If you're drowning in debt, you don't have to swim out alone. While it's commendable to slog through the debt-reduction process solo, getting professional debt help isn't an admission of failure. Instead, it's an acknowledgment of your inability to manage your finances, which can be a sign of maturity. Choosing professional help requires a careful review of the options available. Understanding the options can help you get back on a healthy financial track.
Non-Profit Credit Counseling
Credit counselors typically offer their services on a sliding scale. At the time of publication, most charged less than $100 per month. If you're unable to meet your current monthly debt payments, they step in and work with your creditors to establish a repayment plan. They negotiate a lower interest rate on your credit cards as well as a payment amount. Called a Debt Management Plan, or DMP, this type of plan helps you re-gain control of your finances. You pay the credit counseling firm a monthly amount for a specified period of time. The credit counseling company uses that monthly amount to pay itself a small fee and pay your creditors. A DMP can take years to complete. In addition, the DMP limits access to credit -- the accounts in the DMP are cancelled so you cannot use them to charge anything further. If you travel for business and must use a personal card, keep one card out of the plan to ensure you can reserve a flight, hotel or car. While in the DMP, your account is either noted as current or in credit counseling on your credit report. The credit counseling notation is removed immediately when you complete the DMP, and does not remain on your report. In addition, your credit score won't suffer as a result of enrolling in a DMP.
Debt settlement firms vary in quality and value. Some firms are excellent, offering in-house attorneys with deep experience and in-house management to resolve customer issues. Others are fly-by-night scams that take your money and do nothing to help you. Debt settlement is the most damaging to your credit -- it's typically the option your creditor accepts before writing off your debt. You offer to pay a lump sum that is a percentage of your total debt owed, as little as half the balance. You owe taxes on the amount you don't pay, since the Internal Revenue Service considers it income. However, a good debt settlement firm ensures your creditor doesn't sue you. In addition, a well-negotiated settlement can indicate you've paid as agreed on your credit report, rather than paid as settled, which is more damaging. However, engaging a debt settlement firm may alert your creditor to the seriousness of your financial condition. In some cases, the creditor responds not with an alternative settlement amount, but with a lawsuit in an attempt to recoup as much of the money owed as possible. Debt settlement can happen relatively quickly, depending on the amount owed, but severely damages your credit score. It also makes future credit difficult to obtain -- creditors don't like to lend to debtors who breach their contract by paying less than what is owed.
An attorney specializing in bankruptcy can evaluate your financial condition. The attorney can work in the same fashion as either a credit counseling firm, negotiating lower rates, or a debt settlement firm, negotiating a percentage payment. However, bankruptcy attorneys typically aid you in declaring either Chapter 7 or Chapter 13 bankruptcy. In a Chapter 7 bankruptcy, your creditors write off your debt. This leaves you debt-free, but with a damaged credit report for the next 10 years. In a Chapter 13 bankruptcy, you negotiate a repayment plan with your creditors under court supervision. Bankruptcy can severely limit your access to credit while it exists on your credit report. You may be denied a rental car, mortgage or credit card as a result of this type of filing. However, your attorney can help you determine if this course of action is appropriate given your financial issues.
Making the Choice
The choice you make depends on the severity of your situation and the amount of time you need to rebuild your credit. A DMP is the mildest choice, but requires a regular monthly payment that must be manageable within your budget. If you miss a payment, your creditors have the right to remove themselves from what your credit counseling firm has negotiated. Look for a credit counseling firm rating with the Better Business Bureau that also offers a written contract and a range of services at no cost. A debt settlement is severely damaging, but much quicker. Use a firm affiliated with The Association of Settlement Companies that offers a clear fee schedule. When hiring a bankruptcy attorney, choose one that doesn't quote you an amount over the phone. Cases are too individual to fit a one-size-fits-all fee. Find out the percentage of bankruptcy-related cases the attorney handles. In addition, clarify what type of representation you receive for your fees; whether it's a negotiation-only, or if the attorney will accompany you to any court dates.
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