The Real Story on Debt Management Programs
When it comes to debt management plans, what most people are looking for does not exist. I cannot tell you how many times I find myself on the phone with a prospective client drowning in credit card debt, looking for the perfect debt management program. Here are the criteria they are looking for: - Payoff all your debts in a short period of time - Not affect your credit negatively - Make all your payments on time
The straight fact: That program does not exist!
What I have found over years of assisting clients out from under the burden of debt, is that most are initially seeking a program that does not exist. Let’s be clear, there is no debt management program in existence that will provide the above benefits. That being said, let’s talk about what options are available and in short summary; provide a basic understanding of each one.
Debt Consolidation: Debt consolidation loans are typically home equity loans or second mortgages. This is where you take the equity out of your home to pay off unsecured debts, and then just repay the equity loan with one payment, hopefully lower than the total min payments on all your unsecured debts. The upside is that you can trade in your high-interest unsecured debts for a lower-interest, single payment that can sometimes have a tax benefit. The downside is that most people who have a lot of unsecured debt will not qualify for a loan, or have any equity in their home.
Consumer Credit Counseling: These are the ones that have been getting a lot of negative attention over past few years. Typically, they are non-profit and claim to lower your interest rates and set you up with a low monthly payment. They take your single payment and divide it up into little chunks to pay each creditor a reduced payment. The positive is well there actually is no positive. Because these programs rarely ever do what they claim, and many credit card companies no longer endorse these programs, this has become a serious waste of money and time for most consumers. The negative is, in addition to above, that your creditors will each enter a line into your credit reports on every account included that states that the account is handled through credit counseling. This is looked at very negatively by anyone considering you for credit.
Debt Settlement: In the past couple years; this has become the most popular and most effective program for getting out of debt quickly. However, you must truly be in a financial hardship and not able to pay your current minimum payments. The strategy here is to negotiate with your creditors and get them to accept a settlement pay-off of less than the balance owed. All creditors will accept settlements as long as you have successfully shown hardship. In my experience, attorneys have been most effective in negotiations with creditors because they cannot be bullied by savvy collectors. The upside is that you can completely settle your debt for pennies on the dollar in a very short period of time; usually 3 years or less. The downside is that your accounts must become very delinquent before creditors will accept settlements. This is not a problem if you are in a financial hardship; after all, you are already not able to make your min payments, so going delinquent was happening anyway.
Bankruptcy: In past years, anyone could file bankruptcy chapter 7 and easily eliminate any amount of debt quickly. Now, since the Bankruptcy Reform Act, most do not qualify for bankruptcy, and you are forced to try other solutions such as debt settlement first. Bankruptcy is a legal court process where those who are completely insolvent are able to possibly protect their primary residence and eliminate debts. The upside is that once a chapter 7 bankruptcy is completed, the creditors literally write off the debt and cannot pursue you further. The downside is that it is a permanent court record, and will also remain on your credit reports as a public record for up to 10 years.
This information should provide you with foundation of knowledge that will allow you to select the best debt relief option for your specific financial circumstances.
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