There are people who get into serious trouble over their debts through no fault of their own. They might have had a serious illness or been in a terrible automobile accident. Many people lost their jobs as a result of the Great Recession and are now either unemployed or underemployed. However, the brutal fact is that most people who get into trouble is because of poor spending habits.
Credit cards can get you if you don’t watch out
Credit cards are probably the biggest culprits when it comes to problems with debt. They make it just too easy to spend money you don’t have. You say you’d love to have that 50-inch flat screen TV but you don’t have $700 in cash? Just put it on a credit card and in the immortal words of Scarlett O’Hara, “I’ll worry about that tomorrow.”
Could consumer credit counseling help?
If you’re not familiar with consumer credit counseling this is where you go to a company or agency that specializes in helping people with debt problems. There are consumer credit counseling agencies in most cities and numerous credit counseling companies available via the Internet. The best of them are nonprofits and charge very little for their services. Your best bet would probably be to use a local agency where you could work with your counselor face-to-face.
What to expect
Regardless of whether you go to a local consumer credit counseling agency or find one online, you will be assigned a credit counselor who will first analyze all of your finances, including your spending and your income. He or she will help you develop a budget and a debt management plan. You will also likely be offered financial advice and printed materials to take home that could help you become a better money manager. Finally, if you wish, your credit counselor will contact all of your lenders and attempt to negotiate reductions in your interest rates. He or she will also present your debt management plan to them. If they all agree to your plan, the credit counseling agency will assume responsibility for paying them and you will be required only to send it a check each month until you complete your plan. This typically takes about five years.
The pitfalls of credit counseling
Consumer credit counseling can be a great way to get your debts under control and ultimately paid off. However, there are some pitfalls you need to be aware of. For one thing, you will be required to surrender all of your credit cards and will be very strongly encouraged to not take on any new revolving debt until you complete your plan. Just as important, you will need to stay on your budget for those five years, which could be very difficult. These are reasons why many people are never able to complete their debt management plans.
Here’s a short video that explains more about consumer credit counseling and how it can be used to reduce debt.
Your spending habits
You will definitely need to change your spending habits in order to stay on your budget. The reason you got into debt in the first place was probably because of your spending habits and you will need to change them. This can be difficult as it means you may have to totally change your way of thinking about credit – especially credit cards. In fact, you may need to completely rethink your attitudes about money. You would need to learn to live on cash and totally renounce credit.
Other options
If consumer credit counseling doesn’t appeal to you for some reason, there are alternative ways to get your debt under control or even paid off – although all of them require the same thing, which is to change your spending habits. The most popular of these options are.
- A home equity loan
- A homeowner’s equity line of credit
- Refinance your mortgage
- An unsecured personal loan
- A balance transfer
- A peer-to-peer loan
- Snowballing your credit card debt
- A loan for people with bad credit
- Cash out your savings
- DIY debt negotiation
Tips for DIY debt negotiation
One of the best ways to get debt paid off is through DIY debt negotiation. If you have the intestinal fortitude to try this, it means contacting each one of your lenders and offering to settle your debt on the spot but for much less than you actually owe. For this to work, you would need to be at least six months behind in your payments to each of your lenders. The reason for this is because very few companies are willing to talk debt settlement unless you are that far behind. Of course, you’ll need to have the cash on hand to pay for those settlements. In fact, that’s one of your bargaining points – if they settle with you you’ll immediately send them the required amount of cash either by wire transfer or in the form of a cashier’s check. Beyond this, here are some tips for DIY debt settlement.
- State your option. If you can successfully convince your creditors that it’s either settle or you will file for bankruptcy, you should be able to negotiate some very favorable settlements.
- Check your state’s statute of limitations. Every state has a certain number of years that your creditor or a collection agency has to try to collect a debt from you. If the statute of limitations has expired, the lender cannot legally try to recover by suing you. This is a case where instead of proposing a settlement you could just tell the collection agency to get lost.
- State your conditions. A priority and precondition for settling any debt should be getting your credit cleared. If you are sending in a debt settlement agreement offer or a counter offer, make sure your lender agrees to remove the negative item from your credit file. In fact, this needs to be a clearly stated contingent for settlement. And the lender must return a signed copy of your debt settlement offer – acknowledging agreement and acceptance.
- Get everything in writing with no exceptions. Your creditor may agree to your settlement offer orally but that’s not enough. You need to make sure – in writing – that your creditor will abide by its word and remove negative credit entries from your credit report after a settlement. Keep everything in writing from your first debt settlement offer right up to the point where your creditor sends you a receipt acknowledging your payment.
Why most people hire a debt settlement company
While it is possible to do DIY debt settlement, most people turn to a debt settlement company to handle this for them. There are two reasons for this. First, most people do not have enough cash on hand to pay for the settlements they would negotiate and second, most people understand they are not very good negotiators. Professional debt settlement companies can almost always get better settlements then can people themselves. Plus, this becomes a form of debt consolidation because ultimately people who use a debt settlement company end up sending just one check a month to the settlement company until they complete their plan. This typically takes anywhere from 2 to 4 years.
