The current state of the economy has left millions of Americans in financial hardship.
We are carrying more debt than ever, interest rates are rising and jobs are disappearing.
This has left millions of hard working, honest American families facing the choice of paying their creditors or putting food on the table.
When faced with tough financial decisions, we must know all of our options to make the best decision possible.
1) Minimum Payments: One choice is to pay the minimum payments to your creditors for the next 20 to 30 years.
Obviously this is or will be a problem for you if you are or are likely to fall behind in your payments.
Making the minimum payments does not eliminate debt.
The debt continues and depending upon the interest rate could increase over time.
Bear in mind that the interest rate could be as high as 39 percent.
Based upon the applicable interest rate your debt could even grow.
At best, making minimum payments is like treading water and you are doing nothing to eliminate your debt.
2) Consolidation: Another way to deal with your situation is for you to consolidate your bills into one payment by borrowing the money from a lender.
This option may be a problem as well right now.
Your credit profile will be affected if you are behind in payments.
In order for this option to be the most effective your credit profile must be in good standing to get a fair interest rate.
It is also possible that you may not be able to get a consolidation loan.
Banks are not readily lending money any more.
Consolidation does not reduce your debts.
It just combines them into one single payment.
3) Bankruptcy: Another option is to file for bankruptcy.
Since the passage of the new bankruptcy laws, filing bankruptcy is not as easy as it once was.
There are two kinds of bankruptcy; Chapter 7 and Chapter 13.
- Chapter 7 is called straight or liquidation Bankruptcy.
The court appoints a Trustee who may liquidate or sell some things that you own to pay your creditors.
Most of your debt will be cancelled, but you may choose to pay some creditors, usually to keep a car or home in which the creditor has a lien.
If you have any assets that you want to retain, Chapter 7 can have complications.
- Chapter 13 works much like credit counseling and debt management plans which I will explain next.
In Chapter 13, most of your debts are reorganized into a single monthly payment.
The payment will continue for 36 to 60 months.
You may not have to repay all of your debt.
The minimum payment may be affected by property you want to keep.
When you complete the payments, debt not paid is discharged.
Some people are opposed to bankruptcy on moral grounds.
It is much more difficult to declare bankruptcy than it used to be and bankruptcy is highly regulated with requirements that could be an imposition on you.
Some lawyers who handle bankruptcy will not accept cases unless the amount of debt is at least $45,000.
Bankruptcy whether Chapter 7 or 13 will stay on your credit report for up to ten years once you get out of bankruptcy.
If you want to pursue bankruptcy, we would suggest that you talk with a bankruptcy lawyer.
4) Credit Counseling/Debt Management: Debt management plans offered through non-profit credit counseling agencies and for profit organizations are another alternative.
In practice, if you enroll in a debt management program, all of your creditors will agree to a specific plan for you to repay them in full.
Under this approved plan, each month you will agree to pay a specific amount of money.
The money you pay will be divided up amongst all of your creditors.
Interest on the amounts you owe will also continue to accrue.
It will however be at a lower rate than you currently pay in most instances.
If you are in a debt management program, even though you will repay your creditors in full, you will not be able to use any of the cards enrolled.
You can only enroll unsecured credit card debt.
Debt management plans does not reduce the principal amount of debt and you will continue to have high payments.
You will remain obligated for the entire principal.
Only the amount of interest and penalties could be reduced and during the entire time you are in the program interest will continue to accrue.
In the end, you will pay more than 100 percent of your debt.
During the entire time you would be in a debt management program, it will be noted on your credit report and will not come off until you are out of that program in the 3 to 8 year time span.
Not all creditors offer reduced rates for credit counseling and debt management plans.
For option to make sense for you, you have to be in a position to pay approximately 2.
5 percent or more of the enrolled debt per month.
There are also many rules associated participation including how many times you defaulted on a payment while in a program.
Creditors may pay the credit counselors for the services.
The failure rate in credit counseling programs is very high and unless you fully complete the program, each of your debts will not go away.
There has been some controversy regarding some organizations that engage in credit counseling and offering debt management plans.
In fact, the Internal Revenue Service has recently investigated some and even revoked their tax exempt status.
One way to make the playing field more level with credit counseling is to enroll in a legally supervised credit counseling program where a lawyer will look over everything.
While it adds costs, it also provides additional benefits.
The one benefit of a debt management program is that no creditor will take any legal action against you as long as you comply with the requirements of your program.
5) Debt Settlement/Forensic Mitigation: Another alternative is debt settlement/forensic mitigation.
Debt settlement/forensic mitigation is process where a third party acts on your behalf to negotiate with each of your creditors, one at a time, to reduce the amount of your debt.
The process involves you putting aside a certain amount of money each month.
Out of the money you put aside each month, a portion goes to pay your fees and the rest goes into a savings account.
Once your savings reaches a certain level, a third party begins negotiating with one of your creditors.
Once the third party agrees to a settlement, the savings you have accumulated are then used to pay the settlement.
After the first settlement, the process is repeated with the other creditors sequentially until all of your enrolled debts are settled.
In order to participate in debt settlement/forensic mitigation, you must have a genuine financial hardship.
Otherwise, a creditor could claim you are attempting to defraud them and that you never had any intention of repaying them.
In debt settlement/forensic mitigation, you have an advocate who is working for you and who is not paid by creditors or is supposed to be neutral like a trustee in bankruptcy.
The average debt settlement program/forensic mitigation are estimated to be completed within 36 months.
The total costs including the fees and settlement amounts in debt settlement/forensic mitigation is going to be substantially less than in a debt management plan.
You get to keep your other assets and do not have to get involved with a bankruptcy trustee.