What is Debt Consolidation?

Gregory J. Cook, EA, CPA+
Accredited Tax Advisor
Past President Alabama Society of Enrolled Agents
Past President Alabama Association of Accountants

What is Debt Consolidation and How Does it Help a Person in Debt?

Debt consolidation can help a person who is in debt get his or her debts drastically reduced. In fact, many people who have consolidated their debts have only had to pay between fifteen and twenty five percent of what they actually owed. While it is possible for a person to consolidate his or her debt without professional help, but people find it easier to work with a company that does this type of work. Many of these companies do not charge a high fee and will allow one to pay over time.

A debt consolidation service should only be used at least three months after a person's bills are overdue. A person who wants to consolidate his or her debts needs to start by contacting a number of debt consolidation companies and seeing which one he or she wants to work with. One will naturally need to pay the company a fee and in most instances a person will be required to take a financial management course or a class on how to balance the budget.

A debt consolidation company will contact everyone that a debtor owes money to and work out acceptable payment terms. Creditors do not appreciate getting back only a portion of what is owed to them, but many understand that the alternative to debt consolidation may be bankruptcy. A person who declares him or herself bankrupt will in many cases be able to walk free from the debt entirely, although this is not possible in all cases. For this and other reasons, many creditors are willing to accept at some money in hand.

It may take some time for a debt consolidation company to work out a deal. A lot depends on how many people one owes money to and how much money is owed. Much also depends on what the creditors themselves are like. Some are naturally easier to work with than others. However, a consolidation agency will take as long as needed to work out a deal with all the creditors involved.

Be aware that once a deal has been made, you have to stick to it. You cannot change terms and conditions. The money you owe must be given to the agency who will in turn repay the creditors. Once you have worked to consolidate your debts, make sure you are able to pay them by setting aside the money needed every month. This is one reason why agencies have a mandatory class on balancing the budget.

A person who has debts that he or she cannot pay back should find a good debt consolidation agency to work with. Creditors can be quite ruthless when a person owes them money and does not pay up. A consolidation agency will not only help you pay back your debts but also keep debt collection agencies and impolite creditors at bay. An agreement can be reached in almost all circumstances; such an agreement will allow one to pay back a portion of the debt and then have the debt cleared from his or her account.

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Greg Cook on the Recovery Act ...

The Recovery Act was passed by Congress and signed into law by President Obama on February 17, 2009. The purpose of the $787 billion Recovery package is to jump-start the economy to create and save jobs. The Act specifies appropriations for a wide range of federal programs, and increases or extends certain benefits under Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also reduces individual and corporate income tax collections (to an extent), and makes a variety of other changes to tax laws.

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This Act will have far reaching consequences and we will be dealing with it for years to come (at least until 2018). Twenty-eight different agencies – such as the Departments of Education; Health and Human Services; and Energy – have been allocated a portion of the $787 billion in Recovery funds. Each agency develops specific plans for how it will spend its Recovery Act funds. The agencies then award grants and contracts to state governments or, in some cases, directly to schools, hospitals, contractors, or other organizations. The agencies are required to file weekly financial reports on how they are spending the money and their specific activities related to Recovery funds.

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Have You Refinanced Your Home?
If you are one of thousands who locked into a lower home mortgage interest rate, then you've hit the savings jackpot! Besides getting one of the lowest rates in decades, you may be able to deduct some of the refinancing costs when you file your tax return. The “points” paid to get a home mortgage may be deductible as mortgage interest when you itemize on Form 1040's Schedule A. Points paid to get an original home mortgage may be fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.

For a refinanced mortgage, you figure the interest deduction by dividing the points paid by the number of payments you will make over the life of the loan. You may deduct points only for those payments made in the tax year. Say you paid $2,000 in points and you will make 360 payments on a 30-year mortgage. You could deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year. If you used part of the refinanced mortgage money to finance improvements to your home and if you meet certain other requirements, the points associated with the home improvements may be fully deductible in the year the points were paid.

Also, if you are refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off. Other closing costs – such as appraisal fees and other non-interest fees – generally are not deductible. And the amount of your adjusted gross income could affect the amount of deductions you can take. Any way you look at it, between the lower interest rates and the tax savings, that's money you can take to the bank. For more information on deductions related to refinancing, contact your Cook and Co. Advisor.