Sinking in debt? – Pros and Cons behind debt management
People call into our office every day with the following questions: “Nik. Should I file for bankruptcy? Should I look into consumer credit counseling? Should I consolidate my debt? What should I do?????? Aaaarrrgghhhhh” Well, let’s start by defining each of the options available. There are pros and cons to each scenario and that is why dealing with a neutral company to assess your scenario is always your best bet. Key Credit repair is a “Credit Repair” company. This should not be mistakened for a debt solutions company. When our clients ask us what to do with their debt we are able to assess their options better than a lawyer, debt settlement agent or credit counselor because we do not stand to gain financially from dealing with our clients debt problems. In fact, most of the debt solutions and advise we give is 100% free of charge. Anyway, here are the options….. #1 Banktruptcy: There are two main types of bankruptcies for consumers. The first of which is a Chapter 7( we’re only talking about this options. I think chapter 13 is almost never an option) Pros: A chapter 7 bankruptcy allows a consumer to wipe away all of their debt without paying back anyone. Also, in many cases you are able to keep your home, car and personal belongings. It can be an absolute savior in terms of getting out from under the harassing phone calls and possible law suits and wage garnishments from creditors. It’s a nice, quick “clean slate” if done correctly. Cons: A bankruptcy filing is a 10 year mark on your credit report. bankruptcy doesn’t necessarily clear away all of your debt. Certain federally backed student loans cannot be included. #2: Debt Consolidation: A consolidation should not be mistaken for a debt settlement or debt relief program. A “True” debt consolidation is taking out new loan and using the proceeds of that loan to pay off your existing debt. Pros: These loans have provided major savings to consumers in the past. While credit car rates can hover around 30% Apr most installment loans used to consolidate debt are well below 10%. This can create considerable savings. Also, the payments on these loans are usually fully amortized. This means that your payment each month is not just going to interest but to principal as well. This allows you to see your balance drop each and every month. Cons: These loans are almost completely obsolete. Unless you already have a great credit score (probably not because of your debt load) or belong to a credit union through your employer they are very hard to get (with the exception of student loan debt. Call me:). #3: Consumer Credit Counseling: Most of the companies that offer consumer credit counseling are non-profit organizations (This doesn’t mean that the CEO’s aren’t making a million bucks and the people you are talking to aren’t commissioned employees. Not for profit is too loosely used these days). With these programs the consumer credit counseling agency will negotiate with each of your creditors for a lower interest rate. For a monthly fee (typically around $40) they will have you make a one time payment per month to them that will be distributed to all of your creditors until you are debt free. Cons: While you are in a consumer credit counseling program you will not be able to use your cards. This is probably a good thing but for many consumers this can be a pretty big turn off. Also, each of the creditors that have been placed in a counseling program will place a mark on your credit report indicating that your debt is being managed by a third-party. Although this comment is credit score neutral most banks and lenders will not lend to you while in one of these program. #4: Debt Settlement/Relief program: A debt settlement is a great bankruptcy alternative. In one of these programs a consultant will usually work with you to find out how much money you can budget each month into a dedicated savings account to be used to pay off your creditors. As you accumulate money in your savings account the debt settlement company will use those funds to pay off your debt at a reduced balance. This is a great tool to get out of debt at a pretty large discount. Many of the collection agencies that are purchasing the debts from your credit card companies are willing to settle for 20-50 cents on the dollar. Also, the Federal Trade Commission does not allow debt settlement companies to make fees until they have negotiated your settlement so that guarantees that you will not be charged anything up front. Cons: Many time companies will not make it clear that they will not be making payments to your creditors until you have accumulated enough savings for a settlement. Also, if your debts are currently up to date you will end up seeing a significant credit score drop. These programs are designed primarily as a bankruptcy alternative. #5: Do nothing: Yes, I’ve said it. “DO NOTHING”. Pros: As time passes you will get closer and closer to your states statute of limitations for the collection of a debt. For example, here in Massachusetts you can refuse to pay on a debt 6 years after the date of last activity. Some states have statutes as low as 2 years. This is all pending that they haven’t sued you because judgement can be held over your head for 10 years. Cons: Hhhhmmmm. Karma? Also, your credit report will still carry these debts for 7 years. Your refusal to pay does not necessarily remove the negative record because of their in ability to collect the debt from you. Feel free to reach out to myself or any of my team members with your questions about how to approach debt. We can be reached at 617-265-7900. Also, please forward this to anyone that needs a “real” take on how to deal with debt.