The Real Story on Debt Management Programs

In my years of experience in the industry, I have found that most people are looking for a debt relief option that does not exist. Here are the criteria they are usually requesting: – Pay off all accounts quickly – Not harm their credit – Not cause creditors to hound them with phone calls

Reality Check: There is no such program!

I have found throughout years of helping people free themselves from debt, that most are initially looking for the option that does not exist. To reiterate, there is no debt relief option in existence that will give you the above benefits. Let’s take a good look at the options that are available and provide some basic information about each one.

Debt Consolidation: Debt consolidation is, in nearly all cases, a home equity loan or second mortgage. This is the process of taking equity out of your home to pay off your other accounts. The good thing is that you can get rid of unsecured debts for a lower-interest, single payment that can sometimes have a tax benefit. The bad thing is that most people in a bad debt situation do not qualify for a home equity loan.

Credit Counseling: Credit counseling companies have been getting a lot of trouble lately with consumer protection agencies. Most of them are non-profit and claim to lower your interest rates and provide a low monthly payment. Typically, they take your payment and distribute to pay each creditor a small payment. The good thing is well there is no good thing. Credit counseling programs hardly ever do what they claim, and many creditors no longer participate. Most have found this to be a serious waste of money and time. The bad thing is that your creditors will enter a statement onto your credit report for every account in credit couseling that states that the account is handled through a program. This is a seroius negative for anyone looking at your credit.

Debt Settlement / Debt Negotiation: This now seems to be the most popular and most effective option for getting out of debt fast, while avoiding bankruptcy. You must truly be in a financial hardship and not have an ability to pay your current payments. The strategy is to negotiate a settlement of far less than the current balance of each of your accounts. All companies will accept settlements on accounts held by people in a financial hardship. It has been apparent that attorneys and law firms are more effective in negotiations with creditors that companies that just use non-attorney staff. The good thing is that you can effectly eliminate your debts for a small percentage of what is currently owed. The bad thing is that you must allow your accounts to go unpaid and become delinquent before a collector will accept a settlement. Obviously, this is not a problem if you are legitamately in a financial hardship; since you cannot pay your bills anyway.

Bankruptcy: In past years, anyone could file bankruptcy chapter 7 and easily eliminate any amount of debt quickly. Now, since the Bankruptcy Reform Act, most do not qualify for bankruptcy, and you are forced to try other solutions such as debt settlement first. Bankruptcy is a legal court process where those who are completely insolvent are able to possibly protect their primary residence and eliminate debts. The upside is that once a chapter 7 bankruptcy is completed, the creditors literally write off the debt and cannot pursue you further. The downside is that it is a permanent court record, and will also remain on your credit reports as a public record for up to 10 years.

This information should provide you with foundation of knowledge that will allow you to select the best debt relief option for your specific financial circumstances.

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