If you’ve been searching for debt solutions, you’ve likely discovered there are a lot of options when it comes to managing debt. You may have looked into a variety of solutions and are feeling confused about how they all work. We’ll explain the options for handling debt and the differences between them in detail below.
Why Consider Debt Solutions?
It’s rare to find an American family that isn’t facing some type of debt – whether it’s a mortgage on their house, student loans, one or more car payments and of course, the type that can easily get out of hand, unsecured debt (typically credit card debt.)
In fact, a recent report states that Americans carry $686 billion in credit card debt that is not paid in full each month. The report estimates that roughly 70 million Americans carry unpaid credit card debt from month to month and their average credit card balance is $6,348. That’s a lot of debt!
For some people looking to pay off debt, all that’s required of them is a bit of discipline. They are able to take charge and a make a plan to pay off their debt on their own. But, for many of us, it’s not quite so simple, especially if debt has become unmanageable.
If that’s you, we’re here to help you understand the debt solutions available to help you manage your financial situation.
Debt Solutions – Use Caution!
Before signing up for any debt solution or debt relief service, the Federal Trade Commission recommends using caution. Check with your state Attorney General and local consumer protection agency and do some homework about the provider you are considering. Don’t rely on verbal promises. Get everything in writing, and read everything carefully.
Here are a few guidelines to consider when evaluating any debt solution or debt relief organization:
- Avoid any agency that charges up-front fees before helping you
- Avoid any agency that touts a “new government program” to bail out personal credit card debt
- Be cautious about any debt relief option that guarantees it can make your unsecured debt go away or that your unsecured debt can be paid off for pennies on the dollar
- Avoid any agency that will not provide free information about the services it provides without requiring you to provide personal financial information, like your credit card account numbers, and balances
- Avoid any agency that tries to enroll you in a debt relief program without reviewing your financial situation
Debt Solution 1: A Debt Management Plan
A Debt Management Plan (DMP) will help you pay off unsecured debts through a non-profit credit counseling agency which will enable you to regain control of your finances without incurring more debt. In most cases, you will start with a free budget and credit counseling session with a Certified Financial Counselor. During your online or telephone session, the counselor will help you identify the root cause of your debt, review your income and expenses, and make a debt relief recommendation. If you qualify, one recommendation may be to enroll in a Debt Management Program.
On a DMP, all enrolled unsecured debts are consolidated into one monthly payment which you make to the credit counseling agency. The credit counseling agency then pays each of your creditors on your behalf. In many cases, creditors provide benefits to consumers enrolled in a DMP.
Examples of unsecured debts that can be included in a DMP include:
- Credit cards and store cards
- Collection accounts
- Medical bills
- Unsecured personal loans
- Repossessions
Secured debts including car loans, mortgage payments and secured personal loans cannot be included in a DMP.
The benefits of paying off your debt through a DMP may include:
- One convenient monthly payment instead of paying multiple creditors
- Waived late and over-the-limit fees
- Lower interest rates
- Pay off debt in an average of 3-5 years (much faster than paying minimum payments)
- Get out of debt without taking out additional loans
- Eliminate collection calls
- Ongoing financial education and support
It’s important to note that a DMP is not a loan (we cover Debt Consolidation Loans in detail below). A DMP may help you repay your debt in full while saving money on interest and late fees.
Debt Solution 2: A Debt Consolidation Loan
Debt Consolidation Loans are typically offered by banks or other financial institutions. A Debt Consolidation Loan can be used to pay off multiple debt accounts with one loan that you will pay back to the creditor who makes the loan.
As is the case when applying for any type of loan, in order to qualify for a Debt Consolidation Loan, the lender will typically consider the following criteria:
- Your credit score and history
- You income
- The total loan amount
- Whether to require collateral to secure the loan
- The interest rate for repayment
- The timeline of repayment
Based on the information they gather in their application process, the lender will determine if you are approved for a loan. It may be difficult to qualify for a Debt Consolidation Loan if you are already struggling with debt since the lender will want to see that you are able to handle this new debt and are not at risk for default.
It’s important to note that a Debt Consolidation Loan could come with some risks if you are required to use your property as collateral and fail to make payments. In the case of default, you could lose whatever you used to secure the loan.
It’s also important to be aware that unlike a DMP, a Debt Consolidation Loan will not prevent you from accumulating more debt. It’s wise to proceed cautiously and with a clear plan so you do not end up deeper in debt in the long run.
Debt Solution 3: Debt Settlement
Debt Settlement is a debt relief option where a settlement company negotiates with your creditors to allow you to pay a “settlement” to resolve your debt. A Debt Settlement is typically a lump sum of money that is less than the full amount that you owe to your creditor.
In order to gather the lump sum payment, the Debt Settlement program will typically ask that you set aside a specific amount of money every month in savings (often an escrow type of account) until you’ve gathered enough to make the lump sum payment.
In many cases, Debt Settlement programs encourage or instruct their clients not to make any monthly payments to their creditors during this process so that the account becomes delinquent enough that the creditor is willing to settle the account when the time comes. This can have a tremendously negative impact on your credit report or score.
Debt Settlement may have risks to you as a consumer:
- The amount of time it takes to gather enough savings to settle a debt prevent people from completing the program, and they struggle to make the payments.
- There are no guarantees that your creditor will accept a settlement, and it’s possible that the settlement may not be accepted, even if you have set aside all the monthly payments.
- During the time you are not making payments, your creditors will continue collection efforts and in many cases you will continue to accrue late fees and penalties. In some cases, a creditor can choose to sue for repayment of the debt you owe.
- Any savings you get from debt settlement may be considered taxable income. Creditors may report settled debt to the IRS, which the IRS considers taxable income.
Within the Credit Counseling Industry, agencies are exploring an option for working with creditors to offer a hybrid solution with some of the features of debt settlement (such as paying less than the full balance owed) without the significant credit impact typically experienced by consumers. Talk to a reputable Credit Counseling agency to see if they offer an alternative to Debt Settlement as a debt relief option.
Debt Solution 4: Bankruptcy
Depending on your financial situation, Bankruptcy may be an option. Bankruptcy is a legal procedure that offers a clean slate for people who have gotten into financial distress and can’t repay their debts.
For those who meet all of the Bankruptcy rules and guidelines, it is possible to receive a discharge of debt. A discharge is a court order that eliminates the need to repay certain debts.
The consequences of Bankruptcy, however, are long-lasting. Bankruptcy information (including both the filing date and discharge date) stay on your credit report for 7 to 10 years and can make it difficult to get future credit. This can impact your ability to purchase a home or car, qualify for life insurance, or even be hired for certain jobs.
There are two main types of personal bankruptcy and each type must be filed in federal bankruptcy court. Both types provide exemptions that let you keep certain assets, although exemption amounts vary by state. Both types can also eliminate unsecured debts and stop foreclosures, repossessions, garnishments and utility shut-offs, as well as debt collection activities.
It’s important to understand that personal bankruptcy typically does not eliminate past-due or future child support, alimony, fines, taxes, and some student loan obligations.
Chapter 7 Bankruptcy: This is often referred to as straight bankruptcy. Chapter 7 involves the liquidation of all assets that are not exempt. Exempt property could include automobiles, work-related tools, and basic household furnishings. In a Chapter 7 filing, property may be sold by a court-appointed official, called a trustee, or turned over to your creditors to satisfy debts.
Chapter 13 Bankruptcy: This type of filing allows people with ongoing income to keep property, like a house or a car that they might otherwise lose through the filing process. In Chapter 13 Bankruptcy, the court will mandate a repayment plan that allows you to use income to pay off your debts during three to five years, rather than surrender any property. After you make all the payments under the plan, you receive a discharge of your debts.
An experienced bankruptcy attorneycan advise you on the pros and cons of filing and which chapter would be most suitable for your unique situation.
Which Debt Solution is Right for You?
As you can see, with every debt solution, there is a lot of information to consider. The best debt solutions for you and your family will vary based on your unique financial situation. It’s important to get all of the information before deciding what to do.
Not sure where to start? Talking to a certified credit counselor can help you make sense of all the options available to you. Credit counseling agencies were created to help consumers get back on track financially. Your credit counselor can help you with creating a new budget and will explain the different debt solutions available to help you.
CESI is here to help. Our free debt analysis will help you find the right solution for your situation. If debt is keeping you from living the life you dream of, contact us for a free debt analysis and get started today!
