Debt counseling, debt management, debt settlement, bankruptcy-so many options, so little time. You don't know where to turn. What you do know is you need help. If you go to one of these companies, what will that do to your credit report? How much does it cost? Are you better off dealing with your creditors by yourself?
As a board-certified consumer bankruptcy specialist in Indiana, I help clients find solutions. Sometimes bankruptcy is not the best choice in a given situation, so it's important for me to refer people to places they can get the help they need.
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Let's talk first about debt management.
For profit or not-for-profit?
The first thing to find out about any company or agency is whether it is a for-profit or a not-for-profit operation. (To qualify as a not-for-profit company for tax purposes, a company must provide consumer education as part of its mission.) The typical for-profit will work with you only if you have $5000 or more in unsecured debt, will work only with unsecured debt, and only with specific creditors. For-profits typically don't offer counseling or consumer education programs. They will typically not address such issues as being behind on utilities, insurance, mortgage or rent, nor will they explore alternatives to the debt management services they offer. You want a company that will provide services regardless of employment status, ability to pay, or the debt size, and that's probably going to be a not-for-profit company.
Negotiation with Creditors
Many company websites and advertisements imply their company has a special "in" with credit card companies and that they know how to get those creditors to reduce interest rates and penalties and extend the repayment period. What you need to understand, though, is that major creditors have already made their decision about what compromises they are prepared to make, no matter who negotiates with them. Two and one-half percent of your total balance is the least amount most credit card companies are willing to accept. What is always true is that the monthly payment must be enough to cover finance charges plus some of the principal. Remember, debt management company fees will be in addition to those amounts.
Fees and Charges
Indiana law permits debt management companies to charge an initial set-up fee, plus up to 15% of each payment. Not-for-profit companies will usually have fees substantially lower than for-profits. At Momentive Consumer Credit Counseling Service (www.Momentive.org), the oldest and largest of the not-for-profit credit counseling companies in Indiana, monthly fees are capped at $25, and there is never more than a $50 set-up cost. No matter where you go for debt management help, though, the important thing to remember is that you'll be paying your debts in full. Only the terms of payment and perhaps the interest rate that can be altered.
Credit Reporting
No debt management company can control what credit bureaus do, nor do these companies typically send reports to the bureaus. (Debt management will not, in and of itself, change your credit report, because your debts are still there.) However, the credit report might have a note saying "slow pay" or "paying as agreed", since the credit card companies will have notified the credit bureaus of your debt-paying status.
Shopping Questions
In selecting a company to work with you, here are some important questions to ask about the company:Are your counselors certified? How long have you been in business? Is your agency accredited? (An example of third party accreditation is the Council on Accreditation for Family and Children's Services or COA) Do you provide consumer education?
Then, ask about the arrangement:
Do I have to sign a contract? Can I get out of that contract? How? What exactly are your fees? (How are you paid?) When will you notify my creditors? How long will it take for me to repay my debt? What happens if, in a given month, I'm unable to make a payment?
So, what about all those commercials about getting your debt down to "a fraction of its size", advising you to skip credit card payments for three months? They're referring to debt settlement.
Debt settlement is totally different from debt management. In a debt management plan, you remember, you're paying all your debt, just at a slower pace and with some concessions on interest rates and penalties. With debt settlement, the company promises it will negotiate with each of your creditors to knock off part of your debt and to agree to receive a lump sum that might be as low as 40% to 50% of what you owe.
With debt settlement, you make payments to the debt settlement company. The company takes a fee, then puts the rest of the money in a trust account to pile up for, say, six months, at which time they'll work out a deal with creditors for a reduced lump sum payment. I think you can already see what some of the problems are with this type of arrangement. While the money is accumulating in your debt settlement account, the credit card company continues to pile up late charges and interest, making the situation even worse. Too often it happens that, you the client have paid high fees to that debt settlement company without solving the problem. The debt remains on the credit report until the money is remitted to the creditors. From then on, the credit report shows "settled for less than the remaining balance." Adding insult to injury is the fact that the amount you don't pay under the debt settlement plan becomes taxable income to you. Expect to receive a form you'll need to file with your taxes that year (and pay taxes on!)
I, along with the other attorneys in my four bankruptcy law offices, hear questions about debt management and about debt settlement every working day. As part of filing bankruptcy, we send all of our clients to a credit-counseling course, hoping they can avoid future mistakes and pitfalls. But bankruptcy is the last resort. If, after going over all the options, it turns out that a different form of help is more appropriate, we refer the clients to the proper organizations. Best of all, there's no charge for that analysis of the situation.
Because, for Indy's Child, I wanted to go into some depth on debt management, I decided to interview Kathy Perron, president of Momentive Consumer Credit Counseling Service. I asked her about the success rate of credit counseling and debt management. Her answer was very revealing: "100% of people who follow through and commit to making changes in their lifestyle are successful." Creditors are willing to work with people who are making a sincere effort to get out of debt, Perron explained, adding that in addition to asking questions of debt management or debt settlement companies before signing any agreements, there are two questions for debtors to ask themselves:
What adjustments have I made (or am I willing to make) in my lifestyle?
Do I really know the difference between my "needs" and my "wants?"
I was reminded of one of those changing-a-light-bulb jokes. You know the one.
"How many psychiatrists does it take to change a light bulb? Just one, but the light bulb must really want to change."
All my years of working with people who are going through a financial crisis has taught me this: There's no one-size-fits-all solution for debt problems. Debt management, debt settlement, debt counseling, bankruptcy-each has its purpose in the right situation, and each is meant to help when you've reached the conclusion that you can't do debt alone.
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