Do Debt Relief Programs Work? - Part 2
Option 3: Credit CounselingCounseling is a separate step. This type of program often does not reduce your obligations but helps you understand your situation, as well as empowering you to work out negotiations with creditors on your own. Debt counselors sometimes provide free service for low-income individuals.
These counselors will likely do all of the following:
Have you calculate your total debt
Have you calculate your income
Provide classes on how credit and credit scores work
Provide classes on debt reduction methods
Provide information on how to contact creditors to negotiate
Credit counselors usually do not act as assistance or relief companies. In most cases, they will not negotiate on your behalf. However, these companies may also provide a Debt Management Plan (DMP). This plan gives the counseling agency some control. You deposit a certain amount of money with them each month, and they use that money to pay down your unsecured loans (i.e., those not tied to physical property, such as medical bills or student loans).
You may or may not benefit from a DMP. This depends on whether your creditors agree to the terms negotiated by the credit counselors. The counselors will attempt to work out a payment plan with the creditors that may involve trying to secure lower interest rates. Once your creditors have approved the plan, you will start making payments to the counseling company, who will then make payments to the creditors on your behalf. However, you should not cease to pay your creditors directly until you have confirmed that they accept the plan.
Debt consolidation is where you combine all of your unsecured debts into one, under one creditor. You will normally do this through a consolidation company, which may or may not work in conjunction with an assistance company.
As with assistance companies, you can find reputable consolidation programs by investigating with your state Attorney General’s office or the BBB.
Consolidation companies work by buying your debt from other companies. They will then own whatever obligations you have, and you will begin to make payments to one company instead of multiple companies. You get a better idea of your arrears, and you may get a reduced interest rate. The catch in some cases may be that your term increases, so you may end up paying more after consolidation.
If you are using a counselor or assistance agency, inquire about this option. Only choose this option if it makes more financial sense than the others.
Option 5: File for bankruptcy
Bankruptcy is the last option and one you should not take lightly. Filing for bankruptcy is a legal process in which a court determines that you have no financial ability to pay back debts. The bank may repossess some of your physical and liquid assets to pay outstanding obligations, but creditors will take a loss in the end.
With a chapter 7 bankruptcy, you will:
Have physical assets repossessed and liquidated to repay the creditors
Temporarily stop home foreclosures
Require significant documentation to prove in court
Be freed from most obligations that cannot be paid through asset liquidation
Chapter 7 is primarily for those who have an income below the state median, and a high debt-to-income ratio. Chapter 7 bankruptcy will stay on your credit report for ten years and will have a significant negative impact on your credit score and your ability to secure any new lines of credit for some time.
With a Chapter 13 bankruptcy, you will:
Keep your physical assets
Develop a 3-5 year repayment plan with creditors
Have some, but not all debt reduced
Temporarily stop home foreclosures
Only have to submit a repayment plan to the court, but will require an attorney in most cases
Furthermore, a Chapter 13 bankruptcy has no income requirement but does require that you have unsecured loans less than $394,725 and secured loans below $1,184,200. Chapter 13 bankruptcy will stay on your credit report for seven years and will have a significant negative impact on your credit score and ability to open lines of credit.
Is Relief Worth It?
Although many forms of relief will likely lower your credit score and reduce your ability to open lines of credit for some time, the result can be worth it. You may reduce your overall burden, lower your interest rates, and work your way faster toward complete financial freedom. Many consumers leave high school without proper education regarding how debt works, leading to most adults getting in deep trouble early on.
Reducing and finally eliminating your debt can have significant positive impacts on your emotional well-being, and may allow you to put more money into retirement. It’s only a first step, though. You’ll need to start a long-term program designed to keep you out of debilitating debt and gradually rebuild your credit rating. Rebuilding won’t happen overnight, but you can do it, and it is worth every bit of the time and effort it takes. Good luck!