Debt Counseling Guide
Debt is a major problem for millions of regular Americans. While this has been the case for decades, the problem has taken on a new urgency in recent years thanks to the economic near-collapse that gravely wounded the country’s middle class.
Whether you’re struggling with debt as a result of the recent recession or haven’t been able to get a handle on your finances for years, you’re probably sick of feeling trapped in an endless cycle of financial woe. Fortunately, there are plenty of debt counseling options that might provide the fiscal boost that you need to get a handle on your credit card balances and other unsecured debts.
Consumer Credit Counseling
For starters, there’s credit counseling. Most credit counseling organizations are nonprofit outfits that maintain close ties to the credit card industry. While this might sound suspicious, these ties actually provides nonprofit credit counselors with a key advantage. Since credit card lenders help to fund these organizations’ operations, they have a vested interest in ensuring their success.
In other words, credit card companies want to negotiate with nonprofit credit counselors so that they’ll continue to attract customers. To boost their attractiveness, these organizations often charge relatively low “monthly maintenance” fees and offer credit counseling services to people with as little as $2,000 in unsecured debt.
For-profit credit counselors may be considerably less attractive. In addition to higher monthly maintenance fees, these organizations may charge eye-popping upfront fees and other periodic levies. Some may even misrepresent their services or suddenly disappear without providing adequate debt relief. Before you sign up with a for-profit credit counselor, check with previous customers and your local Better Business Bureau branch to assess its reputation.
Debt Management Plans
In either case, credit counseling organizations may help to reduce your debts with a “debt management plan” that reduces the interest rates on some of your unsecured debts. This can lower your monthly payments by a considerable amount.
Your debt management plan may also lengthen the time that it takes to repay your debts. Again, this might make your debts easier to afford in the short term. However, it might also leave you mired in debt for a longer period of time. As interest continues to accrue on your balances, you might watch helplessly as your credit counseling savings shrink or even disappear.
Many financial planners offer debt counseling services that resemble the debt management programs offered by many for-profit and nonprofit credit counselors. These plans tend to focus specifically on credit card debt. Most are available through retail wealth-management organizations or credit unions.
When you sign up for a credit card counseling program with a financial planner, he or she will assess your debt situation as well as your household budget. In short order, your new planner will provide advice about steps that you can take to reduce your total monthly expenses. While these might be painful at first, they will provide you with the necessary financial breathing room to get a handle on your credit card debts.
Next, your planner will draw up a credit card repayment plan that concentrates your financial firepower. This may resemble a tried-and-true credit management program like Dave Ramsey’s “debt snowball.”
On the other hand, it may involve paying off your most expensive credit cards before moving on to your less expensive debts. In either case, such a plan should be useful. Your financial planner may even attempt to negotiate debt repayment plans with your creditors or provide you with tips for doing so on your own.
However, his or her leverage might be more limited than that of a reputable credit counseling agency or debt settlement provider. In particular, debt settlement providers are recognized by many financial planners and other experts as a powerful force in the debt counseling business. These organizations take a novel approach to debt counseling that hasn’t yet been replicated by other debt-relief outfits.
Debt Settlement Counseling
When you enroll in a debt settlement plan, your provider will begin to negotiate balance reductions with each of your unsecured creditors. Debts like old credit card balances, medical bills, certain repossessions and unsecured business loans may be eligible for debt counseling through settlement.
In some cases, these balance reductions can be significant. Within the four-year maximum duration of the typical debt settlement program, consumers are often able to save 40 percent or more on their outstanding obligations.
As a debt settlement customer, you won’t have to worry about making additional payments on your credit cards or fielding unpleasant phone calls from collections agents. Instead, you’ll focus on saving up for the lump-sum payment that you’ll make to settle your debts at the conclusion of your program.
Debt counseling through settlement is not without its risks. The process may negatively affect your credit score for several years after your debts have been settled. During this time, you may find it difficult to secure prime-rate personal loans, credit cards or mortgages.
Bankruptcy Debt Counseling
However, these effects are liable to be less serious than the effects of a declaration of bankruptcy. Declaring bankruptcy under Chapter 13 of the U.S. Bankruptcy Code is tantamount to enrolling in a debt counseling program led by a bankruptcy attorney. Also known as “restructuring,” Chapter 13 bankruptcy offers many of the benefits of debt settlement.
During the restructuring process, your bankruptcy lawyer will help you draw up a debt counseling plan that can be accepted by your unsecured creditors as well as the judge who presides over your case. In many instances, this plan may involve the sale of certain assets, the seizure of your car by your auto lender, and even the loss of your home to foreclosure. The exact outcome of your lawyer-led debt counseling program will depend upon the severity of your financial situation.
Once you’ve emerged from your restructuring program, you’ll have far fewer debt obligations. However, your credit score will be seriously damaged for a period of several years. During this time, you’ll find it very difficult to obtain a loan. You may even have trouble securing adequate housing or finding a good job. As such, many financial experts advise against declaring bankruptcy before trying other means of debt counseling.
If you’re committed to tackling your debt situation on your own, debt counseling organizations like Debtors Anonymous can provide you with plenty of helpful resources.
Debtors Anonymous Offers Debt Counseling
Like Alcoholics Anonymous, Debtors Anonymous is an organization that provides a safe haven for folks who might be embarrassed about their debt situation. While there’s nothing embarrassing about being in debt, many Debtors Anonymous participants feel more comfortable discussing their financial profiles openly in its relaxed and forgiving environment.
In addition to periodic local meetings and regional or national conferences, Debtors Anonymous participants can take advantage of a wealth of online debt counseling resources. These include manuals, step-by-step programs, “intergroup” resources and generalized debt-reduction tips. Debtors Anonymous even offers an extensive array of Spanish-language resources. Much of its advice focuses on frugal living and debt-reduction strategies.
Although this self-guided approach takes discipline and perseverance, it may pay off in the long run. Crucially, it might not affect your credit score as dramatically as certain other debt counseling options.
There are many different forms of debt counseling available to struggling American consumers. As you review your options, you must remember that only you can determine the correct course of action for your particular debt problems. While you should carefully consider the advice that you’re given, your final decision will be yours and yours alone.
To learn more about debt settlement and other debt counseling options, contact National Debt Relief today.