In my years of experience in the industry, I have found that most people are looking for a debt relief option that does not exist. Here are the criteria they are usually requesting: – Pay off all accounts quickly – Not harm their credit – Not cause creditors to hound them with phone calls
Reality Check: There is no such program!
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 is, in nearly all cases, a home equity loan or second mortgage. This is the process of taking equity out of your home to pay off your other accounts. The good thing is that you can get rid of unsecured debts for a lower-interest, single payment that can sometimes have a tax benefit. The bad thing is that most people in a bad debt situation do not qualify for a home equity loan.
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: This has become, by far, the most popular and most effective program for getting out of debt in a short period of time. However, you must truly be in a financial hardship and not able to pay your current minimum payments. The idea here is to negotiate an accepted settlement of less than what is owed with each of your creditors. All creditors will accept settlements as long as you are far delinquent, and have shown valid reason. It seems that attorneys have been most effective in negotiations with creditors due to the fact they cannot be easily bullied by debt collectors. The positive is that you can completely pay off your accounts for a fraction of what is owed in a very short time-frame; usually 36 months or less. The negative 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 already have an inability to make your minimum payments.
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.
I hope you find this to be helpful information that will also provide you with the ability to choose the best debt management program given your circumstances.