Debt Solutions
Loan Consolidation
A loan consolidation combines all your existing credit card debts into a single loan at a lower interest rate. The primary reason to do a loan consolidation is to reduce the rate of interest you are paying on your credit card debts. In order to obtain a loan consolidation, you will go through the standard loan process. Unfortunately, usually by the time a consumer decides to address and resolve their debt issue, they will not qualify for a loan consolidation. Further, the lender may want to use your home as security for the loan.
It is important to highlight that debt consolidation is not debt relief. You will still pay all of what you owe. A loan consolidation is a restructuring of existing debts at a lower rate of interest. It does not reduce the amount of unsecured debt.
Credit Counseling
Credit Counseling helps consumers who cannot pay their existing credit card debts. Credit Counseling is also referred to as Debt Management Program (DMP). Credit Counseling was established to provide modest relief to those consumers who cannot keep up with the Minimum Monthly Payments. The debt relief provided to consumers in a DMP program consists of reduced interest rates and often the reduction or elimination of penalties. Credit Counseling does not reduce the amount owed. It restructures the existing debt.
Most Credit Counseling agencies or DMPs are non-profit entities. They charge a fee for their service. These agencies have a relationship with certain Banks and have pre-negotiated interest rate reductions and concessions on penalties. With these programs, the Credit Counseling agency creates a monthly payment plan based on your income and amount of debt. This payment plan will resolve all the enrolled debts over a fixed term, usually 3 to 5 years. The DMP collects a single payment from the consumer and the Credit Counseling agency makes the payments to the creditors who are participating in the program. Not all Banks participate in Credit Counseling programs so some accounts may not be included in the program.
Upon completion of all payments, the debts in the program will be satisfied. If a consumer defaults on the payment plan, all concessions (interest and penalties) are reversed and the consumer is then liable for the interest and penalties that were reduced or eliminated.
Bankruptcy
Bankruptcy is often referred to as the solution of last resort. It is critical to understand that there are two types of personal bankruptcy: Chapter 7 and Chapter 13. While both options are bankruptcy, there are important differences.
Chapter 7, referred to as a liquidation bankruptcy, and it erases all debts that qualify for discharge. Chapter 13 bankruptcy reorganizes existing debt into a repayment plan over a period of three to five years. This difference is critical, as Chapter 7 provides substantial debt relief while Chapter 13 only provides moderate relief. However, there are substantial negative consequences to your future credit in choosing either option.
In order to qualify for Chapter 7, the consumer’s income must fall below the median income of their state. If the income is over their state’s median income, then they must take a “means test” to establish their eligibility. If there is any income remaining each month to pay creditors, you will fail the means test and have to file Chapter 13.
In a Chapter 7 liquidation bankruptcy, any assets you have over an allowed value, or that are not exempt, will be sold (liquidated) by the Bankruptcy Trustee to satisfy debts to the creditor. Following this liquidation, the rest of your qualifying debt will be forgiven. A certain amount of home equity and personal effects like clothing and furniture are exempt.
With Chapter 13 reorganization bankruptcy, you will pay some or all of what you owe to your creditors over a three-to-seven-year period. In a Chapter 13 reorganization, the Bankruptcy Court will appoint a Trustee that will determine how much and to whom will be paid, and will supervise the payments to the creditors.
Debt Settlement
Debt settlement is a process that you pay a portion of the principal owed to creditors over 30 to 42 months. This approach is materially different than how you have been paying your credit card debt. With debt settlement you change the structure of the payment of the outstanding credit card debt. You do this by using your available cash to pay down the principal and not interest.
If you do not qualify for a loan consolidation or Chapter 7 bankruptcy, debt resolution is probably your best option. Given the low success rate of Chapter 13 bankruptcy, debt settlement provides an effective and ethical alternative. The key advantage to debt settlement is that it materially reduces the total debt owed. In order to succeed using the debt resolution option, you need to set aside money to save. For most consumers the only way to do this is to stop making the Minimum Monthly Payments on the credit card. This will materially damage your credit score, which is the primary disadvantage. However, once you complete the debt resolution program your credit score will improve.
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