Decreasing Debt: Management, Settlement, Consolidation
Debt management is a lifelong commitment. Debt management, done correctly, is more than paying off credit cards and consumer loans. It’s learning how to avoid getting in over your head again. A good debt management service includes education and counseling, not just the promise of a quick settlement.
Debt management services act as go-betweens for you and your creditors. They may negotiate lower interest rates and reduced fees with your credit card companies. You write the service a monthly check, and it allocates it between your creditors. A single payment and lower interest makes repaying your debt easier. Counseling helps you stay on track with education and support.
Debt management has a minimal impact on your credit score, and may even improve it if the service does a better job of paying your accounts on time than you did. Retiring your debt doesn’t happen overnight, but it does happen if you stick to your plan.
Chapter 13 Debt Management
Chapter 13 bankruptcy is a court-ordered debt management plan. Under Chapter 13, the judge or trustee tells you what you have to pay each month and tells your creditors what they will receive. In a few years, your debts are retired. If your creditors won’t agree to work with a debt management plan, Chapter 13 is an option to consider.
Debt Consolidation
Debt consolidation can be a debt reduction tool on its own, or it can be part of a debt management plan. Debt consolidation involves getting a lower interest loan and using it to pay off your credit cards and consumer debts. Debt consolidation loans secured by equity in your home carry the lowest interest rates. They make debt management easier by allowing you to make a single monthly payment instead of many payments.
However, unless you are also getting a lower interest rate, debt consolidation loans don’t help much. In addition, if you get a debt consolidation mortgage with a 15 or 30 year term, you could end up paying more interest over the life of the loan, even if your interest rate is lower. Finally, one problem that approximately 80% of those who take out debt consolidation loans experience is running up the credit cards again. That’s why a debt management service that educates and counsels you is helpful–it can help keep you from repeating your mistakes.
Debt Settlement
Finally, there’s debt settlement. Debt settlement is illegal in 12 states, and just because someone contacts you about doing it doesn’t mean that you can legally use their service. Debt settlement companies often charge more than bankruptcy attorneys, in many cases thousands of dollars. They typically want these fees upfront, with no guarantee of success.
These companies have you withhold payment to your creditors and use that money to save a lump sum. Then, they call your creditors and negotiate a settlement, typically 20% to 75% of the total amount owed. But before you settle the debts, your creditors could sue you for the whole balance–and get it. Even if you successfully settle, your credit will bear the marks of those late payments. Additionally, the amounts forgiven become taxable–don’t expect to easily settle that debt with the IRS! In the end, most people don’t save nearly as much as the debt settlement companies lead them to believe they will.
Chapter 7 Debt Settlement
Chapter 7 bankruptcy is a court-ordered debt settlement. The judge or trustee tells creditors how much they have to accept to settle your debts, and you how much you have to pay. Some of your assets may have to be sold to satisfy your creditors, but they are not allowed to sue you, and your debt are discharged very quickly.
If you’re looking for a long-term solution that works, debt management with a reputable company is a much better solution than debt settlement. If your debts are insurmountable, or your income is insufficient to make any plan feasible, bankruptcy is probably a better option than debt settlement. Whatever solution you choose, check out the company thoroughly (there are lots of scams out there) and don’t write any checks upfront.
