Debt Restructuring: A Positive Step

It can give you added peace of mind today and a plan for tomorrow.

Debt restructuring is a tool to help you save money and provide financial relief. When used correctly, it realigns your debt burden, usually through a consolidation loan. By rolling multiple debts into one loan and one payment, you simplify life and make debt easier to manage. It’s also an excellent option if you’ve amassed debt over time, seen debt rise quickly, or experienced a negative life circumstance.

Red flags:

  • Poor cashflow
  • Late or missed loan or bill payments
  • Living paycheck to paycheck
  • Using credit cards for daily living expenses
  • Spending more money than you earn

Money problems are not the only motivation in restructuring debt; you may simply find it a more convenient, cost-effective way to repay your obligations. This includes paying off costly credit card and revolving debt.

You also gain peace of mind. For example, it can feel intimidating to witness the monthly growth of credit card payments — without seeing the genuine value or impact of each dollar you pay. Consider that credit card interest is calculated daily on an evolving balance (and thus accumulates more quickly). Compare this to interest on a fixed-rate mortgage or home equity loan, where the interest burden lessens as you repay. With sensible debt restructuring, you can maximize your payments, so each dollar is leveraged to your benefit.

You have options.

Many consumers believe that a home equity loan is their only option for debt restructuring. However, there are other solutions to re-bundling debt. For example, you may consider a first mortgage, which uses up to 80% of your home’s value to pay off other debt. There are also specialty mortgage products that leverage up to 100% of your home’s value. Through our mortgage partner, State Financial Network, you have numerous options, including shorter-term mortgages, such as 10 and 15-year products.

Opportunities and obstacles.

A significant advantage of restructuring debt is the interest you save over the loan’s term. This savings is further emphasized by the amount of time you hold that debt (the longer the debt, the more interest you pay.) If you can roll unsecured or high-interest secured debt into your mortgage and make the same monthly payment, you’ll typically pay off the debt faster than making minimum payments on credit cards.

This faster payoff is a huge benefit.

There is a drawback, and it’s an important one: With a home equity loan or mortgage, you’re placing a lien on your property. This lien is often in exchange for a lower rate and more flexible term. However, you could be subject to potential risk if you are not able to make the payments. If you don’t pay on a credit card, you may have a judgment placed. But if you default on your mortgage, your home could go through foreclosure.

Plan for the future.

A sensible debt reduction strategy involves prudence and foresight, as well as crafting a realistic budget. Remember, how you handle money — and the other behaviors resulting in your present situation — is a key. Do you tend to lack the discipline to follow a budget? Do you often overspend? Those are some of the items to consider as part of the debt restructuring process.

Also be wary of choosing the wrong product.

For example, home equity loans or lines can sensibly pay off existing debt. But if an unscrupulous lender suggests an interest-only payment option, and the loan is not budgeted for and repaid in the specified timeframe, it can lead to a more dire situation.

Debt restructuring lets you stay true to your budget, often with more flexibility to prevent the above situation. Case-in-point: if a 10-year repayment plan is too tight, consider a 15-year term instead, but continue to make the 10-year payment. Later, if you feel pressed on cash flow in a particular month, you can make the lower, 15-year payment.

That’s why it’s important to vet your choices and choose the right plan — with a lender you trust.

Having trouble?

If you feel burdened by your finances, contact us as soon as possible, especially if you’re paying late on your bills. Although debt restructuring is a common strategy, we’re available to discuss various options to provide relief.

With your consultation, we’ll collect essential information, including your bills and debt, and review your credit report and score. We’ll also assess your income sources, your property’s value, and discuss your monthly budget, cash flow, and other budgeting priorities. From there, we present the solutions that fit your unique situation, and if appropriate, create a plan to restructure the debt.

Your home’s equity is an excellent resource but an often untapped one. To illustrate, one can own a home but be sinking in high-rate credit card debt. By restructuring debt sensibly, you can lower your payments and gain cash flow. And it’s always a win when you can honestly discuss your situation with experts you trust, leading to a new strategy towards financial security and success.

Contact MCNJTFCU today for a free consultation or call (609) 586-6669.

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