For people struggling with credit card debt, there are several debt repayment options offered by organizations to help you. Some people think they’re all the same, or that they’re all scams. The repayment options are all legitimate but, frankly, some of the organizations are shady. The options are only as legit as the organization that offers them. Let’s make this as simple as possible and break down each option.
So what is credit counseling? Credit counseling is a process where a certified personal finance counselor reviews your financial situation, and provides education and advice on how to better manage their finances. The process includes a complete budget analysis, where all income and expenses are determined. The cause of the debt is determined and possible repayment solutions are examined. A credit counseling agency can help an individual determine the best repayment option, while also offering education to help them manage their personal finances and avoid problems in the future. Options can include bankruptcy, a debt management plan, or a revised budget plan. Agencies typically offer free counseling, only charging fees if you opt to enter a debt management plan.
Debt Management Plan
A debt management plan is only available to those who complete a credit counseling session. Even then, the counselor must determine if this is an appropriate option for you. Not everyone qualifies. In this plan, the agency will secure lower minimum monthly payments or lower interest rates from your creditors, making repayment more feasible and affordable for the debtor. Any accounts entered into a debt management program must be closed. Your payments will be consolidated into one that is paid to the agency, and they disburse to each credit account.
Debt consolidation is essentially taking out one large loan in order to repay your other debts. This loan usually has a more attractive interest rate than your existing debts, and allows you to have only one outstanding loan rather than many. Your payment will be lower, but it will take you longer to repay and it will usually cost you more in the long run.
Debt settlement is a negotiated reduction of your owed balance, and a lump sum payment is made to your creditor. Creditors typically won’t consider accepting a settlement until you are a few months past due for payment. So you must first do damage to your credit report. If you don’t have the funds for a lump sum payment, a debt settlement company can set up a third party trust account in which your funds can accumulate. You essentially follow common debt management advice and make payments to the settlement company instead of your creditor for a few months. Once your savings are built up enough, the negotiation can begin. The debt settlement company will take a percentage of the agreed upon amount. Accounts that are reported as settled are scored negatively on a credit report until they are paid in full. Even then, your report will contain negative information from the previous missed payments.
Remember that each option has it’s pros and cons for each individual situation and, whatever your choice, you should research the organizations before signing on for any repayment plan. You can do so by looking them up on the Better Business Bureau website, www.bbb.org. For credit counseling agencies, you can also check with the Association of Independent Consumer Credit Counseling Agencies (AICCCA) at www.aiccca.org.