If you’re struggling to repay loans and credit card bills, you may think there’s no way out of a hole of debt that seems to grow deeper every month. Or you may see bankruptcy as your only option.
That’s rarely true. In reality, there are a number of programs to help you take control of your personal finances, leaving bankruptcy to be considered only if you’ve exhausted all other debt options.
Before doing anything, contact a credit counseling organization. What might seem like a disaster may, in fact, be a collection of minor problems with simple solutions, such as creating and sticking to a monthly budget. A credit counselor can evaluate the situation and help get you back on sound footing.
If your problems are more serious, a counselor can advise you on what your next step should be. You may be a good candidate for any number of debt options: a debt management plan, debt settlement, debt consolidation or a tax-relief program.
Credit Counseling
A nonprofit credit counseling organization provides education and counseling free of charge.
Do some research before setting up an initial meeting. Some credit counseling companies charge you for the same services that nonprofit organizations offer free of charge. These companies may claim to be nonprofit or may hide their true fees. If possible, avoid companies that charge for these services.
The first meeting, typically about an hour long, can take place in person, on the Internet or over the phone. If you are given a choice, a face-to-face meeting is always best. If the counselor or service asks for an up-front payment, leave.
At your first meeting, a credit counselor should assess your situation and help you create a budget. He or she also can offer other advice or educational materials.
Depending on your particular situation, you may need only one to three counseling sessions to sort out your finances.
In more-complicated situations, your counselor may recommend that you use a debt management plan. And for still more severe problems, he or she might suggest debt settlement or, in extreme cases, declaring bankruptcy.
Debt Management Plan
A credit counselor may suggest you use a debt management plan (DMP) if you have too much debt and cannot repay it easily. Although you may be able to sign up for a DMP without seeing a credit counselor, the Federal Trade Commission (FTC) advises people to always consult a counselor first.
Once you enroll in a DMP, you make a monthly deposit to your credit counseling organization, which then pays your debts for you.
This means you don’t have to send separate payments for each credit card bill, student loan or other debt. But you are advised to check your monthly statements to confirm that the counseling organization is paying the agreed-upon amounts.
In return for participating in a DMP, your creditors may reduce your interest rates or cancel certain fees. In this way, it can reduce the total cost to you.
A DMP can take up to five years to complete. And during the time you are involved in a DMP, it is vital to make sure your monthly payments to the counseling organization are on time. You are trying to build a reputation as someone able to pay your bills responsibly — the proper amount, on time.
If you make a late payment, you risk the cancellation of your DMP. If your DMP is canceled, you lose any special privileges — fee waivers and/or lower interest rates — that came with the plan.
Debt Settlement
For those facing a greater level of debt, debt settlement may be an option. A debt settlement firm attempts to negotiate with your debtors to have the owed balance reduced. In this way, you may be able to resolve your debt by paying less money than you actually owe.
But proceed with caution. Before entering into a debt settlement plan, do plenty of research on the specific companies you’re considering using. As with credit counseling companies, many debt settlement firms appear to be legitimate but then collect illegal fees or otherwise add to your debt without delivering positive results.
Before you enroll in a settlement plan, the company must disclose all fees and terms. Avoid any company that charges you excessive fees before settling your debts.
Some companies may require you to open a new bank account and set aside money to pay for the company’s services once it reduces your debts. This is a legitimate request as long as the new bank account is in your own name.
Also, find out how long the settlement company plans to wait before attempting to negotiate with your creditors. It could be months or years.
The plan may require you to save up a certain portion of your debts before the company begins making offers. The company is required to tell you what amount you must set aside.
Avoid companies that guarantee a debt settlement. Creditors have no legal obligation to accept a settlement deal and it is impossible to honestly guarantee that the plan will work.
Despite the drawbacks and risks, debt settlement may be the right option for some individuals. It may offer a better alternative to bankruptcy and help individuals reduce the amount of money they owe.
Debt Consolidation
As with a debt management plan, debt consolidation allows you to merge your loans and make only one monthly payment. Debt consolidation combines several high-interest loans into one loan, which typically has a lower interest rate and a longer repayment schedule. It is a means of lowering monthly bills for people struggling to make their payments.
The process generally converts unsecured debt — credit card debt and student loans, for example — into secured debt guaranteed by assets, such as your home. Your new secured loan may be in the form of a second mortgage on your house or a home equity loan.
If you don’t pay back a secured debt, you risk losing your collateral — whatever possessions you put up to secure the loan. For most people, this means losing a house to foreclosure or a car to repossession. Because of the potential losses, it’s important to make sure you can meet your monthly payments before consolidating your debts.
Bankruptcy
Bankruptcy is a last resort for people with too much debt. If you’re considering bankruptcy, your first step should always be to visit a credit counselor. In fact, this is a required step before you are allowed to file for bankruptcy.
After you declare bankruptcy, you are excused from repaying certain debts. Typically, you still must pay alimony, child support, fines, taxes and select student loans. In some cases, you also may have to give up your property.
The consequences of bankruptcy last years and can negatively affect every aspect of your life.
Bankruptcy information stays on your personal credit report for 10 years. Anyone who views your report during that time will see that you declared bankruptcy, which potentially can prevent you from buying a home, receiving life insurance, obtaining new lines of credit or even getting a job.
Tax Relief
If you’re in debt as a result of unpaid taxes, you may have further options in the form of special government programs.
The Federal Trade Commission recommends that you take advantage of these programs rather than enlist the help of a tax relief company, as many of them are scams that cost consumers thousands of dollars and add to their debts.
An installment agreement can help people who are unable to pay their taxes in full by the deadline. This option allows you to pay off a portion of your debt each month.
If you have a greater financial hardship, you may qualify for an offer in compromise (OIC). With this option, you can settle your tax debt and pay less than your actual owed amount.
In limited circumstances of financial hardship, the Internal Revenue Service (IRS) may agree to waive penalty fees. Even more rarely, the IRS may forgive interest fees.
If you owe money to the IRS, contact the agency’s Taxpayer Advocate Service at 877-777-4778. An advocate can further discuss these options with you and help you pick an appropriate course of action.
If you owe state tax money, most states have tax relief options similar to the federal options. Contact your state comptroller for more information.
When you have more debt than you can handle, remember you have options. Set up an appointment with a credit counselor to discuss your finances and choices. And consider less-consequential options, such as a debt management plan, before contemplating something like bankruptcy, which can have long-term effects. For more information, visit the website of the Federal Reserve System.
