Debt Relief Options

Debt continues to grow. The harassing calls from creditors seem to never end. You may start to feel desperate, and you may be inclined to explore any option that promises relief from your debt.

But which debt relief option is right for you? Can you trust the promises of debt settlement companies? Is credit counseling enough? Could bankruptcy really help you recover?

Before you commit to taking a debt relief path you should learn about the options available to you. Some actions designed to reduce your debt may end up costing you more money in the long-run and complicate your current problems.

For serious debt, most people consider three options: filing bankruptcy, working with a debt settlement company and getting help from a credit counseling agency.

Do your debt homework, and then decide on the course that’s best for you. To get you started, we’ll take a look at the three paths, how they can help and any precautions may want to take.

Filing bankruptcy

Bankruptcy can be the fastest way to clear your debt, stop collectors and clear your slate. Bankruptcy for individuals typically comes in two forms, Chapter 7 and Chapter 13. They both use different means to achieve the goal.

Bankruptcy is an option if you have serious debt from multiple collectors. Some debt options will only deal with credit card debt, but bankruptcy can address debt from mortgages, utility bills, medical bills, payday loans and any accounts referred to collections.

Anyone filing bankruptcy also gains the benefit of special legal protections. The law is designed to protect anyone filing bankruptcy from foreclosure, lawsuits, repossession and wage garnishments by creditors.

Typically, the moment you file bankruptcy collectors must stop harassing phone calls and claims against your property. Bankruptcy law will be used to work out your debts, and you may get to keep much of your property, including your home.

Chapter 7 bankruptcy requires filers to pass a means test. If you make too much money above the median in your state, you may not qualify. Chapter 7 allows your non-exempt assets to be converted into cash to clear your debts. However, many people filing for Chapter 7 do not have any non-exempt assets.

The laws vary by state, but even in Chapter 7 bankruptcy you may be able to keep your house, car, tools, work equipment and personal property.

Chapter 13 is an option if you don’t qualify for Chapter 7. Chapter 13 bankruptcy allows you keep all of your possessions while working out a timetable and hierarchy of debts to be repaid. This process can take from 36-60 months. You must still make current payments, but it gives you breathing room and can stop harassment of older debt. This a good choice if you faced a temporary financial set-back, such as injury or loss of a job.

Filing bankruptcy is not free, however. There are filing fees and attorney fees that must be paid. However, these are set by the state and the attorney, and you shouldn’t face any surprise charges or payments that require a percentage of your savings or debt.

Filing bankruptcy will have an impact on your credit and will stay on your record for 10 years. However, filing for bankruptcy may not prevent you from being approved for certain types of loans.

Debt Settlement Companies

Most companies don’t like to advertise debt settlement, but, when reality sets in, they would rather receive a partial payment of debts that often results from a settlement rather than nothing, which is what they often get when a debtor files for bankruptcy.

Working with a company to settle your debt – for a set amount or on a new payment plan – is legal and can generally be conducted by anyone. Indeed, you could call up a credit card company today and try to get them to settle.

But that doesn’t mean a company will listen to your demands. A company may not settle if you’re on time with your payments. And if you want to settle you may need to save up a sizable amount of cash to make a settlement payment. If you owe money to multiple creditors, handling negations yourself could be tricky.

That’s where debt settlement companies in. They claim to be able to effectively negotiate on your behalf with your creditors. For this service, they typically charge a fee. That’s where the problems can begin.

According to an MSN Money report, debt settlement companies typically charge 15 percent of your total debt or 25 percent of your debt savings. These fees may be required upfront, and don’t guarantee any of your debts will be cleared.

In fact, MSN reports that very few people ever complete a program. At the National Consumer Council, which was shut down by the Federal Trade Commission in 2004, fewer than 2 percent of their clients completed the program. Almost half dropped out after paying an average of $1,700 in fees.

In addition to the fees, any debts over $600 that are forgiven outside of bankruptcy can be considered taxable income. So if $10,000 of your debt is forgiven, you will have to pay taxes on that money as if you earned it at your job.

Debt settlement will also affect your credit, and ability to acquire credit in the future. It also may be illegal, depending on the circumstances. Twelve states outlaw for-profit debt management.

Debt settlement may be an option for people who don’t qualify for Chapter 7 bankruptcy. If you have some income, but don’t want to arrange a 3-5 year timetable for debt repayment, as happens with Chapter 13 bankruptcy, you may want to explore this option. But, unlike bankruptcy, settlement must be worked out on a creditor-by-creditor basis and it doesn’t put a legal halt to harassment from collectors.

Credit Counseling

The Federal Trade Commission recommends credit counseling for anyone concerned about living paycheck-to-paycheck, bill collectors or planning for retirement.

Credit counselors may operate through other groups, such as a bank or non-profit company. Many offer their services online or over the telephone. A credit counseling group may offer some of their services for free, but most charge fees, even the “non-profits.” You should beware of any company that requires monthly service fees or a requires a percentage of your debt as payment.

Credit counseling works best at the beginning of a financial change that may impact your ability to live within your means – the loss of a job or the birth of a child. Credit counselors can work with you to develop a monthly budget, meet your monthly bills on time and even save for the future.

Credit counselors can be less effective at helping you pay off large amounts of debt. If you come to a counselor with serious debt, they may steer you towards a debt management plan.

With a debt management plan, you make payments to a trust that is managed by your credit counselor. Your counselor uses this money to pay off your creditors, and may even negotiate lower interest rates or new payment timetables.

If debt management plans and debt settlement sound similar it’s because they are. Neither can guarantee elimination of your debts, and harassing phone calls may continue.

Debt management plans can also move very slowly. They generally require you to make timely, monthly payments and may take 48 months or longer to complete.

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