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Your Debt Management Programs Options

Debt settlement is only one of several different kinds of debt management programs, each with its own advantages and disadvantages. We highlight
those programs here. Also, if you contact CRN for help, we'll tell you if we
think some other debt management program, rather than debt settlement,
is best for you and we'll refer you to the appropriate resource for pursuing that
option.

CONSUMER CREDIT COUNSELING SERVICES (CCCS):

Traditionally, working with a credit counseling agency has been one of
the most popular debt management options among consumers. Although
some agencies that provide credit counseling services are for-profit, most are nonprofit and typically creditors fund them in full or in part. These offices may be able to get the interest rates on your credit card debts lowered and they can help stop collection calls, but they won't get your outstanding credit card balances reduced. Therefore, you'll still be responsible for paying the full balance owed on each of your credit card debts according to the terms of the debt management plan the agency will prepare for you after contacting your creditors. Usually, you'll pay those balances off over 5 years and you'll send your monthly payments to the agency rather than to your creditors during that time. In turn, the agency will pay your creditors for you.

Advantages

• The agency may be able to get your credit card interest rates lowered and can help stop collection calls.
• Some agencies offer free money management workshops.
• Some agencies offer credit, budgeting and debt education.
• Provides a very structured means of paying off debt, which many consumers need in order to resolve their money problems.

Disadvantages

• Most credit counseling agencies won't work with you if your credit card accounts are more than 60 days past due.
• You may not get the interest rates reduced on all of your credit card debts. It's harder to do than it used to be! Be sure to look at your credit card billing statements after enrolling in a credit counseling program to see it, indeed your rates have been lowered.
• You'll experience little or no reduction in the total amount that you owe on each of your debts. Therefore, you may continue to struggle to pay even the minimum due on your debts. Some of the largest credit card companies will not agree to participate in your debt management plan unless all of your unsecured creditors participate.
• If your income is unstable you may not be able to keep up with your monthly payments to the credit counseling agency.
• Statistics show that most credit counseling agency debt management plans take 5 years to complete. Yet, in today's economy with a shrinking job market it's important to get out of debt as quickly as you can -- faster than 5 years. Otherwise, you run the risk that your income will go down while you're paying on your plan and that you won't be able to continue paying on the plan. If that happens, you'll have wasted your limited money and time.
• Participating in a credit counseling agency debt management plan will harm your credit histories. While you are paying on your plan a "DMP" or a similar entry will appear in your credit reports. Historically, it has been difficult for consumers with this notation in their credit reports to get new credit; they'll have to wait until the information goes away. Participation in the plan probably won't affect your FICO scores however.
• You'll get no control over your plan and it will offer you no flexibility. You must make each of your payments to the credit counseling agency in full and on time. Otherwise, you'll lose the lower interest rate and could even end up with higher rates on your unpaid balances than existed when you began working with the credit counseling agency. A detailed 2006 report (using 2001 data) released by the National Consumer Law Center & The Consumer Federation of America, the National Foundation for Credit Counseling (NFCC) showed that only 26% of the consumers enrolled in one of the NFCC's debt management plans actually completed their plans.

DEBT CONSOLIDATION:

Debt consolidation involves paying off existing debt with new debt. If done right, you'll reduce the total amount you are paying in interest on your debts each month, which should help you get out of debt faster.

Advantages

• You can reduce your monthly debt payments by using lower interest debt to pay off higher interest debt.
• You'll have fewer monthly payments to make each month. Therefore it's less likely that you'll be late with one of your payments and incur late fees and penalties as a result.

Disadvantages

• You'll still have a lot of debt to repay; you just won't have as many creditors.
• You'll put your home at risk if you consolidate your debts by getting a second mortgage or by borrowing against the equity in your home.

BANKRUPTCY:

If you file a Chapter 7 liquidation of debt bankruptcy, you'll have to give up some of your assets in exchange for having most of your debts wiped out relatively quickly. However, because of the new bankruptcy law that was enacted in 2005, it's become more difficult to qualify for a Chapter 7. For example, now you must satisfy a "means test", which compares the amount of your income to the amount of your debt, and if you don't pass the test because you have too much income relative to your debt, you'll have to file a Chapter 13 reorganization bankruptcy. A Chapter 13 bankruptcy involves preparing a debt reorganization plan, getting it approved by your creditors, and then paying off your debts according to the terms of the plan over a 3-5 year period. You'll be involved with the bankruptcy court during this time.

Bankruptcy should always be considered your financial option of last resort. The truth is however, that many people who pursue debt settlement or some other debt management program end up in bankruptcy eventually.

Advantages

• You'll get rid of some of your unsecured debts.
• Your creditors and all debt collectors must stop trying to collect from you as soon as you file for bankruptcy.
• You may be able to keep some of your assets.

Disadvantages

• You must get credit counseling from a government-approved credit counseling organization at least six months before you file for bankruptcy.
• You'll lose some of your assets if you file for Chapter 7. The assets will be sold and the sale proceeds will be used to pay back your creditors.
• The fact that you filed for Chapter 7 will remain in your credit histories for ten years (seven years if you file Chapter 13) making it more difficult for you to get new credit at reasonable rates during that time. Your bankruptcy may also affect your ability to purchase adequate insurance, rent a place to live, and even qualify for the job you want.
• Your bankruptcy will be in the public record.
• If you don't qualify for Chapter 7 and you need to file for bankruptcy, you'll have to file a Chapter 13 Reorganization bankruptcy.
• In a Chapter 13, you'll make regular payments to your creditors, sometimes on the full outstanding balances that you owe to them, and your financial life will be under the microscope of the bankruptcy court for as long as 5 years. Historically, only 30% of consumers are able to complete their Chapter 13 bankruptcies.

DEBT SETTLEMENT:

Debt settlement involves negotiating lower interest rates on your credit card debts and lowering the outstanding balances on those debts so you can get out of debt faster.

Advantages

• The amounts that you owe on your credit card accounts will be reduced in exchange for your making an agreed upon series of payments on those accounts.
• The interest rates on your outstanding balances may be reduced.
• You avoid the stigma and hassle of bankruptcy.
• You regain the trust of your creditors by demonstrating to them that you want to repay as much as you can on your debts.

Disadvantages

• You cannot settle past due student loans, mortgages, auto loans, tax liens, court-ordered child and/or spousal support.
• Some credit card companies, like Discover, resist settling credit card balances.
• Your credit histories will show that you've settled debts, which may make future creditors less interested in giving you new credit right away. Also, debt settlement will lower your FICO scores. However, your credit histories and FICO scores have already been damaged by your financial problems, and debt settlement will make it easier (and faster) for you to get out of debt, which means that you'll be able to begin rebuilding your credit histories and raising your credit scores sooner rather than later.

Start Eliminating Your Debts Today!
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