Debt Management
American’s are faced with mounting debt, rising prices, and stagnant paychecks.
The credit and housing crises has put us in the toughest economic times since the
early 1990s. People are in survival mode; trying to meet higher gas, food and prescription
bills leaving minimal available to meet the demands for their credit card payments.
If you’re in over your head in debt, take a deep breath. There is light at the end
of the tunnel. There are several options available; finding the right option is
the ultimate goal. No matter what you choose, understand there is a tough road ahead
of you.
Debt Management
How Does Debt Management Work?
The Debt Management Breakdown
Debt Management; Are They Really Non-Profit?
Will Debt Management hurt my credit?
Credit Counseling
How Does Credit Counseling Work?
Credit Counseling; Are They Really Non-Profit?
Will Credit Counseling hurt my credit?
Debt Settlement
How Does Debt Settlement Work?
The debt settlement breakdown
Is there a fee for debt settlement?
Will Debt Settlement Hurt My Credit?
Bankruptcy
Should I file Bankruptcy?
The bankruptcy breakdown
Is there a fee to file bankruptcy?
The bankruptcy breakdown
How does debt management work?
Debt Management programs are structured to help people repay their debts by negotiating
the interest rate to a lower amount. The programs will range anywhere from 5-7 years
depending on the amount of the debt. You make one monthly payment that is dispersed
to your creditors.
Debt Management has a 70% failure rate because if you are late or miss one payment
your interest rate returns to the original amount as when you entered the program.
There is no margin for error and let’s face it life is unpredictable; it is important
to have flexibility.
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The debt management Breakdown
Many people chose debt management as their method without fully knowing the consequences.
Let’s take a minute to asses this approach. First, if you are seeking relief in
the form of monthly payments that is not going to happen. At best, your payments
will remain the same. Let’s take a closer look at how Debt Management works:
If you had a card that has a $5,000.00 balance and a 30% APR it would take you 15
years and 4 months to pay it off by paying the minimum payment of $125.00. (your
minimum monthly payment is calculated based on 2.5% of your balance).
A debt management program will typically try to negotiate an interest rate as low
as 6% with a fixed monthly payment. What this means to the debtor is that you will
pay the debt off sooner. Instead of 14 years you are looking at 5 years. Although
you pay the entire amount of the debt, you save several years of paying interest.
Note: It is important that I mention if you were behind on your payments, being
in a debt management program will bring your accounts current after three consecutive
payments. Over the limit and late fees are also waived.
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Debt Management Programs; are they all Non-Profit?
Most of these programs claim to be non-profit helping the client without charging
a fee. That is simply not true. These companies are paid by your creditors. The
amount can range anywhere from 8-15% of the debt enrolled. In essence the companies
work on behalf of your creditor.
There are other debt management companies that are for profit and charge fees anywhere
from 10-15% and a monthly service fee as well. I don’t see a problem with having
to pay a fee as long as it is clearly outlined.
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Will debt management hurt my credit?
The answer to this question is yes. Debt Management will have a negative effect
on your overall credit score. Your credit report will show that you needed help
to pay your debt; this is viewed by some lenders as a bankruptcy! If your minimum
monthly payments were negotiated to lower than 2.5% of the balance, your creditor
retains the right to report late payments. Your debt management contract will state
the creditor will accept a lower minimum payment but can report these payments as
late.
There is no easy way to get out of debt. It takes time and dedication, no matter
which road to relief you choose. The best approach is to research any company you
may be considering. There is also a step by step guide you can purchase from our
on-line store should you choose to do-it-yourself.
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Credit Counseling
How does credit counseling work?
Credit Counseling works much like Debt Management. These programs are structured
to help people repay their debts by negotiating the interest rate to a lower amount.
The programs will range anywhere from 5-7 years depending on the amount of the debt.
You make one monthly payment that is dispersed to your creditors.
Like Debt Management, Credit Counseling has a 70% failure rate because if you are
late or miss one payment your interest rate returns to the original amount as when
you entered the program.
The credit counseling breakdown
Many people chose credit counseling as their method of relief because it has been
around for quite some time. People have heard of or know someone who has gone through
credit counseling.
There is usually no immediate monthly relief with credit counseling. The following
is an example of what you can expect with a credit counseling program: If you had
a card that has a $5,000.00 balance and a 30% APR it would take you 15 years and
4 months to pay it off by paying the minimum payment of $125.00. (the minimum monthly
payment is calculated based on 2.5% of your balance).
The interest can be negotiated as low as 6% with a fixed monthly payment. What this
means to the debtor is that you will pay the debt off sooner. Instead of 14 years
you are looking at 5 years. Although you pay the entire amount of the debt, you
save several years of paying interest.
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Credit Counseling; Are they really non-profit?
Most of these programs claim to be non-profit helping the client without charging
a fee. That is simply not true. These companies are paid by your creditors. The
amount can range anywhere from 8-15% of the debt enrolled and how much they can
get you to pay monthly. In essence credit counseling companies work on behalf of
your creditor.
Note: I would encourage anyone thinking of using this method to rethink their strategy.
I do my best to provide unbiased education. In my opinion, credit counseling is
a waste of time. These non-profit companies will stress the fact they do not charge
while their CEO’s are making healthy incomes to avoid showing profit at the end
of the year. Don’t believe they don’t get paid. Your creditors make sure they are
well taken care of.
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Will Credit Counseling hurt my credit?
The answer to this question is yes. Just like Debt Management credit counseling
will have a negative effect on your overall credit score. Again your credit report
will reflect you needed help to pay your debt; this is viewed by some lenders as
a bankruptcy!
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Debt Settlement
How Does Debt Settlement Work?
Debt Settlement programs are structured to help people repay their debts by negotiating
the amount owed instead of the interest. The programs will range anywhere from 1-3
years depending on the amount of the debt.
Debt Settlement programs provide immediate monthly relief. You can typically modify
your payment if you encounter an unexpected hardship without affecting your program.
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The debt settlement breakdown
Many people chose debt settlement without doing their homework first. I do believe
these programs can work but only if the company you chose is credible. I will give
you an example of how debt settlement works:
Debt load in the amount of $65,000 will be negotiated anywhere between 30-50 cents
on the dollar. The length of the program will be 36 months with a payment of $1.200.
What this means to the debtor is that you will pay the debt off sooner. Instead
of 30 years you are looking at 3 years not to mention a savings of $108,000 in interest.
Note: It is important that I mention you do not need to be behind in your payments,
however your accounts must age for at least 2 months before negotiations can begin.
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Is there a fee for debt settlement?
The answer is yes. These companies do charge a fee. Most are for profit and will
charge anywhere from 10-15% of the debt enrolled. As I stated it is important you
ask certain questions before making any decisions. The fees should be clearly outlined.
Click here for a list of questions and red flags.
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Will debt settlement hurt my credit?
The answer to this question is yes. No matter which option you choose (other than
cash), all will have a negative effect on your overall credit score. The quicker
your debts are negotiated the less your credit will be impacted. Another reason
you will want to choose a credible company.
Getting out of debt will take time and dedication. Your best defense is to be proactive
before your circumstances spiral out of control. What you need to remember is no
matter what your situation, there is hope.
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Bankruptcy
Should I file Bankruptcy?
The answer is NO! I saved this as the last options because it should absolutely
be your LAST resort. I cannot stress enough how bad a bankruptcy will affect your
life. A myth is that bankruptcy affords a 'fresh start'. It's NOT true! Today your
credit report contains a point score. A high score is what creditors look for as
a basis for approving credit applications.
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The bankruptcy breakdown
There are two types of bankruptcy that apply to consumer debt; Chapter 7 and Chapter
13. With a Chapter 7 bankruptcy, the individual is allowed to keep certain exempt
property. Some liens, however (such as real estate mortgages and car loans), survive.
The value of property which can be claimed as exempt varies from state-to-state.
Other assets, if any, are sold (liquidated) by the trustee to repay creditors.
Many types of unsecured debt are legally discharged by the bankruptcy proceeding,
but there are various types of debt that are not included such as child support,
income taxes less than 3 years old and property taxes, most student loans, and fines/restitution
imposed by a court for any crimes committed by the debtor.
The main purpose of a Chapter 13 Bankruptcy is to allow a debtor to retain certain
assets by repaying the creditors under a plan. The discharge does not happen until
the plan has been fulfilled. The goal of Chapter 7 bankruptcies is to discharge
the existing debt immediately allowing for a “fresh start. You can keep your home
and your car under either plan (provided your equity does not exceed certain limits)
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Is there a fee to file bankruptcy?
The answer is yes. It can be as little as $1,000 and as much as $5,000.
Will bankruptcy hurt my credit?
The answer to this question is YES. The price of bankruptcy will include a bad credit
report for 10 years, the possibility that companies will refuse to hire you and
you can be denied insurance as well as a security clearance and licensing. Keep
in mind this is all LEGAL. Bankruptcy carries a stigma for life! Public records
containing all of your personal information are kept in storage and available for
20 years after the bankruptcy has been discharged or dismissed.
In my opinion, bankruptcy should only be used as a last resort when all other options
have failed.