Debt Relief: Should You Resort to That?
If you find yourself drowning in debt, with no hope of paying your creditors the amount you agreed on, you may feel like it is the end of the world and that there is no way out of this. However, it doesn't really have to be this way; you will not be left alone to face this completely on your own. I'm talking about resorting to debt relief companies.
But before getting yourself into anything, you should always study the whole thing thoroughly, as you don't want to find yourself in more debt and more trouble.
There are many scammers out there waiting for an opportunity to take advantage of someone's need for money. To make sure you are not their next victim, you need to be careful and understand everything about debt relief before making any step.
When Should You Resort to Debt Relief?
You should only resort to bankruptcy, debt management, or debt settlement if or when either of these is true:
If the total amount of your unpaid unsecured debt equals or is more than half of your total income from all sources.
If you have no hope whatsoever of repaying your unsecured debt (medical bills, credit cards, personal loans, and so on) within the next five years, no matter what you do and how much you try to cut spending.
However, if you think you can, in any way, repay your unsecured debt within the next five years, you should resort to a plan that you do yourself, which you can also create with the help of professionals. This plan can be done with the help of a combination of stricter budgeting, debt consolidation, and appeals to creditors. This should always be your first option, as debt relief can sometimes make things worse.
How Can Debt Relief Make Things Worse?
As we mentioned before, this industry is full of scammers who are eagerly waiting for a chance to rob you of any money that you have. A lot of people who resort to debt relief programs eventually fail to complete them and end up in more trouble; sometimes, they even end up with debts that are even bigger than what they started with.
But not all companies are scammers; some debt-relief companies will help you with all their might to reach a point where you can finally live debt-free.
There are a few things that you need to check and make sure of before you enter any debt-relief programs or agreements:
The company's list of requirements for you to be eligible to make use of their services.
The fees that you will be charged by the company in exchange for the services you will receive.
The creditors that are being paid and how much each one is being paid. If your debt is in collections, you should make sure to know who is the one that owns the debt; this way, you will ensure that payments will go to the right agency.
The tax implications that will be imposed on you.
The effect that debt relief will have on your credit score.
Debt Relief Options
There are different options that debt-relief companies offer. Below, we will talk about three of them:
Debt relief through bankruptcy
The whole point of resorting to debt management or debt settlement programs is to be able to pay the amount agreed on. The first thing you should do before getting yourself into any agreement or pursuing any debt relief programs is to talk to and get the advice of a bankruptcy attorney.
As per the law, the most common form of bankruptcy can relieve different kinds of debt within three to four months; the types of debt bankruptcy can erase include credit card debt, unsecured personal loans, and medical bills.
However, there are several things that you need to keep in mind before filing for Chapter 7 Bankruptcy:
You need to check if you qualify for bankruptcy, as not everyone in debt qualifies; if you have an income that is above the median for your state and family size, you will not qualify for this type of bankruptcy. Instead, you should file for Chapter 13 bankruptcy, which we will explain below.
This will not erase any taxes you owe or any child support obligations you have. It will also most probably not erase any student loan debt you have.
It will destroy a big amount of your credit score and will stay there on your credit report for up to 10 years, even if you restore your credit score history. You need o know that your credit score is a huge deal, as poor credit score and history will affect your future greatly; it will affect your chances of getting apartment leases, your eligibility for some jobs, and it will also affect how much you pay for car insurance. If you already have bad credit, bankruptcy can allow you to work on your credit and rebuild it sooner instead of continuing to repay.
You can use a co-signer in bankruptcy as another person who is liable for the loan. In this case, bankruptcy can assign that co-signer to be solely responsible for the debt.
You can only file for bankruptcy once every eight years, even if your debts end up piling up even more.
If bankruptcy requires you to give up some property that you own and want to keep, then it might not be the best option for you. Every state has different rules of bankruptcy and what you need to give up; usually and in most cases, some property is exempt from bankruptcy; this includes things like some home furniture and motor vehicles (but you will most probably need to give up a second car, vacation homes, and any other valuable collections or family heirlooms).
If you don't have any property or income that creditors can go after, you may not need any of this, as it makes you "judgment proof." You should know, though, that creditors can still sue you and get a judgment, but they won't be able to collect.
Relief through debt management plans
In a debt management plan, you will get to pay your unsecured debts in full (usually credit card debt), but usually at a lower interest rate or with lower fee rates. In this plan, you will deal with a credit counseling agency, making a single monthly payment to them, and the credit counseling agency will distribute your payment among your creditors. There are multiple agreements between credit counselors and credit card companies to help all the debt management clients and customers.
If you resort to a debt management plan, your credit card account will be closed, and you will most probably have to go on living with no credit cards until you complete the plan. And again, many people end up not completing them.
The debt management plan will not affect your credit scores. However, the act of closing your credit card account will hurt your scores. You can later apply for credit again once you have completed your management plan.
However, if you miss payments while doing your debt management plan, you might end up being knocked out of the plan.
Before picking a company to do your debt management plan with, make sure that it is accredited by the Financial Counseling Association of America and/or National Foundation for Credit Counseling. And before getting yourself into anything, make sure to understand everything about the company and its plans; this includes fees and alternatives you may have for debt relief.
Relief through debt settlement
Bankruptcy is a better option almost in all cases. Debt settlement is a debt relief option that we usually ask clients to stay away from as much as they can. Debt settlement should always be the last option and last resort someone should consider upon facing overwhelming financial hardships that cannot be solved with bankruptcy.
When you resort to debt settlement, the company will ask you to stop paying your creditors. Instead, their specialists will lead you through creating an account; they will control this account, and you will deposit your money in it. As the money starts accumulating in your account, the debt settlement specialists in charge of your money will start approaching each creditor, which may be a problem, as this will put you even more behind on payments with the creditors. Some creditors may even feel threatened by the fear of not getting anything at all eventually, which might convince them into accepting a lesser amount from you than the one they agreed on.
When you stop paying your creditors, you should expect collectors to start calling and harassing you. You might even face penalty fees and probably even legal action against you. And unfortunately, none of this can be stopped or prevented by debt settlement companies, not when you're still negotiating, nor when you start the settle offers, and up to six months at least. Of course, debt settlement can take up to many years, based on your situation.
Making late payments will definitely affect your credit scores negatively. Forgiven amounts can still face a bill for taxes on them because the IRS counts this as income. If you undergo a lawsuit, your paycheck may be withheld and your property may be claimed.
If you decide to resort to debt settlement, you may either do it yourself or with the help of a professional. The Consumer Financial Protection Bureau, the National Consumer Law Center, and the Federal Trade Commission warn clients against scammers in this industry.
If a debt settlement company claims to be a debt consolidation company, do not believe them at any cost. Debt consolidation does not even require a company; it is something you can do on your own without even affecting your credit score.
You Can Do It Yourself
You can, instead of getting yourself in a commitment, borrow ideas from different debt relief companies and create and follow your own plan.
You can learn from debt counselors and follow the steps yourself; that is to say, call your creditors and explain your situation to them; let them know what happened and the reason why you have fallen behind on your payments. Explain your issue and try to negotiate with them. A good thing not everyone knows is that most credit card companies offer financial hardship programs, where they can understand and evaluate your situation and, accordingly, lower your waived fees and interest rate.
If your credit is not bad and your debt is not out of hand, you can resort to more traditional ways of paying off your debt; you can, for example, if you still have "good credit," you can apply for a new credit card with a 0% balance to transfer credit to your other card, which can take some weight off your shoulders.
You can also choose to get a consolidation loan with a lower interest rate to pay off your already-existing debt. This option will not affect or hurt your credit score; for as long as you are making the payments, nothing can affect your credit score.
However, you need to know that if you are in huge debt, you may not qualify for a consolidation loan or a new credit card, as it often leads to higher debt and missed payments. So, you should make sure not to let these plans leave you into bigger and worse debt on your credit card.
Things You Need to Avoid
Sometimes, drowning in so much debt will leave you desperately looking for any way out. However, your desperateness should not push you into doing anything reckless.
If you find yourself overwhelmed by debt, take a breath before taking any step, and make sure to think of the following:
Do not, under any circumstances, borrow against the equity in your home. This can result in bigger problems if your house goes under foreclosure; this may force you into secured debt instead of an unsecured debt that has the potential of being erased by bankruptcy.
Do not postpone your secured debt (car loans, for example) to prioritize the payment of your unsecured debt (credit card debt or medical bills). This might result in your losing the collateral that secures your debt.
Avoid borrowing money from workplace retirement accounts. You might need to quit your job at some point; if this happens, your loans can become unplanned withdrawals which can trigger a tax bill.
Do not think of the present while completely abandoning the future; this is to say, do not withdraw money from your retirement savings to repay your unsecured debt. This will fix nothing.
Collectors will pressure you and will keep doing so, so don't base your next step on that. Research every option you have thoroughly before taking any step.
The Bottom Line
Whether it is a debt relief company, a debt settlement company, or a debt consolidation company, you need to think twice before making the decision of using their services. If you think you can avoid them, it will be better for you. If not, then debt settlement might be your last resort.
Before starting your debt settlement program, make sure to study all the options that you have and make your decision wisely.