. As part of your line-of-credit approval you will have to put up line-of-credit approval you will have to put up your house as collateral to “secure” the your house as collateral to “secure” the repayment of the $20,000. Your line-of-credit is repayment of the $20,000. Your line-of-credit is now secured by your property (house). now secured by your property (house).

If for any reason you cannot pay the bank your If for any reason you cannot pay the bank your agreed upon monthly payment, the bank can agreed upon monthly payment, the bank can take the collateral property (house) and sell it to take the collateral property (house) and sell it to pay the balance you owe on the line-of-credit.pay the balance you owe on the line-of-credit.



Q. Q. What are the advantages and What are the advantages and disadvantages of secured debt?disadvantages of secured debt?

If you have no credit or a bad credit history then securing a If you have no credit or a bad credit history then securing a loan with your property is sometimes the only way possible. loan with your property is sometimes the only way possible.

Secured debts usually have structured payment Secured debts usually have structured payment amounts and terms. In addition, you can usually amounts and terms. In addition, you can usually obtain lower rates if your credit is good.obtain lower rates if your credit is good.

The downside to a secured loan is that you can The downside to a secured loan is that you can lose your propertylose your property if you; 1) cannot repay the if you; 1) cannot repay the loanloan or 2) or 2) file bankruptcy against your unpaid file bankruptcy against your unpaid secured loan.secured loan.



Q. Q. What is unsecured debt?What is unsecured debt?

Unsecured consumer debt is debt that Unsecured consumer debt is debt that is notis not tied to a specific piece of property. tied to a specific piece of property.

The most common unsecured debts are “credit The most common unsecured debts are “credit cards and medical bills.” cards and medical bills.”

When you use a credit card to purchase items When you use a credit card to purchase items or see a doctor for medical attention there is no or see a doctor for medical attention there is no property to take from you if you don’t pay the property to take from you if you don’t pay the creditor or hospital. creditor or hospital.



Q. Q. How does unsecured debt work?How does unsecured debt work?

Let’s say you have been approved for a credit Let’s say you have been approved for a credit card with a spending limit of $5,000. The minute card with a spending limit of $5,000. The minute you purchased any item with that credit card the you purchased any item with that credit card the card created an unsecured debt. card created an unsecured debt.

If you cannot make payments to the credit card company, they can: If you cannot make payments to the credit card company, they can:


(1) send you to collections, where a collection agency tries to collect from you, (1) send you to collections, where a collection agency tries to collect from you, or or

(2) sue you in court and convince the judge to grant (2) sue you in court and convince the judge to grant them a judgment against you for the amount you them a judgment against you for the amount you owe them. owe them.


Q. Q. What are the advantages and What are the advantages and disadvantages of unsecured debt?disadvantages of unsecured debt?

Creating unsecured debt can only be obtained Creating unsecured debt can only be obtained by having an average to good credit rating by having an average to good credit rating (FICO score) and payment history. (FICO score) and payment history.

Unsecured debt usually comes with flexible Unsecured debt usually comes with flexible payment amounts and terms and credit limits.payment amounts and terms and credit limits.

Overspending on credit cards is the leading Overspending on credit cards is the leading cause that creates unsecured debt. cause that creates unsecured debt.



(Hand out Chapter 4 Test)(Hand out Chapter 4 Test)





Q. Q. What is Debt Load?What is Debt Load?

Debt load is a creditor term that is used to profile Debt load is a creditor term that is used to profile the total amount of debt that a consumer is the total amount of debt that a consumer is carrying. carrying.

Creditors and other lenders use various methods Creditors and other lenders use various methods to calculate your debt load.to calculate your debt load.

The most common method is called the Debt-to-The most common method is called the Debt-to-Income Ratio.Income Ratio.

Understanding DebtUnderstanding DebtChapter 5Chapter 5


Q. Q. What is a Debt-to-Income Ratio?What is a Debt-to-Income Ratio?

A Debt-to-Income Ratio is the simplest method A Debt-to-Income Ratio is the simplest method that a creditor or lender may use to compare the that a creditor or lender may use to compare the amount of your take-home income with the amount of your take-home income with the amount of your overall debt, excluding your amount of your overall debt, excluding your mortgage or rent payment. mortgage or rent payment.

This method will tell the creditor or lender what This method will tell the creditor or lender what percentage of your take-home income is being percentage of your take-home income is being used to pay for non-mortgage related debt.used to pay for non-mortgage related debt.



Q. Q. How do I calculate my Debt-to-How do I calculate my Debt-to-Income Income Ratio? Ratio?

There are There are three partsthree parts to calculate your Debt-to- to calculate your Debt-to-Income Ratio, which include:Income Ratio, which include:

Part 1 – Take-home IncomePart 1 – Take-home Income

Part 2 – Monthly Debt PaymentsPart 2 – Monthly Debt Payments

Part 3 – Debt-to-Income Ratio formulaPart 3 – Debt-to-Income Ratio formula



Let’s review the three parts:Let’s review the three parts:

Take-home Income Take-home Income – Includes– Includes your job wages, sales your job wages, sales commissions, company bonuses, alimony, child support, tips, commissions, company bonuses, alimony, child support, tips, interest on money, company dividends, social security, interest on money, company dividends, social security, pensions and other government assistancepensions and other government assistance

Let’s review the“Let’s review the“Debt-to-Income Ratio formulaDebt-to-Income Ratio formula” ” on how to calculate it.on how to calculate it.

Monthly Debt Payments Monthly Debt Payments – – This is the amount you owe This is the amount you owe to your creditors each month, excluding mortgage, rent, utilities, to your creditors each month, excluding mortgage, rent, utilities, and taxes. Such as credit cards, student loans, auto loans, etc.and taxes. Such as credit cards, student loans, auto loans, etc.



““Debt-to-Income Ratio formulaDebt-to-Income Ratio formula” calculation chart.” calculation chart.

Step 1Step 1 - - Monthly (take-home income) is Monthly (take-home income) is $2,000$2,000

Step 2Step 2 - Monthly (debt payments) are - Monthly (debt payments) are $700$700 (auto loan, credit cards, other (auto loan, credit cards, other loans, etc.) loans, etc.)

Step 3Step 3 - - Take $700 (debt payments) divide by $2,000 (take-home income) = 35%Take $700 (debt payments) divide by $2,000 (take-home income) = 35%

35%35% is your Debt-to-Income Ratio percentage is your Debt-to-Income Ratio percentage

$700 $2,000 35



Q. Q. How do creditors view my Debt-to- How do creditors view my Debt-to-

Income Ratio? Income Ratio?

As a general rule of thumb, creditors and lenders As a general rule of thumb, creditors and lenders may follow these Debt-to-Income Ratio may follow these Debt-to-Income Ratio percentages when pertaining to credit approval.percentages when pertaining to credit approval.

Less than 10%Less than 10% - - You are in great financial shapeYou are in great financial shape

10% to 19%10% to 19% - A good credit risk - A good credit risk

20% to 34%20% to 34% - - Credit is questionable at these ratiosCredit is questionable at these ratios

35% and higher35% and higher – Considered a high credit risk – Considered a high credit risk

Let’s review:Let’s review:



Q. Q. How can I change my Debt-to-Income How can I change my Debt-to-Income Ratio? Ratio?

It is possible to change your Debt-to-Income It is possible to change your Debt-to-Income Ratio for the better. Changing your Debt-to-Ratio for the better. Changing your Debt-to-Income Ratio can be accomplished by:Income Ratio can be accomplished by:

IncreasingIncreasing your monthly take-home pay your monthly take-home pay

DecreasingDecreasing your monthly debt payments your monthly debt payments

OROR

Let’s review Let’s review threethree different scenarios:different scenarios:



Scenario 1:Scenario 1:

Take-Home Income Monthly Debt Payments

$2,000 Auto loan $375

Credit cards $150

Student loan $50

Personal loan $125

Total Payment $700

$700 $2,000 35




Take-Home Income Monthly Debt Payments

$3,000 Auto Loan $375

Credit cards $150

Student loan $50

Personal loan $125

Total Payment $700

$700 $3,000 23

Note: We increased income by $1,000




Take-Home Income

$2,000

$375 $2,000 19

Note: We lowered the monthly

payments by $325

Monthly Debt Payments

Auto Loan $275

Credit cards $50

Student loan $50

Personal loan $0

Total Payment $375

$375

$150

$50

$125

$700



Summary of Debt-to-Income Ratio Scenarios: Summary of Debt-to-Income Ratio Scenarios:

Scenario Debt-to-Income RatioMonthly

Debt PaymentTake-Home

Income

1 $700 $2,000 35% (High Credit Risk)

2 $700 $3,000 23% (Questionable)

3 $375 $2,000 19% (Good Credit Risk)

Note:Note: You can improve your credit by: You can improve your credit by:

1) Increasing take-home income or 1) Increasing take-home income or

2) Decreasing monthly debt payments.2) Decreasing monthly debt payments.



Q. Q. Why should I monitor my Debt-to-Why should I monitor my Debt-to-Income Ratio? Income Ratio?

Keeping track of your monthly debt payments is very important Keeping track of your monthly debt payments is very important to your Debt-to-Income Ratio and creditworthiness. to your Debt-to-Income Ratio and creditworthiness.

By creating a livable spending plan you will be able to allocate the By creating a livable spending plan you will be able to allocate the necessary monthly payments to all debts, therefore helping you:necessary monthly payments to all debts, therefore helping you:

Make good financial decisions Make good financial decisions

Keep Debt-to-Income Ratio below 20%Keep Debt-to-Income Ratio below 20%

Avoid financial problemsAvoid financial problems



Q. Q. What is the 20/10 Rule?What is the 20/10 Rule?

The 20/10 Rule is another method that lenders The 20/10 Rule is another method that lenders use to grant consumer credit. use to grant consumer credit.

The 20/10 Rule has two parts:The 20/10 Rule has two parts:

Let’s Review:Let’s Review:



The “20” Rule Refers To:The “20” Rule Refers To:

Your total household debt (excluding your Your total household debt (excluding your mortgage) mortgage) should not exceed 20%should not exceed 20% of your net of your net take-home income. Net take-home income is what take-home income. Net take-home income is what you actually take-home after taxes and deductions. you actually take-home after taxes and deductions.




Your total monthly debt payments (excluding Your total monthly debt payments (excluding your mortgage payments) your mortgage payments) should not exceed should not exceed 10%10% of your net take-home income. of your net take-home income.

Let’s Review How Let’s Review How

The 20/10 Works:The 20/10 Works:




Your total net take-home income is $48,000 a yearYour total net take-home income is $48,000 a year

The formula:The formula: Take $48,000 (times) 20% = $9,600 Take $48,000 (times) 20% = $9,600

Your total consumer debt under the “20” Rule Your total consumer debt under the “20” Rule shouldn’t shouldn’t exceed $9,600 exceed $9,600

$48,000 20% $9,600




The first formula:The first formula: Take $48,000 (divide by) 12 = $4,000 Take $48,000 (divide by) 12 = $4,000

The second formula:The second formula: Take $4,000 (times) 10% = $400 Take $4,000 (times) 10% = $400

$4,000 10% $400

Your total monthly payment under the “10” Rule Your total monthly payment under the “10” Rule shouldn’t exceed $400 per monthshouldn’t exceed $400 per month



Q. Q. What is the 28/36 Rule?What is the 28/36 Rule?

The 28/36 Rule is another method that The 28/36 Rule is another method that mortgage lenders use to grant credit. mortgage lenders use to grant credit.

The 28/36 Rule has two parts and works like this:The 28/36 Rule has two parts and works like this:

Let’s Review:Let’s Review:




Your total mortgage payment (principle & Your total mortgage payment (principle & interest), including taxes, insurance, mortgage interest), including taxes, insurance, mortgage insurance and homeowner’s dues insurance and homeowner’s dues should not should not exceed 28%exceed 28% of your gross monthly income. of your gross monthly income.

Gross monthly income is what you actually make Gross monthly income is what you actually make beforebefore taxes and deductions are taken out.taxes and deductions are taken out.




Your total mortgage payment (principle & Your total mortgage payment (principle & interest), including taxes, insurance, mortgage interest), including taxes, insurance, mortgage insurance, homeowner’s dues insurance, homeowner’s dues plus other debts plus other debts (e.g., auto loans, student loans, credit cards, (e.g., auto loans, student loans, credit cards, etc)etc) should not exceed 36%should not exceed 36% of your gross of your gross monthly income. monthly income.

Let’s Review How Let’s Review How

The 28/36 Works:The 28/36 Works:




Your total gross income is $72,000 a yearYour total gross income is $72,000 a year


Your total monthly payments under the “28” Rule Your total monthly payments under the “28” Rule shouldn’t exceed $1,680 of your $6,000 gross monthly shouldn’t exceed $1,680 of your $6,000 gross monthly income.income.

The second formula:The second formula: Take $6,000 (times) 28% = $1,680 Take $6,000 (times) 28% = $1,680

$6,000 28% $1,680




Your total gross income is $72,000 a yearYour total gross income is $72,000 a year


Your total monthly payments under the “36” Rule Your total monthly payments under the “36” Rule shouldn’t exceed $2,160 of your $6,000 gross monthly shouldn’t exceed $2,160 of your $6,000 gross monthly income.income.

The second formula:The second formula: Take $6,000 (times) 36% = $2,160 Take $6,000 (times) 36% = $2,160

$6,000 36% $2,160








Q. Q. How can I tell if my credit card debt is How can I tell if my credit card debt is out of control? out of control?

There are There are five warning signsfive warning signs, which indicate that , which indicate that your credit card debt may be getting out of control:your credit card debt may be getting out of control:

Paying bills late Paying bills late

Transferring balances from one account to another Transferring balances from one account to another

Depending on overtime at work to cover minimum monthly bills Depending on overtime at work to cover minimum monthly bills

Hoping that checks you’ve written don’t clear the bank before Hoping that checks you’ve written don’t clear the bank before payday payday

Borrowing from friends and relatives to cover Borrowing from friends and relatives to cover basic living expenses basic living expenses

Getting Out of DebtGetting Out of DebtChapter 6Chapter 6


Q. Q. What do I do if I fall behind on my What do I do if I fall behind on my credit card payments? credit card payments?

You should contact your creditor(s) and explain You should contact your creditor(s) and explain your financial situation honestly before your your financial situation honestly before your account becomes seriously past-due and/or gets account becomes seriously past-due and/or gets referred to a collection agency. referred to a collection agency.

Note:Note: If a creditor is unwilling to work with you, If a creditor is unwilling to work with you, we recommend that you we recommend that you contact our company contact our company immediately for help.immediately for help. In most cases, we can In most cases, we can work with your creditors and structure a work with your creditors and structure a repayment plan to bring your accounts current.repayment plan to bring your accounts current.



Q. Q. What do I do if a creditor is harassing What do I do if a creditor is harassing me?me?

We suggest that you:We suggest that you:

Tell the creditor or collection agency to stop Tell the creditor or collection agency to stop calling you at your home and/or work. calling you at your home and/or work.

If they continue to call, If they continue to call, you can contact our you can contact our company for help. company for help. In most cases, In most cases, we can we can workout a repayment plan that will stop workout a repayment plan that will stop the harassing calls. the harassing calls.



Q. Q. Can a creditor take me to court if I fail Can a creditor take me to court if I fail to make payments?to make payments?

YesYes. If your debt is large enough a creditor may . If your debt is large enough a creditor may refer your account to an attorney and take you to refer your account to an attorney and take you to court. court.

Creditors realize that court can be a scary Creditors realize that court can be a scary place so they file suit knowing that you won’t place so they file suit knowing that you won’t show up at the hearing date. Therefore, they show up at the hearing date. Therefore, they win their case by default and may have the win their case by default and may have the ability to ability to garnish your wages (up to 25% or garnish your wages (up to 25% or more)more) or take your property. or take your property.



Q. What does it mean when an account Q. What does it mean when an account is charged-off?is charged-off?

Once a creditor has tried every angle to collect Once a creditor has tried every angle to collect payment on your past-due account, that creditor payment on your past-due account, that creditor will stop collection, and rather than take you to will stop collection, and rather than take you to court, they write off your uncollected debt as bad court, they write off your uncollected debt as bad debt. This is known as a charge-off. debt. This is known as a charge-off.

Even though your account is charged-off, you Even though your account is charged-off, you still owe the money and a charge-off will be still owe the money and a charge-off will be noted on your credit report. noted on your credit report.



Q. How can I settle a charged-off Q. How can I settle a charged-off account?account?

Settling a charged-off account can take some Settling a charged-off account can take some work and patience on your part. Here are some work and patience on your part. Here are some suggestions:suggestions:

Come up with a payment amount that you can pay.Come up with a payment amount that you can pay.

Contact the creditor. Make them a settlement offer.Contact the creditor. Make them a settlement offer.

Get the settlement offer in writing from the creditor Get the settlement offer in writing from the creditor before sending payment.before sending payment.

Once paid, send copies of that written settlement Once paid, send copies of that written settlement statement from the creditor to the three credit statement from the creditor to the three credit bureaus.bureaus.



Q. What are my options in getting out of Q. What are my options in getting out of debt?debt?

Option 1Option 1 - Getting out of debt:- Getting out of debt:

Stop using your credit cards. Stop using your credit cards. Take the Take the minimum payment dueminimum payment due on your statement on your statement ($125($125). ).

Add the $125 to the Add the $125 to the creditor’s finance chargecreditor’s finance charge ($72($72).).

$197 is your New Fixed Monthly Payment. $197 is your New Fixed Monthly Payment.

$125$125 $72$72 $197$197



Q. What are my options in getting out of Q. What are my options in getting out of debt?debt?

Option 2Option 2 - Getting out of debt:- Getting out of debt:

Contact our Contact our credit counseling agencycredit counseling agency for help. for help.

Our agency has certified credit counselors trained to Our agency has certified credit counselors trained to help consumers create livable household budgets, help consumers create livable household budgets, spending plans and repayment plans. Our main focus spending plans and repayment plans. Our main focus is to help is to help get your finances under controlget your finances under control so you so you can create a plan to eliminate your debt.can create a plan to eliminate your debt.

In addition, In addition, our agencyour agency can:. can:.



Option 2Option 2 – – Getting out of debtGetting out of debt

Consolidate all Consolidate all your unsecured debtsyour unsecured debts (credit (credit cards) into a debt management program which, cards) into a debt management program which, could help you:could help you:

Lower your monthly payments 30% to 50%.Lower your monthly payments 30% to 50%.

Re-age past-due accounts to current status.Re-age past-due accounts to current status.

Stop collection calls and demands letters.Stop collection calls and demands letters.

Lower or eliminate interest.Lower or eliminate interest.

Develop a repayment plan to get out of debt in Develop a repayment plan to get out of debt in 48 to 60 months, instead of 20 years.48 to 60 months, instead of 20 years.






Corporate Address:Corporate Address:

American Consumer Credit Counseling, Inc.American Consumer Credit Counseling, Inc.

130 Rumford Avenue, Suite 202130 Rumford Avenue, Suite 202

Newton, MA 02466Newton, MA 02466

How To Contact UsHow To Contact Us

Contact Information:Contact Information:

Toll Free: 1-800-769-3571Toll Free: 1-800-769-3571

Main: 1-781-647-3377Main: 1-781-647-3377

Fax: 1-781-893-7649Fax: 1-781-893-7649

Email: [email protected]: [email protected]

Web Address: www.consumercredit.comWeb Address: www.consumercredit.com

Understanding Debt S..

Documents

understanding

total gross

gross monthly

total mortgage

monthly debt

credit card

credit card

income ratio