Continue reading to learn more about debt consolidation and the best option available to you.
Written by Attorney Alexander Hernandez.
Updated March 26, 2021
The popular Friendly’s restaurant closed its last location in Rhode Island earlier this year, leaving hundreds without work. Even the city of Central Falls had to file for bankruptcy and Providence was facing bankruptcy until the state of Rhode Island contributed financially. But during these difficult financial times, know that Upsolve is here to help you free of charge. Continue reading to learn about the different debt relief options available to you.
One option to get rid of your high-interest debt is debt consolidation. With debt consolidation, you’re combining your debt into a new loan which gives you the convenience of a single monthly payment. Other benefits include a lower interest rate which will save you money. Personal loans, home equity loans, credit card balance transfers, and debt management plans are different types of debt consolidation options.
With good credit, consider a credit card balance transfer which is when you transfer your debt to another credit card. However, confirm the interest rate when the promotional period ends, if not, you may end up with a higher monthly payment then you currently have. Also, read the fine print and confirm any transfer fees. The same applies to personal loans. With a home equity loan, ask the lender about loan origination fees and appraisal costs. Debt consolidation works best when overspending isn’t an issue. If not, you could end up in more debt since you have credit available. You can also consolidate your debt with a home equity loan or a line of credit, but if you default on the loan payments, you risk losing your home because of a foreclosure.
Traditional debt consolidation is different from a debt settlement because you are paying back your total amount of debt. With a debt settlement, you settle for less than your original balance which affects your credit score negatively. A debt management plan involves working with a non-profit credit counseling agency that will help negotiate with creditors to reduce your monthly payments and create an affordable payment plan. If you have been denied a Rhode Island debt consolidation loan or a balance transfer, a debt management plan may be the right choice as you take steps toward being debt-free.
Learn More Through Free Nonprofit Credit Counseling
Credit counseling can help anyone who needs debt relief. A credit counselor experienced in financial situations similar to yours, will review budgeting techniques with you and come up with a debt management plan. Negotiating with creditors, the credit counselor may help reduce the monthly payments on your credit card debt and unsecured loans. Your credit card debt can also be combined into a single payment and your credit score may improve. Besides debt management plans, credit counseling agencies also offer foreclosure and bankruptcy counseling. However, credit counseling agencies are not banks, so they don’t offer loans. Confirm the agency you choose is a nonprofit organization and accredited by the NFCC.
How to Consolidate Your Debts in Rhode Island
Continue reading to learn more about debt consolidation and the best option available to you.
Collect the Details About Your Debts
First, find out who your creditors are and the outstanding balances on your accounts. You can do this by reviewing recent credit card statements and your credit report that you can get for free every year. If you find any mistakes when reviewing your credit history, file a dispute under the Fair Credit Reporting Act at no cost to you.
Next, categorize your debt into secured and unsecured. Examples of secured debts are car loans and mortgage(s). Unsecured debt includes credit cards, personal loans, medical bills, and student loans. As you review your debts, focus on the interest rates and monthly payments as this information will be needed when planning your budget.
Determine Your Monthly Income
Your income and credit card balances determine how much you can afford to pay back. With regular and consistent income, debt consolidation works best. However, commission-based jobs make calculating a budget difficult, thus, an unsecured debt consolidation loan may not be the right choice. Depending on child support or alimony payments can also make budgeting difficult.
As you calculate your income, include average paystubs. Watch out for paystubs with more overtime than normal. If not, you will end up with more disposable income and a payment plan you can’t afford. Remember, besides be debt-free, you want to get or maintain a good credit score, so you can’t default on your monthly payments.
If you are paid bi-weekly, multiply your net income times 26 and divide the answer by 12 since there are 26 pay periods in one year. Include income from your spouse or domestic partner, especially if you are both responsible for the credit card debt. If you receive Social Security income, a debt consolidation may not be the right option for you since your income is protected in a bankruptcy.
Put Together Your Budget
Include all your bills and expenses in your budget. Separate your expenses into those that are the same amount each month such as your rent/mortgage, auto loans, and car insurance. Review several months of bank statements to find bills that fluctuate monthly like gas, groceries, and utility bills. Include expenses such as car maintenance that occurs every few months and annual bills such as your real estate taxes and property insurance. Forgetting to include these expenses will result in not having enough money to pay for it when it comes due. As a result, you may need to get into more debt because of it. To figure out the monthly average of these expenses, add up the full amount and divide that number by 12.
In reviewing your bank statements, analyze your spending habits. Can expenses be reduced? If so, use that extra money towards your monthly payments. Paying down your debt faster and paying more than the minimum payments will increase your credit score.
How much money is left over after calculating your expenses and subtracting that amount from your income? If you have too much money left over, review your income and expenses again for any mistakes. If you don’t have any money available or even a negative balance, then a debt consolidation plan won’t work since you can’t afford to pay back your debts. If you need help with a budget, use apps such as Mint, and Albert. Your bank may also have an online budgeting program.
Do the Math
Now that you calculated your income and expenses, it’s time to calculate your monthly payment plan. Get the total amount of your debt and divide that number by 60 to calculate a monthly payment plan of five years without interest. If you still have disposable income available after calculating your monthly debt total, consider a debt consolidation. Also, figure out your credit utilization ratio as that may help you when negotiating with your creditors. A good score is under 30% and is calculated by dividing the total amount of debt by your credit limit.
If you don’t have money available after comparing your monthly debt total to your disposable income, continue reading to learn more about a debt management plan as an alternative way of consolidating your debts.
Review Your Rhode Island Debt Consolidation Options
Let’s review the different types of loans available to you. With good credit, a balance transfer to one or more credit cards is a good choice, especially if you are being offered a lower rate of interest. As mentioned before, find out the interest rate once the promotional period expires. Don’t assume you will receive more offers before it does.
If you have enough equity in your home, then a refinance of your mortgage or a home equity loan are both good options. To figure out the equity in your home, subtract the full amount of the mortgage balance from the value of your home. One advantage of a home equity loan is a lower monthly payment, but it will cost you more in the long run. If the bank offers an Adjustable Rate Mortgage, known as ARM, know that the interest rate changes monthly. This may increase your monthly payment making budgeting more difficult. If possible, apply for a mortgage modification program with your lender which may reduce your monthly payment. Find out in advance of any additional costs such as getting a property appraisal and loan origination fees.
If you don't qualify for a Rhode Island debt consolidation loan, then a debt management plan may be the right choice.
Why using your retirement account to consolidate and pay off your debt is a terrible idea
Think twice before using your retirement account to pay off your debt. Retirement accounts are protected from creditors in a bankruptcy case and there are tax consequences as well. Withdraws also result in having less money available for retirement.
Also, don’t pay off your auto loan with a debt consolidation. Rhode Island bankruptcy exemptions protect a portion of the equity in your car. Any equity above the bankruptcy exemptions, the bankruptcy trustee could have you pay back. That money is then used to pay back your creditors. Since student loans can be negotiated separately, they shouldn’t be included in a debt consolidation. If you need to lower your student loan payments, apply for an income-based payment plan with the lender.
Apply for a Rhode Island Debt Consolidation Loan
If you are applying for a Rhode Island debt consolidation loan, start with lenders you know and trust. Your local bank is a good choice. Be careful of lenders that offer deals that sound too good to be true, as it probably is. Before you commit to a lender, research with trustworthy organizations such as the BBB (Better Business Bureau) and the Rhode Island Attorney General. Look out for high-pressure sales tactics, mail offers from unknown lenders and lenders that require money upfront.
How to Stay Current with Payments After Consolidating Your Debts in Rhode Island
Now that you are tracking your spending habits and taking steps towards being debt-free, avoid certain pitfalls that will cost you money unnecessarily. The due date on your debt consolidation loan shouldn’t be during the same pay period as your larger expenses such as your mortgage or rent. You don’t want to be in a situation where you have little to no money available until your next paycheck. To avoid late payments and late fees, have your monthly payments withdrawn automatically from your bank account. Start an emergency fund or open a savings account with the money you are saving.
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Rhode Island Debt Management Plan
Another form of debt consolidation is a debt management plan. If you were denied a balance transfer, personal loan or a Rhode Island debt consolidation loan, a debt management plan could put you back on track financially. Besides free budget counseling, a certified credit counseling agency can organize your debt payments to be paid over a 48 – 60 month period. Credit counseling agencies could also negotiate with creditors for new repayment terms, a lower interest rate, and a single monthly payment.
A Rhode Island debt management plan is different from a traditional debt consolidation loan because you are not getting a new loan or debt. A debt settlement results in reaching an agreement with a creditor to pay less than the full balance of the original debt.
Rhode Island Debt Settlement
If you are being sued by a creditor or have bad credit, a Rhode Island debt settlement might be a good choice. Even though a debt settlement company is not required by law to negotiate a settlement, try settling for an amount that is less than the original balance. Any agreement should be in writing and research the debt settlement company via the links provided above. Remember there are possible tax consequences with a debt settlement.
Rhode Island Bankruptcy
If you were unable to qualify for a debt consolidation loan, debt management plan, or debt settlement, then consider filing for a Rhode Island bankruptcy. If bankruptcy can help a city like Central Falls, it can help you, too.
Upsolve has hundreds of articles on bankruptcy and related subjects to help you decide what is the best choice for you. We also offer our bankruptcy service free for those that qualify. Even if you don’t qualify or prefer to speak to a lawyer first, we will connect you to a bankruptcy attorney in your area.