Debt Snowball - 2 Schools of Thought

The debt snowball is a debt reduction method and strategy used to pay off debt. It is widely preached by debt counselors all over the world and many consumer finance and debt help gurus such as Dave Ramsey absolutely swear by it.


How the Debt Snowball Works

It is really a rather simple concept. The one employing this method simply lists all their debt and budgets out the minimum payment owed monthly to each creditor. Then one creditor is selected and any remaining funds available after all minimum payments have been made is allotted the remaining balance. After that creditor is paid off that minimum payment as well as the remaining excess funds is targeted towards the next selected creditor. Thus the snowball grows. You pay of the next creditor at a faster rate then the previous. As creditors are eliminated the snowball grows bigger and bigger. Rinse and repeat.

There is an internal conflict in this method. Conflict arises in determining which creditor should be targeted first, second, and so on.

There are two schools of thought on this matter. The "motivational finance method" and the "logical finance method".

1. Motivational Finance Method - Here the creditor owed the least amount of money is always targeted first. In this way the one paying off debt is thought to be more motivated because they are awarded the satisfaction of seeing the fruits of their labour sooner. However this method pays no attention to interest rates. Thus in theory the consumer will most likely pay more then the one who utilizes the logical method.
2. Logical Finance Method - Here the highest interest bearing creditor is paid off first. In this way the consumer is paying off their debt the fastest and the cheapest. However experts tend to agree that the consumer will be more likely to quit than the same consumer who employs the motivational finance method.

So Which Debt Snowball Method is Best?

Technically it is kinda impossible to argue against the logical method. However, if the consumer in financial hardship is not motivated then perhaps the motivational method would work better. I would contend that if the consumer can't stay self motivated enough to see it through the logic method then neither would work anyway. But that is just my opinion. Personally I would rather get out of debt faster and cheaper.

Debt Settlement Risk Factors

Debt Settlement Risk - Three Key Fundamental Risks

Debt Settlement has some fundamental risks that come with the decision to pursue efforts of settling debt for a discounted price with your creditors.

This article provides an outline of three existing debt settlement risk.



3 Financial Risks

No Guarantee

• There is never a guarantee that you will be able to settle debt with a lender. Just because you want to settle and make an offer does not mean that they will take it.

Taxes

• You will most likely have to pay taxes on any debt forgiven by your lender.
• The government and the IRS count those funds as income. So you will get a 1099 for the discounted amount of debt in most cases.

Credit

• Your credit score is not going to be in good shape. there is no doubt that you will have to become delinquent in order to have any real chance of settling any debt with your lenders. Those missed payments and default statuses go on your credit history and payment history records.
• Also just because you settle a debt successfully does not mean that other potential creditors are going to view that as a good thing. Think about it. You borrowed money and did not pay the full amount back.

Related Articles

DIY Credit Card Debt Settlement

California Mortgage Foreclosure Crisis - Hardest Hit Fund Assistance

The Hardest hit Fund has contributed approximately 700 million dollars to aid California's fight to stop foreclosure.

California homeowners have endured comparatively high levels of financial hardship. Many borrowers in California have lost the ability to make mortgage payments due to a loss of income, divorce, medical issues and other typical causes of unpreventable hardship. The difference in California is that a large population of homeowners have been adversely affected by the unwinding housing, mortgage, and foreclosure crisis. Factors such as rising monthly mortgage payments and unprecedented statewide declining home values have created a compounding effect compared to other states.  These horrific economic conditions have triggered an even worst and unforeseen trend in which homeowners are now strategically defaulting on their mortgage because of the overwhelming drop in home values and thus home equity.

The housing slump and economic hardships experienced in California are dramatically worst in comparison to other states. This difference appears both in the size and severity of the declining trends of the housing and mortgage slump as well as the rising rates of foreclosures. The typical mortgage solutions and foreclosure alternatives that work in other states do not prove as effective in California because of the limited dollars available to help this large segment of California homeowners suffering through financial hardship and mortgage default.

These circumstances have led to the decision to financially assist the state of California in it's fight to stop foreclosure and provide homeowners assistance through available resources of the Hardest Hit Fund which was created trough the Making Home Affordable Plan.

California Mortgage Help from Hardest Hit Fund Program

California Housing Finance Agency has taken measures to offset the consequences of elevated levels of foreclosure and mortgage default by developing government mortgage assistance programs through the Hardest Hit fund. The California Foreclosure Assistance Plan provides debt help and mortgage assistance for homeowners in financial hardship. 


The California mortgage assistance programs have been developed by working with lenders, loan servicers, borrowers, housing counselors, and private mortgage insurers to create, develop, and utilize targeted mortgage solutions that will reduce the growing amount of foreclosures and help financially troubled homeowners keep their home.

Four California Homeowner Assistance Programs

The California Foreclosure Assistance Plan is composed of four mortgage help programs. Three of the four programs focus on creating an opportunity for homeowners to keep their home. The fourth program provides homeowners with foreclosure relocation assistance in the form of financial aid.

• Monthly Mortgage Payment Assistance for Unemployed Homeowners - Provides homeowners with financial  aid to help pay the monthly mortgage payments.
• Home Loan Reinstatement - Helps homeowners bring their loan current by providing financial assistance to pay of part of the past due balance.
• Mortgage Balance and Principle Cuts - Gives borrowers with upside down home loans financial aid to pay off part of the principle balance on the mortgage loan.
• Moving Assistance and Financial Aid - Provides borrowers who are losing their home due to a short sale or deed in lieu up to 5,000 dollars in foreclosure relocation assistance. This cash for keys like program provide financial assistance to homeowners who will incur moving expenses due to foreclosure.

Though the foreclosure and home assistance programs will help a great deal of homeowners in financial hardship they will only put a dent in the entire California foreclosure crisis. These programs that are funded through the Making Home Affordable Plan's Hardest Hit Fund will act as an effective compliment to the Federal mortgage assistance programs such as the Home Affordable Modification Program and the Home Affordable Refinance Program.

Cash for Keys

Lenders give thousands of dollars to homeowners who lose their home because of foreclosure. This foreclosure relocation assistance help homeowners cover the cost of moving out of their home and into another residence.


The amount paid to the homeowner or renter may vary from the amount of a thousand dollars to five thousand dollars. The program is also offered to real estate agents who gain a commission. They do so by lowering the amount paid out and keep the difference for themselves. It is wise to talk to the lender yourself to get the best amount available.

This financial aid for homeowners who lose home in foreclosure through cash for keys like programs are supposed to create good will, but is that the real motivation for the lenders?

Perhaps the reasons behind cash for keys and foreclosure relocation assistance is actually two fold.

• One reason is to get the renter or homeowner to depart quickly. No one wants to sell a home that has old owners refusing to leave.
• Secondly to create an incentive to for the former occupants to resist damaging or destroying property out of spite against the lender. 

HAFA - Foreclosure Alternative Help

HAFA is the Home Affordable Foreclosure Alternative program created for homeowners who can not afford to keep their home.


President Barrack Obama helped establish the program through his Making Homes Affordable Plan and it is for the homeowners who are not capable of making a payment even if those payments are reduced through the Home Affordable Modification Program.

Obama Foreclosure Alternatives

In that case the homeowner is offered other mortgage solutions that do not let the homeowner keep the home but allow them to walk away with no mortgage debt. This is done with a short sale or perhaps a deed in lieu.

Obama Cash for Keys Program

Along with the foreclosure alternative the homeowner is able to receive a few thousand dollars of foreclosure relocation assistance through the Obama cash for keys program. Typically the cash for keys program available through HAFA allows homeowners to obtain 3,000 dollars of financial aid.

Foreclosure Relocation and Financial Assistance

Homeowners and renters alike are losing their homes at a rapid rate. These homeowners and renters must vacate their homes because of the home being sold due to a foreclosure sale. Many who lose their home in this manner are often left feeling vengeful and out of spite will cause damage to the home or property.


Lenders thought that angry complaints and phone calls from the former homeowner were the least of their problems and they were wrong. Former owners would get their revenge by trashing the home. A new risk management tactic was soon formed called Cash for Keys. Simply put, it is a program designed by lenders providing financial assistance to occupants who must depart and relocate elsewhere because of the foreclosure sale.

The agreement is usually fixed with conditions and requires the former homeowner or renter to agree then honor these terms and conditions including move out dates. If the former homeowners meet these terms and conditions, lenders will pay a lump sum of money to the evicted party.

Typical homeowners might be offered a monetary sum of twenty-five hundred dollars given if they vacate the foreclosed home within forty-five days and leave the residence in good condition. The program recognizes the financial hardship and relocation expense of those affected directly.

How to Get an Affordable Loan Modification

If you are a homeowner who wants to reduce their mortgage payment via the Obama mortgage modification program known as HAMP the Home Affordable Modification Program than you need to follow the step by step process listed below.


Qualify Yourself

The first step is to determine if you meet the basic qualifications for affordable mortgage modification program.

Preliminary HAMP Application

Next you need to obtain, complete, and submit the preliminary modification request application. This is what the government refers to as the Request for Modification Affidavit. This application is what starts the ball rolling and will get you into a HAMP trial modification.

Prepare Financial Package

With the initial application you should send a financial package that includes the following documents listed below.

• Tax Form 4506-EZ. This form allows your lender access to past tax returns you submitted to the IRS.
• Income documentation such as pay stubs and bank statements. Submit at least three months worth.
• Document certifying that you have not been convicted of felony larceny, fraud, forgery, money laundering, tax evasion, or the like in the past 10 years.

Successfully Complete HAMP Trial Modification

You must make all your trial payments on time and respond to the packages and inquires your lender will send in the mail. Play it safe and utilize the envelopes and payment coupons provided.

Get Approval (or Unmentionable) Decision

Wait for lender to evaluate debt, income, financial hardship, and the like.

Typical Reverse Mortgage Borrower

Are you considering a reverse mortgage loan?




If you are you may be wondering if you are a right fit for this particular type of mortgage product. As an effort to help folks dig into this question and find the correct answer for their unique situation I have given a brief and accurate description of the typical reverse mortgage borrower.

The typical reverse mortgage borrower is an elderly homeowner whom is in need of some cash and or cash flows. The borrower will initially own the home out right or owe very little. The borrower will live in the property secured by the reverse mortgage loan. Usually the borrower is single, widowed or divorced and lives alone.

What is a Reverse Mortgage Loan?

The reverse mortgage was created to help elderly homeowners who need to increase their income.


A reverse home loan is a backward operated mortgage product that pays the homeowner in exchange for the right to the equity value in the home has to offer up to the amount owed at the end of the loans life or term.

A reverse mortgage loan is a loan that can be either obtained in a lump sum, line of credit, or the traditional reverse mortgage installments. The equity in a home is reduced in accordance to the money borrowed an the costs incurred.

A reverse mortgage loan is a mortgage product that offers elderly borrowers a cash flow solution in the form of a secured loan.

A reverse mortgage is a non-recourse loan and debt. This means that only the value of the home may pursued as a source of repayment.

Related Articles

Reverse Mortgage History

FHA Reverse Mortgage

FHA Reverse Mortgage Equity Conversion Loan

FHA Reverse Mortgage

The FHA reverse mortgage loan is known as HECM – Home Equity Conversion Mortgage.

A FHA reverse mortgage is of course guaranteed by the FHA.


There are some general requirements that a borrower must meet in order to qualify for a FHA reverse mortgage loan. Below I have listed just the very basic FHA reverse mortgage qualifications for borrowers interested in utilizing this financial tool.

Qualifications for FHA Reverse Mortgage

• At least 62  years or older
• One - Four Unit dwellings
• Own the home, or the existing traditional forward mortgage is close to be paid off more specifically it can be paid with the proceeds obtained from the reverse mortgage loan.

Related Resources

How to Refinance and Lower Your Mortgage Payment

Reverse Mortgage History

History of the Reverse Mortgage

The reverse mortgage loan is a government inspired mortgage product designed to help elderly homeowners tap into their home equity with out the risk of losing their home.


HUD administered the program starting in the late 1980's. This was done through the Housing and Community Development Act of 1987

Initially a test run was approved in which 2500 mortgage insurance policies were authorized for issue. Three years later in 1990 which was actually closer to 1991 the Omnibus Budget Reconciliation Act of 1990 expanded and set in motion the modern day system used to insure reverse mortgage loans with FHA mortgage insurance.

Related Articles

Thoughts on Mortgage Loans

Refinance - Lower Mortgage Payment

How to Refinance and Lower Your Monthly Payment

This article is a step by step guide on how to refinance and lower your mortgage payment. It is intended for homeowners who need to lower their monthly payments in order to stay current on their home loan.


I have another post in which I describe what borrowers are the best match for this particular mortgage payment solution. I suggest you make sure you are a good fit for refinance help to lower your payment before you move forward.

Below I have created a list of nine steps to take in order to refinance and lower your monthly mortgage payment.


Steps to Refinance and Lower Your Mortgage Payment

1. Create monthly budget.
2. Write hardship letter.
3. Income and tax documents.
4. Call your lender.
5. Ask about refinancing options for distressed borrowers.
6. Complete financial package that they request.
7. Submit financial package.
8. Follow up to make sure they received it and ask when to expect a reply.
9. Wait for approval.

Refinance Help - Lower Mortgage Payment

Many homeowners, who are still current on their mortgage, are worried about making their next monthly mortgage payment on time. Some will be able to make the next payment, but they know that something has to be done in the near future, or they will default.


These homeowners need help making home affordable for the long term.

If you are a homeowner who has found yourself amidst a financial hardship during these slow economic times than you know of the stress and worry it brings to your life.

If you are dealing with this stress, if you are a homeowner who knows you have to do something or you will eventually default on your mortgage, than be sure to read the rest of this post.

You can refinance your mortgage to a loan with more favorable terms. You can lower your monthly payment.

Characteristics of Homeowners who May Be Able to Lower Their Mortgage Payment by Refinancing

• They have at least 9 - 12 percent of home equity that has accumulated.
• They are still current on their mortgage payments.

Those are only generic qualifications. If you are interested in a specific program than you need to reference the applicable qualifications for that refinance program of interest.

If you are a homeowner who meets this basic borrower profile than you may be able to refinance and lower your mortgage payment.

Where to Go From Here

If you want to explore this opportunity or move forward towards refinancing your mortgage loan than I suggest taking a look at another recent article of mine that lists all the steps involved in refinancing your loan to lower your mortgage payment. The post is titled and linked below...

How to Refinance and Lower Your Monthly Payment

Creditors are Willing to Eliminate Debt - Find Out Why

It often comes as a shocking surprise to people when they learn just how much folks typically save through debt settlement.

People often do not expect lenders to be willing to eliminating tens of thousands in credit card debt for people who are in financial hardship. None the less it is true.


Lenders routinely agree to forgive 30% - 70% of outstanding credit card debt through debt settlement offers for credit card consumers who are unable to pay the full amount.

Why are Lenders Willing to Settle Credit Card Debt?

Lenders are will to do reduce the outstanding debt on credit card accounts for several reasons.

• Unlikely to obtain full amount anyways.
• Large cash payment.
• The tax write off they will get for doing so.

Want to Learn More About Debt Settlement

If this post has sparked some interest then I suggest that you check out another article I posted not to long ago. It is a guide outlining a DIY Credit Card Debt Settlement Plan.

Related Articles

Cash Credit or Cell?

Debt Settlement Basics

Debt Settlement

Debt settlement can be defined as resolving distressed loans and debt through a pay off agreement between both creditor and borrower. Typically the debt to be payed is drastically reduced and the new reduced amount is paid immediately in one large payment.


Settling debt and financial obligations is a great way to get rid of unsecured debt that has accumulated from credit cards and or other high interest unsecured debt that one may have.

Who Performs or Negotiates a Debt Settlement Agreement?

A debt settlement agreement must be approved by both the lender and the borrower. As this would imply all that is needed for a person overwhelmed with credit card debt is a means to contact the lender as well as a lender willing to settle.

However many consumers have been known to hire debt settlement firms and or debt settlement lawyers or debt settlement counseling agencies or even a friend better suited to to do so. Having said this there is no reason what so ever that you should not partake on this task on your own if you feel you are able to so adequately enough.

You can successfully obtain a debt settlement arrangement all by yourself if you are willing to put in the time and effort. Prior to this post I posted a DIY article outlining how to settle credit card debt. If you are interested in getting rid of credit card debt than that may be a helpful resource and worth taking a look at.

I also wanted to make sure that everyone realizes that negotiating with credit card lenders is no easy task and should be given considerable consideration and effort.

Related Articles

Cash, Credit, or Cell

How Credit Card Companies Make Money

DIY Credit Card Debt Settlement

Borrowers who are amidst a financial hardship and can not make timely monthly payments on their credit card debt can benefit from debt settlement. Distressed borrowers are able to avoid bankruptcy as well as reduce the total amount owed by successfully negotiating a settlement with their creditors.

This post discuses how consumers of credit card debt can obtain debt help and a debt settlement offer on their own.



How to Obtain a Debt Settlement Agreement with Your Creditors


1. Raise the Cash

Before you can seriously entertain the idea of settling your debt you need to have some serious cash.

This may mean saving for a while. Many people are only able to do this by defaulting on their credit card payments.

The lender already has a monthly payment arrangement with you that you have most likely defaulted on sense you are in the current predicament that you are in.

The lender is not going to be quick to jump to another monthly payment plan and is certainly going to want more then you would have to pay in a lump sum agreement.

2. Determine Your Settlement Target

Typically a debt settlement agreement is anywhere from 20 - 70 percent of the outstanding balance that is owed to the lender.

Figure out what percentage you are able to pay. Is this amount realistic?

Rationalize how you are going to lay these cards out on the table once you get on the phone.

For instance if your dealing with a 8,000 dollar acct and you have 5,500 dollars that you can some how muster then in terms of debt settlement you are doing pretty well. Here I would suggest offering 3000 and no higher the 3500 to 4000 dollars in this initial round of negotiations.


3. Make the Initial Contact


When you do get on the phone and you get that first rep on the phone you can probably expect to hear "NO". This does not really mean "NO" this will almost always be the case because you are most likely talking to somebody not able to say yes.

Try to go around them if you can, this comes surprisingly natural to some but it can also be like moving a mountain depending on your personality and how long of a lunch break your rep on the other end took if any.

What you can do is to collect as much information as possible. Important information would be the time the reps id info and the questions and responses that accumulate between you and the rep. It does not hurt to let it be known that you are in fact recording information and responses.


4. Find a Decision Maker

Remember that it is not easy finding a decision maker who can approve a settlement offer. The longer you have been in default the easier it is going to be to get a settlement offer. However it is never going to be easy to find a decision maker which is what you really want.

Once you do get a decision maker on the phone you should be able to get a settlement offer at some point.

Sometimes you will have to correspond by mail. This is especially true with bigger banks.

If you get a offer through the mail continue correspondence and lender communication via that outlet of communication.


5. Getting the Agreement

Generally they will send it in the mail.

You need to look it over of course and sign it and send it back with the payment but only after you know that the representative has signed it as well.

Then you can count on that credit card account and card to be useless.

Cash For keys

Foreclosure sales are at all time highs.

Homeowners are losing their homes everywhere. Many people who lose their home to foreclosure have to move, and thus incur significant expenses and moving costs. This is a financial hardship in itself but is often endured while the former residents are already amidst a current financial hardship which has caused them to default on their mortgage payments and fall victim to foreclosure in the first place.

A program called Cash for Keys was developed to address this homeowner difficulty.


Cash for keys offers homeowners and renters who must move due to foreclosure financial aid and foreclosure relocation assistance.

How Cash for Keys Works

The lender or mortgage servicer offers the occupant who must move due to a foreclosure financial assistance through a conditional agreement.

The occupant must agree to move out by a certain date.

The occupant must agree to leave the property in acceptable condition.

If the occupant follows all requirements of the agreement they are given thousands of dollars in foreclosure relocation assistance and financial aid.


Typical Cash for Keys Amount

The exact amount received through a cash for keys like program is variable.

The typical amount will range from 1,000 - 5,000 dollars.

Chapter 13 Bankruptcy

Borrowers with overwhelming financial obligations can obtain debt help through a chapter 13 bankruptcy given the borrower has income and is able to make good on their financial obligations through a feasible and fair compromise with the existing creditors.


What is Chapter 13 Bankruptcy?

This bankruptcy chapter is the legal process of restructuring the debt under the supervision of a trustee.

This is not a liquidation like chapter 7 bankruptcy. Instead this chapter of bankruptcy restructures the existing debt of the borrower by developing a feasible and fair payment plan. Creditors are paid according to the plan developed in the chapter 13 bankruptcy process.

Key Points of Chapter 13 Bankruptcy

The repayment plan will be for a term of about 3-5 years.

Chapter 13 will stop foreclosure.

The mortgage payments will be due as usual after you file and the back owed portion will be part of the chapter 13 repayment plan.

Designed for individuals or unincorporated businesses.


Other Important aspects of Chapter 13 Bankruptcy


Bankruptcy is not a pleasant or relieving experience. Nor is it cheap. There are many consequences which carry a long shelf life and the consideration of Bankruptcy should be done so with extreme care, time, responsibility, and the proper resources and guidance such as a qualified attorney.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy allows businesses to obtain debt relief by restructuring the existing financial obligations of the distressed business. This type of bankruptcy is ideal for businesses that would be profitable if not for unmanageable levels of debt.


What is Chapter 11 Bankruptcy?


Chapter of bankruptcy that is used for businesses that have to much debt but are worth more as an operating business then the sum of all proceeds that could be raised from a total asset liquidation sale.

How Chapter 11 Works

A trustee will overlook the reorganization of the debt and efficiency of a business.

Once this process is complete the business is simply to follow the terms of the restructured debt agreements.

Remember...

Bankruptcy is not usually thought of as a nice or relieving experience, nor is the process of bankruptcy cheap. There are many consequences to bankruptcy that can last a long time.

Bankruptcy is a legal process and decision so one should discuss bankruptcy with there own qualified attorney.